-----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, BQ5yQZ9EuLg3Qo8oqrQObBmBpzLFahI2oM1fF6hiXxWgykclxTU2e8/TP87IML6K H2Y/Kz+a84CqTAzBdF8/0A== 0000950129-99-004239.txt : 19991018 0000950129-99-004239.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950129-99-004239 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19991001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATCO GROUP INC CENTRAL INDEX KEY: 0001057693 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 222906892 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-48851 FILM NUMBER: 99721283 BUSINESS ADDRESS: STREET 1: BROOKHOLLOW CENTRAL III STREET 2: 2950 NORTH LOOP WEST STE 750 CITY: HOUSTON STATE: TX ZIP: 77092 BUSINESS PHONE: 7136839292 MAIL ADDRESS: STREET 1: BROOKHOLLOW CENTERL III STREET 2: 2950 NORTH LOOP WEST STE 750 CITY: HOUSTON STATE: TX ZIP: 77092 S-1/A 1 NATCO GROUP INC. - AMENDMENT NO. 2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER , 1999 REGISTRATION NO. 333-48851 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ NATCO GROUP INC. (Exact Name of Registrant as specified in its charter) DELAWARE 3443 22-2906892 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
J. MICHAEL MAYER SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER NATCO GROUP INC. BROOKHOLLOW CENTRAL III BROOKHOLLOW CENTRAL III 2950 NORTH LOOP WEST, SUITE 750 2950 NORTH LOOP WEST, SUITE 750 HOUSTON, TEXAS 77092 HOUSTON, TEXAS 77092 (713) 683-9292 (713) 683-9292 (Address, including zip code, and telephone (Name, address, including zip code, and telephone number, number, including area code, including area code, of agent for service) of Registrant's principal executive offices)
Copies To: VINSON & ELKINS L.L.P. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. 1001 FANNIN STREET, SUITE 2300 1700 PACIFIC AVENUE, SUITE 4100 HOUSTON, TEXAS 77002-6760 DALLAS, TEXAS 75201-4618 (713) 758-2222 (214) 969-4780 ATTN.: WILLIAM E. JOOR III ATTN.: SETH R. MOLAY, P.C.
------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities registered on this Form are being 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 statement 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 this Form is a post-effective amendment filed pursuant to Section 462(d) 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 AMOUNT OF TITLE OF EACH CLASS OF SECURITIES AGGREGATE REGISTRATION TO BE REGISTERED(1) OFFERING PRICE(2)(3) FEE - ---------------------------------------------------------------------------------------------------------------- Class A Common Stock, par value $0.01(4)........ $111,000,000 $30,858(5) - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
(1) In accordance with Rule 457(o) under the Securities Act, the number of shares being registered and the proposed maximum offering price per share are not included in this table. (2) Estimated solely for the purpose of computing the registration fee in accordance with Rule 457 of the Securities Act. (3) Includes shares to be offered by the selling stockholder and shares subject to an option granted to the underwriters to cover over-allotments. (4) Includes associated preferred share purchase rights, which currently are attached to and trade with the shares of Class A Common Stock registered hereby. (5) Of this amount, $24,249 was paid at the time of filing the registration statement amended hereby and the balance is paid herewith. 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 SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SUBJECT TO COMPLETION -- , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS , 1999 [LOGO TO COME] SHARES OF CLASS A COMMON STOCK NATCO GROUP INC.: - - We are a leading provider of wellhead equipment, systems and services used in the production of oil and gas. - - NATCO Group Inc. Brookhollow Central III 2950 North Loop West, Suite 750 Houston, Texas 77092 (713) 683-9292 PROPOSED SYMBOL & MARKET: - - NTG/New York Stock Exchange THE OFFERING: - - We are offering 5,000,000 shares of our common stock and a selling stockholder is offering shares of our common stock for resale. - - We have granted the underwriters an option to purchase an additional shares of common stock to cover over-allotments. - - This is our initial public offering, and no public market currently exists for our shares. - - We anticipate that the initial public offering price for our common stock will be between $ and $ per share. - - We will not receive any proceeds from the sale of common stock by the selling stockholder. - - We plan to use the proceeds from this offering to repay outstanding debt and for general corporate purposes, including pending acquisitions. - - Closing: , 1999.
- ---------------------------------------------------------------------------------- Per Share Total - ---------------------------------------------------------------------------------- Public offering price: $ $ Underwriting fees: Proceeds to NATCO: Proceeds to the selling stockholder: - ----------------------------------------------------------------------------------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE SALOMON SMITH BARNEY SIMMONS & COMPANY INTERNATIONAL - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. 3 MAP PAGE 4 TABLE OF CONTENTS
PAGE Prospectus Summary..................... 1 Risk Factors........................... 7 Cautionary Statement Regarding Forward Looking Statements................... 14 Use of Proceeds........................ 15 Dividend Policy........................ 15 Dilution............................... 16 Capitalization......................... 17 Selected Consolidated Financial Data... 18 Unaudited Condensed Pro Forma Financial Statements........................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 25
PAGE Business............................... 35 Management............................. 46 Related Party Transactions............. 55 Principal and Selling Stockholders..... 59 Description of Capital Stock........... 60 Shares Eligible for Future Sale........ 64 Underwriting........................... 65 Legal Matters.......................... 67 Experts................................ 67 Available Information.................. 68 Index to Financial Statements.......... F-1
NATCO GROUP INC. We were incorporated in Delaware in 1988. In 1989, we acquired National Tank Company, which was founded in 1926 and is now our principal operating subsidiary. The address of our principal executive offices is Brookhollow Central III, 2950 North Loop West, Suite 750, Houston, Texas 77092, and our telephone number is (713) 683-9292. ------------------ You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with different information. This document may be used only where it is legal to sell these securities. The information in this prospectus is only accurate on the date of this prospectus. In this prospectus, all references to "we," "us" and "our" refer to NATCO Group Inc. and its subsidiaries, unless indicated otherwise. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. i 5 PROSPECTUS SUMMARY This summary highlights selected information from this prospectus but does not contain all of the information that may be important to you. This prospectus includes specific terms of this offering, information about our business and financial data. We encourage you to read this prospectus in its entirety before making an investment decision. WHAT WE DO We are a leading provider of wellhead equipment, systems and services used in the production of oil and gas. Our production equipment and systems are primarily used at or near the wellhead to separate oil and gas within a hydrocarbon stream and to remove contaminants. Separation and decontamination at the wellhead are necessary to meet the specifications of transporters and end users. Our products and services are used in onshore and offshore fields in most major oil and gas producing regions in the world. On a pro forma basis, after giving effect to our acquisition of The Cynara Company (Cynara), our revenues and EBITDA for the twelve months ended December 31, 1998 were approximately $213.7 million and $9.7 million. For the six months ended June 30, 1999, our revenues and EBITDA were approximately $86.2 million and $5.0 million. We design and manufacture a diverse line of production equipment, including: - separators, which separate a hydrocarbon stream into oil, gas and water; - dehydration and desalting units, which remove water and salt from oil and gas; - heaters, which prevent solids from forming in gas and reduce the viscosity of oil; - gas conditioning units and membrane separation systems, which remove carbon dioxide and other contaminants from a gas stream; - water filtration systems, which remove oil and contaminants from water derived from the production process; and - control systems, which monitor and control production equipment. We offer our products and services as either integrated systems or individual components. We provide our products and services through four business segments: - traditional production equipment and services, which primarily provides standardized components, replacement parts and used components and equipment servicing; - engineered systems, which primarily provides customized, large scale integrated oil and gas production systems; - our Canadian operations, which provide traditional production equipment and services and engineered systems; and - instrumentation and electrical systems, which provides control panels and systems that monitor and control oil and gas production. We have designed, manufactured and marketed production equipment and systems for over 70 years. We believe that, among our competitors, we have the largest installed base of production equipment in the industry. We have achieved our position in the industry by maintaining our technological leadership, capitalizing on our strong brand name recognition and offering a broad range of products and services. 1 6 OUR BUSINESS STRATEGY Our strategy for future growth is to expand and improve our market position through: - Focusing on Customer Relationships. We believe that our customers increasingly prefer to work on a regular basis with a small number of leading suppliers. We believe our size, scope of products, technological expertise and service orientation provide us with a competitive advantage in establishing preferred supplier relationships with customers. We expect to generate growth in revenue and market share by establishing and further developing new and existing customer relationships. - Providing Turnkey Integrated Systems and Solutions. We believe our turnkey design and manufacturing capabilities enable us to reduce our customers' production equipment and systems costs and shorten delivery times. Our strategy is to be involved in projects early, to provide, as among our competitors, the broadest and most complete scope of equipment and services and to focus on larger integrated systems. In some applications, we also intend to increase the degree of standardization to reduce engineering costs and to shorten delivery times. - Introducing New Technologies and Products. Since our inception, we have developed and acquired leading technologies that enable us to address the world market demand for increasingly sophisticated production equipment. We will continue to pursue new technologies through licenses, acquisitions and internal development. - Pursuing Complementary Acquisitions. Our industry is highly fragmented and contains many smaller competitors with narrow product lines and geographic scope. We intend to continue acquiring companies that provide complementary technologies or enhance our ability to offer integrated systems. - Expanding International Presence. We have operated in various international markets for more than 50 years. We intend to continue expanding internationally in targeted geographic regions. Currently, our most important international opportunity is the future development of Southeast Asian gas markets. We believe our proprietary technology for the bulk removal of carbon dioxide provides us with a competitive advantage in pursuing projects in this region. RECENT DEVELOPMENTS CYNARA ACQUISITION In November 1998, we acquired Cynara because it had proprietary technology for the bulk removal of carbon dioxide from gas streams. Cynara designs, constructs, operates and services membrane separation systems utilizing this technology. A primary market for this application is production from gas wells, such as those located in Southeast Asia, which have high levels of naturally occurring carbon dioxide. Another market is production from wells, such as those located in West Texas, in which carbon dioxide injection is used to enhance the recovery of oil and gas reserves. This acquisition has expanded our ability to offer integrated systems and services and complements our gas conditioning product line. In acquiring Cynara, we issued 500,000 shares of our common stock and paid $5.3 million in cash to the Cynara stockholders. We also repaid $10.1 million of Cynara's debt and agreed to issue additional shares of our common stock contingent on the occurrence of specified operational thresholds. Based on operations through September 30, 1999, approximately 300,000 of these additional shares have been earned and will be issued on November 30, 1999. Up to a total of 950,000 more of these additional shares may be earned at March 31, 2000 and December 31, 2000. 2 7 PENDING ACQUISITIONS We have executed non-binding letters of intent to acquire Porta-Test International Inc. and Engineering Specialties, Inc. These acquisitions, if completed, will close subsequent to the completion of this offering. Porta-Test International Inc. Porta-Test International Inc. (Porta-Test) is located in Edmonton, Alberta, Canada. Porta-Test designs and manufactures centrifugal devices used to enhance the effectiveness of separation equipment. We expect to close the acquisition of Porta-Test in late 1999. For the fiscal year ended June 30, 1999, Porta-Test had revenues of $7.3 million and EBITDA of $(0.1) million. To acquire all the outstanding Porta-Test capital stock, we have agreed: - to pay approximately $5.4 million in cash, net of cash acquired; and - to issue our one-year promissory note for approximately $0.7 million. Engineering Specialities, Inc. Engineering Specialties, Inc. (ESI) is located in Covington, Louisiana. ESI designs and manufactures water processing equipment used to remove oil and contaminants from water produced at the wellhead, primarily on offshore facilities. We expect to close the acquisition of ESI in early 2000. For the year ended December 31, 1998, ESI had revenues of $3.9 million and EBITDA of $0.8 million. To acquire all the outstanding ESI capital stock, we have agreed: - to pay approximately $7.3 million in cash, net of cash and marketable securities acquired; and - to issue options for 25,000 shares of our common stock, exercisable at the initial offering price. 3 8 THE OFFERING Class A common stock offered(1): By us................. 5,000,000 shares By the selling stockholder............ shares Total............ shares Common stock to be outstanding after this offering(1)... 14,287,520 shares(2) Use of proceeds............ We intend to use the net proceeds of approximately $ million that we will receive from this offering primarily: - to repay outstanding debt; and - for general corporate purposes, including the pending acquisitions. Proposed New York Stock Exchange symbol......... NTG - ------------------------------ (1) Our common stock is divided into Class A common stock and Class B common stock. The shares to be sold in this offering are Class A common stock. Only the former stockholders of Cynara hold Class B common stock. Upon completion of this offering, the two classes will have the same rights, except that the holders of the Class B common stock will continue to have the rights: - to elect one director; and - to hold a class vote on any amendment to our charter that would authorize additional Class B common stock or would adversely affect their right to elect a director. On January 1, 2002, the Class B common stock converts automatically into Class A common stock to constitute a single class of common stock. In this prospectus, references to "our common stock" include both our Class A and Class B common stock. (2) Excludes: - up to shares of Class A common stock if the underwriters exercise their option to cover over-allotments; - 1,795,947 shares of Class A common stock issuable on exercise of outstanding stock options at a weighted average exercise price of $4.40 per share; and - 1,250,000 shares of Class B common stock contingently issuable under the terms of our agreement to acquire Cynara. 4 9 SUMMARY FINANCIAL INFORMATION The following summary consolidated historical and unaudited pro forma financial information for the periods and the dates indicated should be read in conjunction with our consolidated historical and unaudited pro forma financial statements included elsewhere in this prospectus. In 1998, we changed our fiscal year-end to December 31 from March 31. The interim data reflects all adjustments that, in the opinion of our management, are necessary to present fairly the information for the six-month periods. The unaudited pro forma statement of operations and other financial data give effect to the acquisition of Cynara as though it occurred on January 1, 1998. The unaudited historical financial data presented for the six month period ended June 30, 1999 is not necessarily indicative of the actual financial results to be expected for the full fiscal year. See "Selected Consolidated Financial Data" and "Unaudited Condensed Pro Forma Financial Statements" for more information regarding the historical and the unaudited pro forma consolidated financial data.
FISCAL YEAR ENDED NINE MONTHS PRO FORMA SIX MONTHS MARCH 31, ENDED YEAR ENDED ENDED JUNE 30, ------------------- DECEMBER 31, DECEMBER 31, ------------------ 1997 1998 1998 1998(1) 1998 1999 -------- -------- ------------ ------------ -------- ------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA(2): Revenues......................................... $126,657 $202,023 $145,611 $213,651 $106,658 $86,175 Cost of goods sold............................... 100,803 161,801 115,521 168,816 85,635 65,821 -------- -------- -------- -------- -------- ------- Gross profit..................................... 25,854 40,222 30,090 44,835 21,023 20,354 Selling, general and administrative expense...... 23,313 28,553 24,530 35,076 15,274 15,321 Depreciation and amortization expense............ 862 1,322 1,473 4,383 795 2,311 Interest expense................................. 1,861 2,992 2,215 3,555 1,347 1,673 Interest cost on postretirement liability(3)..... 957 1,048 786 1,048 524 523 Revaluation loss on postretirement liability(3)................................... 1,466 159 53 53 -- -- Interest income.................................. (116) (140) (227) (227) (101) (99) -------- -------- -------- -------- -------- ------- Income (loss) from continuing operations before income taxes................................... (2,489) 6,288 1,260 947 3,184 625 Income tax provision (benefit)................... (659) 1,141 608 (30) 594 479 -------- -------- -------- -------- -------- ------- Income (loss) from continuing operations......... $ (1,830) $ 5,147 $ 652 $ 977 $ 2,590 $ 146 ======== ======== ======== ======== ======== ======= Basic earnings (loss) per share from continuing operations..................................... $ (0.31) $ 0.68 $ 0.08 $ 0.11 $ 0.32 $ 0.02 Diluted earnings (loss) per share from continuing operations..................................... (0.28) 0.64 0.07 0.10 0.29 0.01 Basic earnings per share......................... 0.67 0.78 0.08 0.11 0.32 0.02 Diluted earnings per share....................... 0.64 0.73 0.07 0.10 0.29 0.01 Basic weighted average number of shares of common stock outstanding.............................. 6,032 7,623 8,243 8,665 8,146 9,151 Diluted weighted average number of shares of common stock outstanding....................... 6,371 8,067 8,942 9,366 8,876 9,824 OTHER DATA: Cash flows provided by (used in) operating activities..................................... $ 1,059 $ 3,113 $ (1,450) $ 2,569 $ 3,248 Cash flows provided by (used in) investing activities..................................... (798) (24,712) (17,069) (2,692) (1,574) Cash flows provided by (used in) financing activities..................................... (1,033) 21,660 20,179 589 (2,797) Earnings before interest, taxes, depreciation and amortization (EBITDA)(4)....................... 1,075 11,510 5,507 9,706 5,749 5,033
MARCH 31, PRO FORMA ----------------- DECEMBER 31, JUNE 30, JUNE 30, 1997 1998 1998 1999 1999 ------- ------- ------------ -------- --------- (IN THOUSANDS) BALANCE SHEET DATA (END OF PERIOD): Working capital............................... $12,551 $24,442 $ 31,466 $ 30,172 $ 53,353 Net property, plant and equipment............. 6,833 9,332 18,294 18,120 18,120 Total assets.................................. 70,044 95,413 118,412 105,468 122,027 Long-term debt(5)............................. 27,566 33,719 41,777 39,065 -- Stockholders' equity (deficit)................ (6,737) 5,419 24,190 24,338 79,962
(See footnotes on next page) 5 10 - ------------------------------ (1) The unaudited pro forma statement of operations and other data do not give pro forma effect to this offering or to the pending acquisitions of Porta-Test and ESI as these acquisitions, if they close, will close after this offering. For information regarding the pro forma effect of this offering and these pending acquisitions, see "Unaudited Condensed Pro Forma Financial Statements." (2) In June 1997, we distributed our investment in Process Technology Holdings, Inc. (PTH) to our stockholders in a tax-free transaction. In accordance with generally accepted accounting principles, we account for the results of operations of PTH as discontinued operations for all periods presented. Accordingly, the net income of PTH is excluded from income (loss) from continuing operations in our statements of operations for the periods presented. (3) When we acquired National Tank Company in 1989 from Combustion Engineering, Inc., we agreed to provide specified health care and life insurance benefits to employees of National Tank Company who retired prior to June 21, 1989. These agreements provided that our annual cash costs related to these benefits were reimbursed by the seller through June 21, 1999 to the extent that they exceeded on an annual basis the lesser of one-third of the cash costs in that year or $0.8 million, as adjusted for inflation. For the fiscal year ended March 31, 1997, our aggregate cash costs related to these benefits were $1.7 million, of which $1.1 million was reimbursed. For the fiscal year ended March 31, 1998, our aggregate cash costs were $1.8 million, of which $1.0 million was reimbursed. For the nine months ended December 31, 1998, our aggregate cash costs were $1.6 million, of which $1.1 million was reimbursed. For the six months ended June 30, 1999, our aggregate cash costs related to these benefits were $0.6 million, of which $0.4 million was reimbursed. The reimbursement obligation expired on June 22, 1999, and we no longer receive reimbursement for any portion of these cash costs. We currently plan to fund the cash requirements related to these retired employee benefits on a current basis. (4) EBITDA consists of income (loss) from continuing operations plus interest expense, interest cost on postretirement benefit liability, income tax expense, and depreciation and amortization expense, less interest income. EBITDA is not a measurement presented in accordance with generally accepted accounting principles. You should not consider it in isolation from or as a substitute for net income or cash flow measures prepared in accordance with generally accepted accounting principles or as a measure of our profitability or liquidity. EBITDA is included as a supplemental disclosure because it may provide useful information regarding our ability to service debt and to fund capital expenditures. (5) Includes current portion of long-term debt and revolving lines of credit. 6 11 RISK FACTORS In determining whether to purchase shares of our common stock, you should carefully consider the risk factors described below and all the information we have included in this prospectus. A SUBSTANTIAL OR EXTENDED DECLINE IN OIL OR GAS PRICES COULD RESULT IN LOWER EXPENDITURES BY THE OIL AND GAS INDUSTRY, THEREBY AFFECTING OUR REVENUE. Our business is substantially dependent on the condition of the oil and gas industry and its willingness to spend capital on the exploration for and development of oil and gas. A substantial or extended decline in these expenditures may result in the location of fewer new reserves of oil and gas, adversely affecting the market for our production equipment and services. The level of these capital expenditures is generally dependent on the industry's view of oil and gas prices, which have been characterized by significant volatility in recent years. Oil and gas prices are affected by numerous factors, including: - the level of exploration activity; - worldwide economic activity; - interest rates and the cost of capital; - environmental regulation; - tax policies; - political requirements of national governments; - coordination by the Organization of Petroleum Exporting Countries (OPEC); - the cost of producing oil and gas; and - technological advances. WE MAY LOSE MONEY ON FIXED PRICE CONTRACTS. Many of our projects, including larger engineered systems projects, are performed on a fixed-price basis. We are responsible for all cost overruns, other than any resulting from change orders. Our costs and any gross profit realized on our fixed-price contracts will often vary from the estimated amounts on which these contracts were originally based. This may occur for various reasons, including: - errors in estimates or bidding; - changes in availability and cost of labor and material; and - variations in productivity from our original estimates. These variations and the risks inherent in engineered systems projects may result in reduced profitability or losses on our projects. Depending on the size of a project, variations from estimated contract performance can have a significant impact on our operating results for any particular fiscal quarter or year. WE HAVE RELIED AND WE EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES. There have been and are expected to be periods where a substantial portion of our revenues are derived from a single customer or a small group of customers. We had revenues of $28.3 million (14% of our total revenues) from the BP Exploration (Alaska), Inc. alliance project for fiscal 1998. On July 1, 1999, we were awarded a $73.0 million contract to supply gas treating and conditioning equipment to a project in Southeast Asia. The project is a joint venture under the control of the Carigali-Triton Operating Company (CTOC), which is owned 50% by Petronas, the Malaysian National Oil Company and 50% by ARCO and Triton. The project is located in the Gulf of Thailand. Although this project has not yet 7 12 produced more than 10% of our revenues in any period, it will take approximately two years to complete and is expected to comprise more than 10% of annual billings during that period. A prolonged failure of this customer to fulfill its contractual obligations to us or a termination of the related project could have a material adverse effect on our results of operations and financial condition. OUR ABILITY TO ATTRACT AND RETAIN SKILLED LABOR IS CRUCIAL TO THE PROFITABILITY OF OUR FABRICATION AND SERVICES ACTIVITIES. Our ability to remain profitable depends in part on our ability to attract and retain skilled manufacturing workers, equipment operators, engineers and other technical personnel. Our ability to expand our operations, particularly in the Gulf Coast area, depends primarily on our ability to increase our labor force. Demand for these workers is currently high and the supply is extremely limited. We believe that our wage rates are competitive and that our relationship with our skilled labor force is good. A significant increase in the wages paid by competing employers could, nevertheless, result in a reduction in our skilled labor force, increases in the rates of wages we must pay or both. If this were to occur, the immediate effect on us would be a reduction in our profits and the extended effect would be diminishment of our production capacity and profitability and impairment of our growth potential. A THIRD PARTY WILL NO LONGER REIMBURSE US FOR A PORTION OF OUR COSTS OF SPECIFIED EMPLOYEE HEALTH AND LIFE INSURANCE. We are required by contract to provide health care and life insurance benefits to our former employees who retired prior to June 21, 1989. The contract also provided for partial reimbursement of our annual cash costs related to these benefits by a third party. For the fiscal years ended March 31, 1997 and 1998, our cash costs related to these benefits were $1.7 million and $1.8 million. In fiscal 1997, we were reimbursed $1.1 million, and in fiscal 1998 we were reimbursed $1.0 million. For the nine months ended December 31, 1998, our cash costs were $1.6 million, of which we were reimbursed $1.1 million. For the six months ended June 30, 1999, our aggregate cash costs related to these benefits were $0.6 million, of which $0.4 million was reimbursed. The reimbursement obligation expired on June 22, 1999, and we no longer receive reimbursement for any portion of these cash costs. At June 30, 1999, there were 536 retirees and surviving spouses and 323 dependents covered by the specified postretirement benefits obligations. As a result of the transaction described in "Related Party Transactions -- Capricorn I Subsidiaries -- Tyler" these numbers will increase to 629 and 352, respectively. In accounting for this liability, we evaluate annually the estimated liability, discounted to present value, of the unreimbursable portion of these benefits. We recognize and report in our financial statements gains and losses from these evaluations. For the fiscal years ended March 31, 1997 and 1998, we reported losses on revaluation of postretirement employee liability of $1.5 million and $0.2 million. For the nine months ended December 31, 1998, we reported a loss of $0.1 million. We cannot assure you that the costs of the actual benefits will not exceed those projected or that future actuarial assessments of the extent of those costs will not exceed the current assessment. Under those circumstances, the adjustments required to be made to our recorded liability for these benefits could have a material adverse effect on our results of operations and financial condition. THE LOSS OF ONE OR MORE OF OUR CUSTOMER RELATIONSHIPS COULD MATERIALLY HARM OUR BUSINESS AND EARNINGS. We expect to continue our practice of entering into relationships with major oil companies and large independent producers. In these relationships, we are typically designated as the preferred supplier of equipment or services or both. Many of these relationships are nonbinding arrangements in which both parties undertake to satisfy the objectives of the relationship. They may be characterized as: - blanket purchase orders for specified amounts of standardized equipment; - project-specific integrated relationships; or - ongoing informal working relationships. 8 13 The loss of one or more of these relationships could have a material adverse effect on our business, results of operations and financial condition. OUR INTERNATIONAL OPERATIONS MAY EXPERIENCE INTERRUPTIONS DUE TO POLITICAL AND ECONOMIC RISKS. We operate our business and market our products and services in oil and gas producing areas throughout the world. We are, therefore, subject to the risks customarily attendant to international operations and investments in foreign countries. These risks include: - nationalization; - expropriation; - war and civil disturbances; - restrictive actions by local governments; - limitations on repatriation of earnings; - changes in foreign tax laws; and - changes in currency exchange rates. The occurrence of any of these risks could have an adverse effect on regional demand for our products and services or our ability to provide them. An interruption of our international operations could have a material adverse effect on our results of operations and financial condition. A portion of our sales are made in Southeast Asia. The currencies of several countries in Southeast Asia underwent significant devaluations against the United States dollar in 1997 and early 1998. The devaluation of these currencies and the related consequences to the economies in these countries have adversely affected economic growth in the region. To the extent the economies of countries in Southeast Asia continue to be adversely affected, we cannot assure you that the demand for our products and services in the region will continue at historical or anticipated levels. OUR PENDING ACQUISITIONS THAT ARE INCLUDED IN OUR PRO FORMA FINANCIAL STATEMENTS ARE SUBJECT TO THE RISK THAT THEY MAY NOT BE CONSUMMATED. Our Unaudited Condensed Pro Forma Financial Statements give effect to the completion of this offering and the pending acquisitions. With respect to the pending acquisitions, however, we have only entered into nonbinding letters of intent. Accordingly, the completion of each of these transactions is subject to numerous conditions, including the negotiation and execution of definitive agreements and the fulfillment or waiver of the conditions to closing to be included in the agreements. These conditions are expected to include such matters as confirmation by each party of its representations and warranties in those agreements, fulfillment of its covenants to be fulfilled by closing and the absence of any material adverse change in the financial condition or results of operations of the party we intend to acquire. We can not assure you that these conditions will be fulfilled or that these acquisitions will be completed. Moreover, even if they are completed, the pro forma financial statements are for illustrative purposes only and are not necessarily indicative of the financial results that would have been achieved if the acquisitions had been completed. FUTURE ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND ADVERSELY AFFECT OUR OPERATING RESULTS. We intend to continue our practice of acquiring other companies, assets and product lines that complement or expand our existing business. Each acquisition, however, involves a number of risks. These risks include: - the diversion of our management's attention to the assimilation of the operations and personnel of the acquired business; 9 14 - possible adverse effects on our operating results during the integration process; and - the possible inability to achieve the intended objectives of the combination. In pursuit of our acquisition strategy, we may seek to finance an acquisition through borrowings under credit facilities or the issuance of new debt or equity securities. If we should proceed with a relatively large cash acquisition, we could deplete a substantial portion of our financial resources to the possible detriment of our other operations. Any future acquisitions could also dilute the equity interests of our stockholders, require us to write off assets for accounting purposes or create other undesirable accounting issues, such as significant expenses for amortization of goodwill or other intangible assets. OUR INSURANCE POLICIES MAY NOT COVER ALL PRODUCTS LIABILITY CLAIMS. Some of our products are used in potentially hazardous production applications that can cause: - personal injury; - loss of life; - damage to property, equipment or the environment; and - suspension of operations. We maintain insurance coverage against these risks in accordance with normal industry practice. This insurance will not protect us against liability for some kinds of events, including specified events involving pollution, or against losses resulting from business interruption. We cannot assure you that our insurance will be adequate in risk coverage or policy limits to cover all losses or liabilities that we may incur. Moreover, we cannot assure you that we will be able in the future to maintain insurance at levels of risk coverage or policy limits that we deem adequate. Any future damages caused by our products or services that are not covered by insurance or are in excess of policy limits could have a material adverse effect on our business, results of operations and financial condition. LIABILITY TO CUSTOMERS UNDER WARRANTIES MAY MATERIALLY AND ADVERSELY AFFECT OUR EARNINGS. We typically provide warranties as to the proper operation and conformance to specifications of the equipment we manufacture. Failure of this equipment to operate properly or to meet specifications may increase our costs by requiring additional engineering resources, replacement of parts and equipment or service or monetary reimbursement to a customer. Our warranties are often backed by letters of credit. At June 30, 1999, we had provided to our customers approximately $1.9 million in letters of credit related to warranties. We have in the past received warranty claims and we expect to continue to receive them in the future. To the extent that we should incur warranty claims in any period substantially in excess of our warranty reserve, our results of operations and financial condition could be materially and adversely affected. WE MAY INCUR SUBSTANTIAL COSTS TO COMPLY WITH OUR ENVIRONMENTAL OBLIGATIONS. In our equipment fabrication and refurbishing operations, we generate and manage hazardous wastes. These include: - waste solvents; - waste paint; - waste oil; - washdown wastes; and - sandblasting wastes. 10 15 We attempt to identify and address environmental issues before acquiring properties and to utilize industry accepted operating and disposal practices regarding the management and disposal of hazardous wastes. Nevertheless, either we or others may have released hazardous materials on our properties or in other locations where hazardous wastes have been taken for disposal. We may be required by federal or state environmental laws to remove hazardous wastes or to remediate sites where they have been released. We could also be subjected to civil and criminal penalties for violations of those laws. Our costs to comply with these laws may adversely affect our earnings. OUR QUARTERLY SALES AND EARNINGS MAY FLUCTUATE SIGNIFICANTLY. A substantial amount of our revenues are derived from significant contracts which are often performed over periods of two to six quarters. As a result, our revenues and earnings may fluctuate significantly from quarter to quarter, depending upon our ability to replace existing contracts with new orders and upon the extent of any delays in completing existing projects. TERMINATION OF A FEW LARGE PROJECTS COULD SUBSTANTIALLY REDUCE OUR BACKLOG. Our backlog is based on awarded projects. Awarded projects include those projects on which customers have authorized us to begin work or to purchase materials. Each project that we currently include in our backlog is subject to change or termination at the customer's election. Exercise by our customers of their rights to change or terminate projects could change or reduce the amount of backlog currently reported. The decrease could be substantial in the case of the termination of a few large projects. A decrease in backlog may adversely affect our future earnings and financial condition. THE LOSS OF ANY MEMBER OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Our success depends heavily on the continued services of our senior management. Our senior management consists of a small number of individuals relative to other comparable or larger companies. These are the individuals who possess our bidding, procurement, transportation, logistics, planning, project management, risk management and financial skills. If we lost or suffered an extended interruption in the services of one or more of our senior officers, our results of operations could be adversely affected. Moreover, we cannot assure you that we will be able to attract and retain qualified personnel to succeed members of our senior management. We do not maintain key man life insurance. COMPETITION COULD RESULT IN REDUCED PROFITABILITY AND LOSS OF MARKET SHARE. Contracts for our products and services are generally awarded on a competitive basis, and competition is intense. The most important factors considered by our customers in awarding contracts include: - the availability and capabilities of our equipment; - our ability to meet the customer's delivery schedule; - our price; - our reputation; - our experience; and - our safety record. Historically, the existence of overcapacity in our industry has caused increased price competition in many areas of our business. 11 16 In addition, we may encounter obstacles in our international operations that impair our ability to compete in individual countries. These obstacles may include: - subsidies granted in favor of local companies; - import duties and fees imposed on us and other foreign operators; - taxes imposed on foreign operators; - lower wage rates in foreign countries; and - fluctuations in the exchange value of the United States dollar compared with the local currency. Any or all these factors could adversely affect our ability to compete and thus adversely affect our results of operations. THE INTERNAL REVENUE SERVICE MAY CHALLENGE OUR TAX POSITION REGARDING THE SPIN-OFF OF PROCESS TECHNOLOGY HOLDINGS, INC. Prior to June 1997, we owned all the outstanding stock of Process Technology Holdings, Inc. (PTH). In connection with a financing in June 1997, we distributed all of that stock to our sole stockholder at the time, Capricorn Investors, L.P. (Capricorn I). At that time, we obtained an opinion of counsel to the effect that the distribution would be not be subject to federal income tax either to us or Capricorn I. Tax-free treatment of the distribution depends, in part, on the underlying facts and circumstances at the time of the distribution. We cannot assure you that the IRS will agree with our interpretation and that of our counsel of those facts and circumstances. If the IRS were to challenge the tax-free treatment of the distribution and to prevail, we would recognize a gain for federal income tax purposes with respect to the distribution. The amount of the gain would be equal to the excess of the fair market value of the PTH stock at the time of the distribution over our tax basis in that stock. The resulting tax could have a material adverse effect on our results of operations and financial condition. See "Related Party Transactions -- Capricorn I Subsidiaries -- Tyler." CONTROL OF OUR COMPANY BY THE EXISTING STOCKHOLDERS MAY DISCOURAGE TAKEOVER BIDS. As of August 31, 1999, Capricorn I and Capricorn Investors II, L.P. (Capricorn II) owned 59.9% and 33.2% of our outstanding common stock. Immediately upon completion of this offering, they will own % and %, which percentages will decline to % and % if the underwriters exercise fully their over-allotment option. As a result, one of our directors, Herbert S. Winokur, Jr., through his control of Capricorn I and Capricorn II, will have sufficient voting power to control our direction and policies. He will also be able to determine the outcome of any matter requiring stockholder approval, including: - a business combination involving a merger, consolidation or sale of all or substantially all of our assets; and - the election of directors of our company. He will also be able to prevent a change in control of our company except on terms acceptable to him. In addition, Mr. Winokur will be able to exercise the contractual rights of Capricorn I and Capricorn II to nominate two of our directors so long as Capricorn I and Capricorn II together own at least 20% of our common stock. We understand that Capricorn I intends in the near future to distribute to its partners all the shares of our common stock that it owns. Even after that distribution, however, Mr. Winokur is expected to be able to control the direction and policies of our company through his direct holdings of our common stock and his control of Capricorn II. 12 17 OUR RIGHTS PLAN AND THE DELAWARE LAW MAY DISCOURAGE ACQUISITION BIDS. Our board of directors has adopted a stockholders' rights plan. Under this plan, we have issued preferred stock purchase rights as a dividend on our outstanding common stock and on any other common stock issued after adoption of the plan. This will include the shares issued by us in this offering. These rights are not currently exercisable. They would become exercisable, however, if someone acquired or offered to acquire specified amounts of common stock. Moreover, a provision of Delaware law that is applicable to us could delay or make difficult a merger, tender offer or proxy contest involving us. This provision also becomes applicable if someone acquires or offers to acquire a specified amount of our common stock. The rights and the provisions of the Delaware law have certain anti-takeover effects. The rights will cause substantial dilution to a person or group that attempts to acquire us without the approval of our board of directors. The rights and the provisions of Delaware law may deter a potential unfriendly offer or other effort to gain control of our company that is not approved by our board of directors. This may deprive the stockholders of opportunities to sell shares of our common stock at prices higher than those prevailing in the market. Neither the rights nor this provision of Delaware law should, however, interfere with any merger or other business combination that is approved by our board of directors. PROVISIONS OF OUR CHARTER AND BYLAWS MAY ALSO DISCOURAGE ACQUISITION BIDS. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock. The board of directors can fix the terms of the preferred stock without any action on the part of our stockholders. Our board has designated a series of 500,000 shares of preferred stock that is subject to issuance under our rights plan. The issuance of shares of preferred stock may delay or prevent a change in control transaction. This may adversely affect the market price and interfere with the voting and other rights of our common stock. We have no current plans to issue any shares of preferred stock. Our charter and bylaws contain the following anti-takeover provisions: - only one of the three classes of directors is elected each year; - the ability of our stockholders to remove directors without cause is precluded; - our stockholders may not act by written consent in lieu of a meeting unless both the subject matter of the consent and the taking of action by written consent have been approved by our board; - a written request signed by the holders of at least 10% of our outstanding common stock is required for the stockholders to call a special meeting of stockholders; and - advance notice is required for the stockholders to nominate directors or submit proposals for consideration at stockholder meetings. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. As a result, they may limit the price that some investors might be willing to pay in the future for shares of our common stock. These provisions may also impede changes in our management. OUR STOCK PRICE MAY BE VOLATILE BECAUSE OUR SHARES HAVE NOT PREVIOUSLY BEEN TRADED PUBLICLY. Prior to this offering, there has been no public market for our common stock. We intend to apply to list our common stock on the NYSE. We cannot assure you, however, that an active trading market for the common stock will develop or that, if it develops, it will be sustained. The initial public offering price of our common stock will be determined through negotiations between our management and the selling stockholder on one hand and the representatives of the underwriters on the other. The initial public offering price may bear no relationship to the price at which our common 13 18 stock will trade after the offering. Following the offering, prices for our common stock may be influenced by a number of factors. These include: - the liquidity of the market for our common stock; - investor perceptions of us; - investor perceptions of the energy services industry; and - general economic conditions. THE LAPSE OF LEGAL RESTRICTIONS ON THE SALE OF SHARES COULD AFFECT OUR STOCK PRICE AND DILUTE YOUR STOCK OWNERSHIP. Sales of substantial amounts of our common stock in the public market by insiders following the offering, or the perception that these sales may occur, could cause the market price of our common stock to fall. After the offering, assuming the underwriters do not exercise their over-allotment option, there will be outstanding 14,287,520 shares of our common stock. If the underwriters exercise their over-allotment option, this number will increase to shares. Of these, shares will be held as follows:
STOCKHOLDER NUMBER OF SHARES Capricorn I.......................................... Capricorn II......................................... 3,087,021 Former stockholders of Cynara........................ 500,000* Nathaniel A. Gregory................................. 136,832
- --------------- * Based on operations through September 30, 1999, approximately 300,000 additional shares have been earned and will be issued on November 30, 1999. Up to a total of 950,000 additional shares may be earned at March 31, 2000 and December 31, 2000. The holding periods under Rule 144 with respect to the shares of our common stock held by Capricorn I, Capricorn II and the former stockholders of Cynara have already expired or will have expired before the scheduled expiration of the lock-up agreements to be entered into by our directors, officers and specified shareholders. These lock-up agreements are scheduled to expire 180 days after the date of this prospectus. Mr. Gregory may sell his shares under Rule 144 after July 12, 2000. PURCHASERS IN THIS OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION. The net tangible book value of shares of our common stock that you purchase in this offering will be substantially less than the price that you pay for them. This immediate and substantial dilution in the net tangible book value of the shares you purchase will be $ assuming an initial public offering price of $ per share. If and to the extent that outstanding common stock options are exercised after the offering, there may be further dilution in the net tangible book value of your shares of common stock. A CHANGE IN THE ESTIMATED LIFE OF GOODWILL COULD REDUCE OUR EARNINGS. Our balance sheet at June 30, 1999, had an amount called "goodwill" that represented 15.8% of assets and 68.4% of stockholders' equity. Goodwill is recorded when we pay more for a business than the fair value of the tangible and separately measurable intangible net assets. GAAP requires us to amortize this and all other intangible assets over the periods we benefit from those assets. The amortization periods for our acquisitions to date are either 20 years or 40 years. We evaluate the useful life of all our assets on an ongoing basis. If we were to assign a shorter life to a material portion of the goodwill, earnings reported in prospective periods would be reduced. Earnings in later years could be significantly affected if management determined then that the remaining balance of goodwill was impaired. 14 19 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS This prospectus, including the sections entitled "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," contains forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks and uncertainties. These factors may cause our company's or our industry's actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These risks and other factors include those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of these forward-looking statements. USE OF PROCEEDS We estimate that the net proceeds from the sale of the 5,000,000 shares of common stock that we are selling in this offering will be approximately $ million ($ if the underwriters fully exercise their over-allotment option.) This is based on a public offering price of $ per share and after deducting the underwriting discount and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares being sold by the selling stockholder. We intend to use the net proceeds that we receive from this offering as follows: - to repay all of our outstanding indebtedness under our credit facilities (approximately $39.8 million as of August 31, 1999); and - to apply the balance to general corporate purposes, including approximately $12.7 million to fund the pending acquisitions of Porta-Test and ESI. Pending use for these purposes, we plan to invest the net proceeds in short-term investment-grade securities. The weighted average interest rate for outstanding borrowings under our credit facilities as of August 31, 1999 was 7.9%. The term loan portion of one of our credit facilities is payable in quarterly installments through November 2003. The revolving portion of that credit facility matures on November 30, 2001. The other credit facility matures on July 23, 2002. We used borrowings under our credit facilities to fund acquisitions and capital expenditures and for general corporate purposes. 15 20 DIVIDEND POLICY We do not intend to declare or pay any dividends on our common stock in the foreseeable future. Instead, we intend to retain any future earnings for use in our business. Our board will determine the payment of future dividends on our common stock and the amount of any such dividends in light of: - any applicable contractual restrictions limiting our ability to pay dividends; - our earnings; - our financial condition; - our ability to fund our capital requirements; and - other factors our board deems relevant. Currently, our bank credit facilities restrict the amount of dividends and other distributions that our operating subsidiaries may pay to us. Since we are a holding company, these restrictions have the practical effect of precluding us from paying dividends on our common stock. 16 21 DILUTION Our net tangible book value at June 30, 1999 was $0.84 per share of our common stock. Net tangible book value per share represents our total tangible assets reduced by our total liabilities and divided by the number of shares of common stock outstanding. Dilution in net tangible book value per share represents the difference between the amount per share that you pay in this offering and the net tangible book value per share immediately after this offering. After giving effect to the receipt of the proceeds from our sale of 5,000,000 shares at a public offering price of $ per share, our net tangible book value per share at June 30, 1999 would have been approximately $ . This represents an immediate increase in net tangible book value per share of $ to existing stockholders and an immediate decrease in net tangible book value per share of $ to you. The following table illustrates this dilution. Assumed public offering price per share..................... $ Net tangible book value per share at June 30, 1999........ $ 0.84 Increase per share attributable to new investors.......... -------- Net tangible book value per share after this offering....... $ -------- Dilution per share to new investors......................... $ ========
The following table sets forth as of June 30, 1999 the differences between the amounts paid by existing stockholders and new investors with respect to: - the number of shares of our common stock purchased from us; - the total consideration paid; and - the average price per share paid by existing stockholders and new investors, before deducting underwriters' commissions and our expenses and assuming a public offering price of $ per share.
SHARES PURCHASED TOTAL CONSIDERATION ----------------- -------------------- AVERAGE PRICE NUMBER % AMOUNT % PER SHARE Existing stockholders..................... 9,150,688 37,747,000 $4.13 New investors............................. Total...........................
The above table excludes 1,795,947 shares of our common stock reserved at September 30, 1999 for issuance under existing stock options and up to 1,250,000 shares contingently issuable under the terms of our agreement to acquire Cynara. You will experience further dilution if those additional shares of our common stock are issued. 17 22 CAPITALIZATION The following table sets forth our capitalization at June 30, 1999 and as adjusted as of that date to reflect the sale of 5,000,000 shares of our common stock in this offering and the application of the estimated net proceeds from the offering. You should read the information below in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements.
JUNE 30, 1999 ----------------------- AS ACTUAL ADJUSTED(1) -------- ------------ (DOLLARS IN THOUSANDS) Cash........................................................ $ 1,428 $16,882 ======= ======= Current portion of long-term debt and revolving credit facility.................................................. $ 6,622 $ -- Long-term debt (excluding current portion).................. 32,443 -- Stockholders' equity: Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized; no shares outstanding............... -- -- Class A Common Stock, par value $0.01 per share, 45,000,000 shares authorized; 8,650,688 and 13,650,688 shares outstanding, respectively(2)(3)................. 86 136 Class B Common Stock, par value $0.01 per share, 5,000,000 shares authorized; 500,000 shares outstanding(2)(4).... 5 5 Additional paid-in capital................................ 38,651 95,242 Accumulated deficit....................................... (8,672) (9,689) Treasury stock, 470,188 shares at cost...................... (4,550) (4,550) Accumulated other comprehensive loss........................ (1,182) (1,182) ------- ------- Total stockholders' equity........................ 24,338 79,962 ------- ------- Total capitalization.............................. $63,403 $79,962 ======= =======
- ------------------------------ (1) Does not reflect adjustments related to the pending acquisitions of Porta-Test and ESI as they will not close, if at all, until after this offering. The estimated cash required for the pending acquisitions is $12.7 million. (2) The shares to be sold in this offering are Class A common stock. Only the former stockholders of Cynara hold Class B common stock. Upon completion of this offering, the two classes will have the same rights, except that the holders of the Class B common stock will continue to have the rights: - to elect one director; and - to hold a class vote on any amendment to our charter that would authorize additional Class B common stock or would adversely affect their rights to elect a director. On January 1, 2002, the Class B common stock converts automatically into Class A common stock to constitute a single class of common stock. (3) Excludes the following related to Class A common stock: - 136,832 shares issued to Mr. Gregory in July 1999 as discussed under "Management -- Employment Agreement." - 1,795,947 shares issuable at September 30, 1999 on exercise of outstanding stock options at a weighted average exercise price of $4.40 per share; and (4) Excludes 1,250,000 shares of Class B common stock contingently issuable under the terms of our agreement to acquire Cynara. 18 23 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for each of the four fiscal years ended March 31, 1998 and the nine months ended December 31, 1998 has been derived from our audited consolidated financial statements. The data for the six month periods ended June 30, 1998 and 1999 has been derived from our unaudited interim consolidated financial statements, which include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations for these periods. Operating results for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the entire year. This data should be read in conjunction with our consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
SIX MONTHS NINE MONTHS ENDED YEAR ENDED MARCH 31, ENDED JUNE 30, ----------------------------------------- DECEMBER 31, ------------------ 1995 1996 1997 1998 1998 1998 1999 -------- -------- -------- -------- ------------ -------- ------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA(1): Revenues............................. $109,909 $112,724 $126,657 $202,023 $145,611 $106,658 $86,175 Cost of goods sold................... 88,322 91,530 100,803 161,801 115,521 85,635 65,821 -------- -------- -------- -------- -------- -------- ------- Gross profit......................... 21,587 21,194 25,854 40,222 30,090 21,023 20,354 Selling, general and administrative expense............................ 22,483 21,754 23,313 28,553 24,530 15,274 15,321 Restructuring charges(2)............. 984 776 -- -- -- -- -- Depreciation and amortization expense............................ 903 731 862 1,322 1,473 795 2,311 Interest expense..................... 3,358 2,422 1,861 2,992 2,215 1,347 1,673 Interest cost on postretirement liability(3)....................... 1,064 932 957 1,048 786 524 523 Revaluation (gain) loss on postretirement liability(3)........ (4,781) 2,273 1,466 159 53 -- -- Interest income...................... (1,692) (336) (116) (140) (227) (101) (99) Gain on sale of investment(4)........ (10,124) (6,320) -- -- -- -- -- -------- -------- -------- -------- -------- -------- ------- Income (loss) from continuing operations before income taxes..... 9,392 (1,038) (2,489) 6,288 1,260 3,184 625 Income tax provision (benefit)....... 4,462 (528) (659) 1,141 608 594 479 -------- -------- -------- -------- -------- -------- ------- Income (loss) from continuing operations......................... $ 4,930 $ (510) $ (1,830) $ 5,147 $ 652 $ 2,590 $ 146 ======== ======== ======== ======== ======== ======== ======= Basic earnings (loss) per share from continuing operations.............. $ 0.76 $ (0.08) $ (0.31) $ 0.68 $ 0.08 $ 0.32 $ 0.02 Diluted earnings (loss) per share from continuing operations......... 0.76 (0.08) (0.28) 0.64 0.07 0.29 0.01 Basic earnings per share............. 0.81 0.05 0.67 0.78 0.08 0.32 0.02 Diluted earnings per share........... 0.81 0.05 0.64 0.73 0.07 0.29 0.01 Basic weighted average shares of common stock....................... 6,502 6,056 6,032 7,623 8,243 8,146 9,151 Diluted weighted average shares of common stock....................... 6,502 6,243 6,371 8,067 8,942 8,876 9,824 OTHER DATA: Cash flows provided by (used in) operating activities............... $ (5,160) $ (4,416) $ 1,059 $ 3,113 $ (1,450) $ 2,569 $ 3,248 Cash flows provided by (used in) investing activities............... 15,457 9,544 (798) (24,712) (17,069) (2,692) (1,574) Cash flows provided by (used in) financing activities............... (8,547) (7,671) (1,033) 21,660 20,179 589 (2,797) EBITDA(5)............................ 13,025 2,711 1,075 11,510 5,507 5,749 5,033
19 24
MARCH 31, ------------------------------------- DECEMBER 31, JUNE 30, 1995 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------------ ----------- (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA (END OF PERIOD): Working capital................................ $ 3,445 $ 3,102 $12,551 $24,442 $ 31,466 $ 30,172 Net property, plant and equipment.............. 6,506 6,660 6,833 9,332 18,294 18,120 Total assets................................... 67,105 57,349 70,044 95,413 118,412 105,468 Long-term debt(6).............................. 25,649 23,245 27,566 33,719 41,777 39,065 Stockholders' equity (deficit)................. (4,672) (8,866) (6,737) 5,419 24,190 24,338
- ------------------------------ (1) In June 1997, we distributed our investment in PTH to our stockholders in a tax-free transaction. In accordance with generally accepted accounting principles, we account for the results of operations of PTH as discontinued operations for all periods presented. Accordingly, the net income of PTH is excluded from income (loss) from continuing operations in our income statements for the periods presented. (2) We have recorded charges of: - $1.0 million in fiscal 1995 consisting of relocation, severance benefits and recruiting costs related to the relocation of engineering and administrative personnel to corporate headquarters; and - $0.8 million in fiscal 1996, of which $0.5 million related to the closing of our Singapore operations and $0.3 million related to recruiting and employee relocation expenses. (3) When we acquired National Tank Company in 1989 from Combustion Engineering, Inc., we agreed to provide specified health care and life insurance benefits to employees of National Tank Company who retired prior to June 21, 1989. These agreements provided that our annual cash costs related to these benefits were reimbursed by the seller through June 21, 1999 to the extent that they exceeded on an annual basis the lesser of one-third of the cash costs in that year or $0.8 million, as adjusted for inflation. For the fiscal year ended March 31, 1997, our aggregate cash costs related to these benefits were $1.7 million, of which $1.1 million was reimbursed. For the fiscal year ended March 31, 1998, our aggregate cash costs were $1.8 million, of which $1.0 million was reimbursed. For the nine months ended December 31, 1998, our aggregate cash costs were $1.6 million, of which $1.1 million was reimbursed. For the six months ended June 30, 1999, our aggregate cash costs related to these benefits were $0.6 million, of which $0.4 million was reimbursed. The reimbursement obligation expired on June 22, 1999, and we no longer receive reimbursement for any portion of these cash costs. We currently plan to fund the cash requirements related to these retired employee benefits on a current basis. (4) In fiscal 1995, we sold a portion of our interest in a subsidiary for a gain of $10.1 million, and in fiscal 1996, we completed the sale of our remaining interest in that subsidiary for a gain of $6.3 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- History of the Company." (5) EBITDA consists of income (loss) from continuing operations plus interest expense, interest cost on postretirement benefit liability, income tax expense, and depreciation and amortization expense, less interest income. EBITDA is not a measurement presented in accordance with generally accepted accounting principles. You should not consider it in isolation from or as a substitute for net income or cash flow measures prepared in accordance with generally accepted accounting principles or as a measure of our profitability or liquidity. EBITDA is included as a supplemental disclosure because it may provide useful information regarding our ability to service debt and to fund capital expenditures. (6) Includes current portion of long-term debt and revolving lines of credit. 20 25 UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS The tables on the following pages present selected unaudited condensed pro forma financial data for the periods and dates indicated. In 1998, the Company changed its year end to December 31. For pro forma purposes, the quarter ended March 31, 1998 is combined with the nine months ended December 31, 1998 to present the twelve months ended December 31, 1998. The unaudited condensed pro forma statement of operations and other financial data give effect to this offering and to the acquisitions of Cynara, and the pending acquisition of Porta-Test and ESI as though each occurred on January 1, 1998. The unaudited condensed pro forma balance sheet data gives effect to this offering and to the acquisitions of Porta-Test and ESI as though each occurred on June 30, 1999, and excludes contingent consideration related to Cynara. The unaudited condensed pro forma statements of operations and other financial data presented below are not necessarily indicative of the financial results that would have occurred had this offering and the acquisitions of Cynara, Porta-Test and ESI occurred on January 1, 1998 or of our financial position had this offering or the acquisitions of Porta-Test and ESI occurred on June 30, 1999 and should not be viewed as indicative of operations or financial position in future periods. With respect to our pending acquisitions, we have only entered into nonbinding letters of intent. Accordingly, the completion of each of the acquisitions of Porta-Test and ESI is subject to numerous conditions, including the negotiation and execution of definitive agreements and the fulfillment or waiver of the conditions to closing to be included in the agreements. As a result, we can not assure you that these acquisitions will be completed. Porta-Test reports its financial results on the basis of a fiscal year ending on June 30. The information contained in these unaudited condensed pro forma financial statements with respect to Porta-Test has been derived from the unaudited interim financial statements of Porta-Test for the twelve months ended December 31, 1998 and the six months ended June 30, 1999. ESI reports its financial results on the basis of a fiscal year ending on December 31. The information contained in these unaudited condensed pro forma financial statements with respect to ESI has been derived from the audited combined financial statements of ESI for the year ended December 31, 1998 and the unaudited combined interim financial statements of ESI for the six months ended June 30, 1999. You should read this information in conjunction with "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Consolidated Financial Statements and related notes included elsewhere in this prospectus. 21 26 NATCO GROUP INC. UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
NATCO GROUP INC. --------------------- THREE NINE MONTHS MONTHS ENDED ENDED PRO FORMA PRO FORMA MARCH 31, DECEMBER COMBINED ADJUSTMENTS PORTA-TEST ESI 1998 31, 1998 CYNARA(A) COMPANY(B) OFFERING ACQUISITION ACQUISITION --------- --------- --------- ---------- ----------- ----------- ----------- Revenues........................... $55,219 $145,611 $12,821 $213,651 $ -- $8,118 $3,906 Cost of goods sold................. 44,572 115,521 8,723 168,816 -- 4,854 1,882 ------- -------- ------- -------- ------- ------ ------ Gross profit....................... 10,647 30,090 4,098 44,835 -- 3,264 2,024 Selling, general and administrative expense.......................... 7,368 24,530 3,178 35,076 -- 2,391 1,231 Depreciation and amortization expense.......................... 410 1,473 2,500 4,383 -- 55 65 Interest expense................... 704 2,215 636 3,555 (3,555)(d) 64 -- Interest cost on postretirement liability........................ 262 786 -- 1,048 -- -- -- Revaluation loss on postretirement liability........................ -- 53 -- 53 -- -- Interest income.................... -- (227) -- (227) -- -- (69) ------- -------- ------- -------- ------- ------ ------ Income (loss) from continuing operations before income taxes... 1,903 1,260 (2,216) 947 3,555 754 797 Provision for income taxes......... (2) 608 (636) (30) 1,351(e) 22 6 ------- -------- ------- -------- ------- ------ ------ Income (loss) from continuing operations....................... $ 1,905 $ 652 $(1,580) $ 977 $ 2,204 $ 732 $ 791 ======= ======== ======= ======== ======= ====== ====== Basic earnings per share from continuing operations............ $ 0.08 $ 0.11 Diluted earnings per share from continuing operations............ $ 0.07 $ 0.10 Basic weighted average number of shares of common stock........... 8,243 8,665 Diluted weighted average number of shares of common stock........... 8,942 9,366 EBITDA............................. $ 5,507 $ 9,706 PRO FORMA ADJUSTMENTS ACQUISITIONS PRO FORMA ------------ --------- Revenues........................... $ -- $225,675 Cost of goods sold................. -- 175,552 ----- -------- Gross profit....................... -- 50,123 Selling, general and administrative expense.......................... -- 38,698 Depreciation and amortization expense.......................... 392(c) 4,895 Interest expense................... (64)(d) -- Interest cost on postretirement liability........................ -- 1,048 Revaluation loss on postretirement liability........................ -- 53 Interest income.................... -- (296) ----- -------- Income (loss) from continuing operations before income taxes... $(328) 5,725 Provision for income taxes......... 614(e) 1,963 ----- -------- Income (loss) from continuing operations....................... $(942) $ 3,762 ===== ======== Basic earnings per share from continuing operations............ $ 0.28 Diluted earnings per share from continuing operations............ $ 0.26 Basic weighted average number of shares of common stock........... 13,665 Diluted weighted average number of shares of common stock........... 14,366 EBITDA............................. $ 11,372
See the accompanying notes to our unaudited pro forma financial statements. 22 27 NATCO GROUP INC. UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS PORTA-TEST ESI PRO FORMA HISTORICAL OFFERING ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA ---------- ----------- ----------- ----------- ----------- ----------- Revenues.............................. $86,175 $ -- $ 2,253 $1,380 $ -- $ 89,808 Cost of goods sold.................... 65,821 -- 2,130 840 -- 68,791 ------- ------- ------- ------ ----- -------- Gross profit.......................... 20,354 -- 123 540 -- 21,017 Selling, general and administrative expense............................. 15,321 -- 1,451 632 -- 17,404 Depreciation and amortization expense............................. 2,311 -- 38 27 196(c) 2,572 Interest expense...................... 1,673 (1,673)(d) 11 -- (11)(d) -- Interest cost on postretirement liability........................... 523 -- -- -- -- 523 Revaluation loss on postretirement liability........................... -- -- -- -- -- -- Interest income....................... (99) -- -- (107) -- (206) ------- ------- ------- ------ ----- -------- Income (loss) from continuing operations before income taxes...... 625 1,673 (1,377) 43 (185) 724 Provision for income taxes............ 479 636(e) (26) -- (503)(e) 586 ------- ------- ------- ------ ----- -------- Income (loss) from continuing operations.......................... $ 146 $ 1,037 $(1,351) $ (12) $ 318 $ 138 ======= ======= ======= ====== ===== ======== Basic earnings per share from continuing operations............... $ 0.02 $ 0.01 Diluted earnings per share from continuing operations............... $ 0.01 $ 0.01 Basic weighted average number of shares of common stock.............. 9,151 14,151 Diluted weighted average number of shares of common stock.............. 9,824 14,824 EBITDA................................ $ 5,033 $ 3,613
See the accompanying notes to our unaudited pro forma financial statements. 23 28 NATCO GROUP INC. UNAUDITED CONDENSED PRO FORMA BALANCE SHEET AS OF JUNE 30, 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA PRO FORMA OFFERING PRO FORMA PORTA- ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS OFFERING TEST ESI ACQUISITIONS AS ADJUSTED ---------- ----------- --------- ------ ------ ------------ ----------- ASSETS Current assets: Cash and cash equivalents...... $ 1,428 $ 55,000(a) $ 16,882 $ 80 $ 149 $ (6,011)(c) $ 1,100 (39,065)(b) (10,000)(d) Marketable Securities.......... -- (481)(e) -- -- 2,600 -- 2,600 Trade accounts receivable, net of allowance for doubtful accounts..................... 35,208 -- 35,208 613 655 -- 36,476 Inventories.................... 19,731 -- 19,731 639 331 -- 20,701 Note receivable from an officer and a director............... 1,803 481(e) 2,284 -- -- -- 2,284 Net deferred income tax assets....................... 1,894 -- 1,894 -- -- -- 1,894 Income tax receivable.......... 1,671 624(e) 2,295 -- -- -- 2,295 Prepaid expenses and other current assets............... 1,138 -- 1,138 245 25 -- 1,407 -------- -------- -------- ------ ------ -------- -------- Total current assets..... 62,873 16,559 79,432 1,577 3,760 (16,011) 68,758 -------- -------- -------- ------ ------ -------- -------- Property, plant and equipment, net.......................... 18,120 -- 18,120 338 220 1,375(c) 20,053 Goodwill....................... 16,648 -- 16,648 -- -- 5,444(c) 27,013 4,921(d) Net deferred income tax assets....................... 6,797 -- 6,797 -- -- -- 6,797 Other assets, net.............. 1,030 -- 1,030 -- 9 -- 1,039 -------- -------- -------- ------ ------ -------- -------- Total assets............. $105,468 $ 16,559 $122,027 $1,915 $3,989 $ (4,271) $123,660 ======== ======== ======== ====== ====== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current installments of long-term debt......................... $ 4,693 $ (4,693)(b) $ -- $ 93 $ -- $ (93)(c) $ -- Revolving credit bank loan..... 1,929 (1,929)(b) -- -- -- -- -- Accounts payable............... 14,533 -- 14,533 358 22 -- 14,913 Accrued expenses and other..... 10,825 -- 10,825 962 153 -- 11,940 Customer advances.............. 721 -- 721 -- 43 -- 764 Income taxes payable........... -- -- -- -- -- -- -- -------- -------- -------- ------ ------ -------- -------- Total current liabilities............ 32,701 (6,622) 26,079 1,413 218 (93) 27,617 -------- -------- -------- ------ ------ -------- -------- Long-term debt, excluding current installments......... 32,443 (32,443)(b) -- 163 -- (163)(c) -- Postretirement benefit liability and other.......... 15,986 -- 15,986 28 -- -- 16,014 -------- -------- -------- ------ ------ -------- -------- Total liabilities........ 81,130 (39,065) 42,065 1,604 218 (256) 43,631 -------- -------- -------- ------ ------ -------- -------- Stockholders' equity: Common stock, $.01 par value per share.................... 91 50(a) 141 -- 2 (2)(c)(d) 141 Additional paid-in capital..... 38,651 56,591(a)(e) 95,242 -- 4 63(d) 95,309 Accumulated deficit............ (8,672) (1,017)(e) (9,689) 323 4,547 (4,870)(c)(d) (9,689) Treasury stock, 470,188 shares at cost......................... (4,550) (4,550) -- (990) 990(d) (4,550) Accumulated other comprehensive loss......................... (1,182) -- (1,182) (12) 208 (196) (1,182) -------- -------- -------- ------ ------ -------- -------- Total stockholders' equity................. 24,338 55,624 79,962 311 3,771 (4,015) 80,029 -------- -------- -------- ------ ------ -------- -------- Total liabilities and stockholders' equity... $105,468 $ 16,559 $122,027 $1,915 $3,989 $ (4,271) $123,660 ======== ======== ======== ====== ====== ======== ========
See the accompanying notes to our unaudited pro forma financial statements. 24 29 NATCO GROUP INC. NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS The following sets forth the assumptions used in preparing our unaudited condensed pro forma statements of operations for the twelve months ended December 31, 1998 and for the six months ended June 30, 1999 and our unaudited condensed pro forma balance sheet as of June 30, 1999. STATEMENTS OF OPERATIONS (a) The results for Cynara are taken from their interim financial statements for the period from January 1, 1998 to November 18, 1998, the date that we acquired Cynara. Results for Cynara include a provision for additional goodwill amortization of $0.5 million. (b) Results for this column represent our results combined with those of Cynara for the twelve months ended December 31, 1998. (c) To reflect additional goodwill amortization recorded in the acquisition of Porta-Test of $0.3 million and $0.1 million and ESI of $0.1 million and $0.1 million for the twelve months ended December 31, 1998 and the six months ended June 30, 1999. (d) To reflect the elimination of our interest expense of $3.6 million and $1.7 million, and the interest expense of Porta-Test of $0.1 million and $0.0 million, for the twelve months ended December 31, 1998 and the six months ended June 30, 1999, as a result of repayments of all outstanding debt balances with the proceeds of this offering. (e) To reflect income tax adjustments at a rate of 38% for the interest expense adjustments and income tax expense and benefit to Porta-Test and ESI at a rate of 38%. BALANCE SHEET (a) To reflect our sale of 5,000,000 shares of our common stock in this offering at an assumed initial public offering price of $12.00 per share and the related costs and the application of the net proceeds of the sale. The unaudited condensed pro forma statements of operations reflect reductions of interest attributable to the use of those proceeds to pay our debt under our revolving credit facility. (b) To reflect the repayment of $39.1 million of outstanding borrowings under our credit facilities from the proceeds of this offering. (c) To reflect the pending acquisition of Porta-Test for $6.1 million, consisting of $5.1 million cash, a note of $0.7 million and assumed debt of $.3 million. We will retire the assumed debt of $0.3 million and reflect payment of the $0.7 million note we recorded in connection with the acquisition from the proceeds of this offering. We will account for the acquisitions by using the purchase method of accounting; the preliminary valuation of fair market values of assets and liabilities of Porta-Test did not differ materially from those amounts recorded as historical cost. Excess purchase price over the fair market value of the underlying assets of $5.4 million was allocated to goodwill and will be amortized over 20 years. (d) To reflect the pending acquisition of ESI for $10.1 million, consisting of $10.0 million cash and options to purchase 25,000 shares of common stock at the initial public offering price valued at $0.1 million. As part of the purchase, the former owner of ESI will contribute property, plant and equipment valued at $1.4 million. We will account for the acquisition by using the purchase method of accounting; the preliminary valuation of fair market values of assets and liabilities of ESI did not differ materially from those amounts recorded as historical cost. Excess purchase price over the fair market value of the underlying assets of $4.9 million was allocated to goodwill and will be amortized over 40 years. (e) To record the net effect of a bonus to be paid to the Chief Executive Officer upon the completion of the initial public offering. We will issue 136,832 shares of stock to the officer at a price of $8.81 per share in exchange for a $1.2 million note receivable. Upon completion of the offering, we will pay the officer a bonus equal to the outstanding principal and interest of the note, and we will record 25 30 compensation expense in the amount of $1.2 million. We will also record compensation expense of $0.4 million to reflect the difference between the anticipated price per share of the initial public offering, and the price to be paid by the officer of $8.81. At the time the bonus is paid, the officer will repay $0.7 million toward the balance due on his note. We will also record a tax benefit of $0.6 million related to this transaction. This expense will be recognized, net of income taxes, in the quarter the offering is consummated. See "Management -- Employment Agreement." 26 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HISTORY OF OUR COMPANY Our company was incorporated in 1988 by Capricorn I. In 1989, Capricorn I and a group of investors provided us with sufficient funds to enable us to acquire all the outstanding capital stock of National Tank Company, W. S. Tyler, Incorporated (Tyler) and another company from Combustion Engineering, Inc. (C-E) for cash. National Tank Company is now our principal subsidiary. In December 1991, Capricorn I loaned us approximately $5.0 million. In exchange, we issued to Capricorn I our subordinated promissory notes in an equal principal amount. In 1992, we organized PTH as our subsidiary and contributed to it all the outstanding stock of W. S. Tyler, Incorporated. During the period from June 1989 through January 1997, both we and Capricorn I, on various occasions, acquired shares of our common stock from our original investor group other than Capricorn I. By the end of January 1997, Capricorn I was our sole stockholder. Between 1992 and 1997, Capricorn I consented to the addition to principal of accrued but unpaid interest on our subordinated promissory notes, and to various extensions of the maturities of the promissory notes. On June 30, 1997, we undertook a significant financing and reorganization. At that time: - PTH, with the consent of Capricorn I, assumed $4.6 million in principal amount of our subordinated promissory notes; - we distributed all the outstanding capital stock of PTH to Capricorn I; - we refinanced our portion of the original subordinated promissory notes by issuing a new $5.1 million 13% subordinated promissory note due 2000 in exchange for the old notes; - Capricorn II acquired from us a new $2.4 million 13% subordinated promissory note due 2000 and 2,113,334 shares of our common stock for $13.0 million in cash; and - we acquired all the outstanding capital stock of Total Engineering Services Team, Inc. (TEST) by using the proceeds from the Capricorn II financing and proceeds from borrowings under a bank credit facility. In March 1998, we issued 1,010,333 shares of our common stock to Capricorn I and 468,925 shares of our common stock to Capricorn II in exchange for the surrender and cancellation of our subordinated promissory notes. In November 1998, we acquired Cynara by merging it into our subsidiary National Tank Company in exchange for which we: - paid $5.3 million in cash; - repaid $10.1 million of Cynara's debt; - issued 500,000 shares of our Class B common stock; and - granted Cynara's stockholders a right to receive up to 1,400,000 additional shares (which we currently expect not to exceed 1,250,000 shares) of our Class B common stock under specified circumstances. We have consolidated the results of operations of Cynara with our results from the date of acquisition under the purchase method of accounting for business combinations. 27 32 To assist us in our acquisition of Cynara, Capricorn II invested $5.3 million in our company in exchange for a convertible promissory note. In December 1998, Capricorn II elected to convert the note, and we issued an additional 504,762 shares of our common stock to Capricorn II. OVERVIEW We are a holding company, and substantially all of our operations are conducted through our directly and indirectly wholly owned subsidiaries. We operate through four business segments: - traditional production equipment and services, which primarily provides standardized components, replacement parts and used components and equipment servicing; - engineered systems, which primarily provides customized, large scale integrated oil and gas production systems; - our Canadian operations, which combine traditional production equipment and services and engineered systems; and - instrumentation and electrical control systems, which provides control panels and systems that monitor and control oil and gas production. We recognize revenues from significant contracts (contracts greater than $250,000 and longer than four months in duration) and all instrumentation and electrical contracts and orders on the percentage of completion method. We record revenues and profits on other sales as shipments are made. Earned revenue is based on the percentage that incurred costs to date bear to total estimated costs. If estimated total costs on any contract or work-in-process indicate a loss, we recognize the entire loss immediately. We generally recognize revenue and earnings to which the percentage of completion method applies over a period of two to six quarters. Customers typically retain an interest in uncompleted projects. RESULTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED FOR THE TWELVE MONTHS ENDED MARCH 31, DECEMBER 31, ----------------------------------- ----------------------------------- 1997 1998 1997(1) 1998(1) -------- -------- -------- -------- Statement of Operations Data: Revenues................................. $126,657 100.0% $202,023 100.0% $182,372 100.0% $200,830 100.0% Cost of goods sold....................... 100,803 79.6 161,801 80.1 146,804 80.5 160,093 79.7 -------- ----- -------- ----- -------- ----- -------- ----- Gross profit............................. 25,854 20.4 40,222 19.9 35,568 19.5 40,737 20.3 Selling, general and administrative expense................................ 23,313 18.4 28,553 14.1 28,219 15.5 31,898 15.9 Depreciation and amortization expense.... 862 0.7 1,322 0.7 1,086 0.6 1,883 0.9 Interest expense......................... 1,861 1.5 2,992 1.5 3,112 1.7 2,919 1.5 Interest cost on postretirement liability.............................. 957 0.8 1,048 0.5 1,067 0.6 1,048 0.5 Revaluation (gain) loss on postretirement liability.............................. 1,466 1.2 159 0.1 159 0.1 53 -- Interest income.......................... (116) (0.1) (140) (0.1) (98) (0.1) (227) (0.1) -------- -------- -------- -------- Income (loss) from continuing operations before income taxes.................... (2,489) (2.0) 6,288 3.1 2,023 1.1 3,163 1.6 Provision (benefit) for income taxes..... (659) (0.5) 1,141 0.6 938 0.5 606 0.3 -------- -------- -------- -------- Income (loss) from continuing operations............................. (1,830) (1.5) 5,147 2.5 1,085 0.6 2,557 1.3 Income from discontinued operations, net of income tax(2)....................... 1,100 0.9 767 0.4 767 0.4 -- -- Gain on disposal of division, net of income tax............................. 4,788 3.8 -- -- -- -- -- -- -------- -------- -------- -------- Net income............................... $ 4,058 3.2 $ 5,914 2.9 $ 1,852 1.0 $ 2,557 1.3 ======== ======== ======== ======== FOR THE SIX MONTHS ENDED JUNE 30, ---------------------------------- 1998 1999 -------- ------- Statement of Operations Data: Revenues................................. $106,658 100.0% $86,175 100.0% Cost of goods sold....................... 85,635 80.3 65,821 76.4 -------- ----- ------- ----- Gross profit............................. 21,023 19.7 20,354 23.6 Selling, general and administrative expense................................ 15,274 14.3 15,321 17.8 Depreciation and amortization expense.... 795 0.7 2,311 2.7 Interest expense......................... 1,347 1.3 1,673 1.9 Interest cost on postretirement liability.............................. 524 0.5 523 0.6 Revaluation (gain) loss on postretirement liability.............................. -- -- -- -- Interest income.......................... (101) (0.1) (99) (0.1) -------- ------- Income (loss) from continuing operations before income taxes.................... 3,184 3.0 625 0.7 Provision (benefit) for income taxes..... 594 0.6 479 0.6 -------- ------- Income (loss) from continuing operations............................. 2,590 2.4 146 0.1 Income from discontinued operations, net of income tax(2)....................... -- -- -- -- Gain on disposal of division, net of income tax............................. -- -- -- -- -------- ------- Net income............................... $ 2,590 2.4 $ 146 0.1 ======== =======
- --------------- (1) In 1998, we changed our fiscal year end from March 31 to December 31. For comparison purposes, we have presented our unaudited statement of operations data for the twelve months ended December 31, 1997 and 1998. (2) Represents the results of operations of PTH, all the outstanding stock of which was distributed by us to Capricorn I as a dividend on June 30, 1997. See Note (17) to Notes to Consolidated Financial Statements. 28 33 SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Revenues. Revenues for the first six months of 1999 decreased $20.5 million, or 19%, to $86.2 million from $106.7 million for the six months ended June 30, 1998. Revenues generated in the first six months of 1999 included $5.1 million of revenue attributed to Cynara, which we acquired in November 1998. Excluding the impact of Cynara for 1999, our revenues would have declined $25.6 million, or 24%, in the first six months of 1999 compared to the first six months of 1998. The overall decline in revenue in 1999 compared to 1998 was attributable to the significant reduction in spending by our customers as a result of the sharp decrease in energy prices that began in mid-1998 and continued until early 1999. Revenues for traditional equipment and services for the six months ended June 30, 1999 decreased $11.6 million, or 30%, to $26.8 million from $38.5 million for the first six months of 1998. For comparison purposes, the average number of drilling rigs operating in the United States during the first six months of 1999 was 538, compared to an average of 916 rigs operating during the first six months of 1998. This 41% decrease in the average number of rigs operating is indicative of the significant curtailment in spending levels of our customers. Revenues for engineered systems for the six months ended June 30, 1999 increased $7.3 million, or 34%, to $28.7 million from $21.4 for the first six months of 1998. This increase was largely due to the inclusion of Cynara's results in 1999. The remaining increase was due to the completion of contracts awarded to us in the second half of 1998 and completed in the first six months of 1999. Revenues for NATCO-Canada for the six months ended June 30, 1999 decreased by $16.7 million, or 63%, to $9.6 million from $26.3 million for the six months ended June 30, 1998. The decrease in revenue was attributable to the significant decline in spending levels by our customers due to low energy prices as well as the completion of a large project in 1998. Revenues for instrumentation and electrical systems for the six months ended June 30, 1999 increased $0.6 million, or 3%, to $22.8 million from $22.2 million for the six months ended June 30, 1998. Gross Profit. Gross profit for the six months ended June 30, 1999 decreased $0.7 million, or 3.2%, to $20.4 million, compared to $21.0 million for the six months ended June 30, 1998. As a percentage of revenue, gross margins improved to 23.6% for the six months ended June 30, 1999 versus 19.7% for the six months ended June 30, 1998. The margin improvement was attributable partially to the inclusion of Cynara's results in 1999, as well as an improved product mix due to the sharp decline in revenue from NATCO-Canada, which historically has generated lower margins. Gross profit for traditional equipment and services decreased $3.1 million, or 31.3%, for the six months ended June 30, 1999, to $6.8 million, compared to $9.9 million the first six months of 1998. This decrease was primarily due to the 30% reduction in revenue during the same time period. As a percentage of revenue, gross margins were 25.3% for the first six months of 1999, compared to 25.7% for the first six months of 1998. Gross profit for the six months ended June 30, 1999 for engineered systems increased $3.6 million, or 102.8%, to $7.1 million, compared to $3.5 million for the six months ended June 30, 1998. The increase was partially due to the inclusion of Cynara in the 1999 results, as well as the completion of two projects during the second quarter of 1999 that had favorable margins. As a percentage of revenue, gross margins were 24.7% for the first six months of 1999, compared to 16.1% for the first six months of 1998. Gross profit for the six months ended June 30, 1999 for NATCO-Canada decreased $1.8 million, or 57%, to $1.4 million, compared to $3.2 million for the six months ended June 30, 1998. Gross profit decreased due to a 63% decline in revenue during the same period. As a percentage of revenue, gross margins were 14.7% for the first six months of 1999, compared to 12.3% for the first six months of 1998. Gross profit for the first six months of 1999 for instrumentation and electrical systems increased $0.6 million, or 13.3%, to $5.1 million, compared to $4.5 million for the first six months of 1998. Gross profit improved due primarily to the more efficient completion of projects in 1999 and to the completion of 29 34 a high margin project in Venezuela during the second quarter of 1999. As a percentage of revenue, gross margins were 22.1% for the first six months of 1999, compared to 20.1% for the first six months of 1998. Selling, General and Administrative Expense. Selling, general and administrative expense totaled $15.3 million for the six months ended June 30, 1999, unchanged from the $15.3 million reported for the six months ended June 30, 1998. Overall, reductions in expenses in the United States and Canada as a result of the severe downturn in the industry were offset by the inclusion of Cynara in the 1999 results. In addition, during the first six months of 1999 we recorded non-recurring costs primarily associated with the retirement of one of our officers totaling $0.5 million. During the first six months of 1999, we revised previous estimates related to the remaining costs associated with the closure of NATCO (UK) Ltd., and reversed these accruals. Depreciation and Amortization Expense. Depreciation and amortization expense for the first six months of 1999 increased $1.5 million, or 191%, to $2.3 million, compared to $0.8 million the first six months of 1998. This increase was due solely to the inclusion of Cynara in 1999. Interest Expense. Interest expense was $1.7 million in the first six months of 1999, compared to $1.3 million for the same period in 1998. This 24% increase in interest expense was due primarily to increased debt incurred in connection with the acquisition of Cynara. Interest Cost on Postretirement Benefit Liability. Interest cost on postretirement benefit liability remained constant on a year-to-year basis. Income from Continuing Operations. Income from continuing operations for the six months ended June 30, 1999 decreased to $0.1 million compared to $2.6 million for the six months ended June 30, 1998. The decrease is due primarily to the $0.7 million decrease in gross margin (largely due to the decrease in revenues), a $1.5 million increase in depreciation and a $0.4 million increase in interest expense. Net Income. Net income for the six months ended June 30, 1999 decreased to $0.1 million compared to $2.6 million reported for the six months ended June 30, 1998. The decrease was due to the various factors discussed above. TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1997 Revenues. Revenues for the year ended December 31, 1998 increased $18.5 million, or 10%, to $200.8 million from $182.4 million for the year ended December 31, 1997. The increase was principally attributable to the inclusion of TEST for the full year in 1998 as compared to six months for 1997. The increase was also attributable to the inclusion of Cynara revenue for five weeks in 1998. Excluding the impact of the acquisitions, our revenues would have declined $7.0 million, or 4%, from 1998 to 1997. The decline in revenue in 1998 compared to 1997 was attributable to the reduction in spending by our customers as a result of the sharp decrease in energy prices that began in mid-1998 and continued until early 1999. Revenues for traditional production equipment and services for the year ended December 31, 1998 decreased $1.6 million, or 2%, to $71.0 million from $72.6 million for the year ended December 31, 1997. Revenues for engineered systems for the year ended December 31, 1998 increased $8.9 million, or 24%, to $45.6 million from $36.6 million for the year ended December 31, 1997. This increase is largely due to the completion of projects in 1998 that were awarded to us in 1997. Revenues for NATCO-Canada for the year ended December 31, 1998 decreased by $11.2 million, or 20%, to $43.5 million from $54.7 million for the year ended December 31, 1997. The decrease in revenue was attributable to the significant decline in spending levels by our customers due to low energy prices as well as the completion of a large project in the first six months of 1998. Revenues for instrumentation and electrical systems for the year ended December 31, 1998 increased $24.7 million, or 113%, to $46.6 million from $21.9 million from the year ended December 31, 1997. The 30 35 increase is principally attributable to the inclusion of TEST for the full year in 1998 as compared to six months in 1997. Gross profit. Gross profit for the year ended December 31, 1998 increased $5.2 million, or 15%, to $40.7 million from $35.6 million from the year ended December 31, 1997. As a percentage of revenue, gross margin improved to 20.3% for 1998 versus 19.5% for 1997. The margin improvement was attributable to improved performance for engineered systems projects as well as an improved product mix due to the sharp decline in revenue from NATCO-Canada, which historically has generated lower margins. Gross profit for traditional production equipment and services decreased $1.1 million, or 6%, to $17.6 million from $18.7 million from the year ended December 31, 1997. This decrease was primarily due to the 2.2% reduction in revenue during the same time period. As a percentage of revenue, gross margins were 24.8% for 1998 compared with 25.7% for 1997. Gross profit for engineered systems increased $3.9 million, or 87%, to $8.4 million from $4.5 million from the year ended December 31, 1997. The increase was partially due to the inclusion of Cynara in the 1998 results, as well as due to the completion of projects during 1998, which had more favorable margins due to improved project management as well as selectivity in the bid and acceptance process. As a percentage of revenue, gross margins were 18.3% for 1998 compared to 12.2% for 1997. Gross profit for NATCO-Canada decreased $2.4 million, or 29%, to $6.0 million from $8.4 million. The decrease is principally attributable to a 20% reduction in revenues for the same period of time. As a percentage of revenue, gross margins were 13.7% for 1998 compared to 15.3% in 1997. Gross profit for instrumentation and electrical systems increased $4.8 million, or 122%, to $8.9 million from $4.0 million from the year ended December 31, 1997. The increase was principally attributable to the inclusion of TEST for the full year in 1998 as compared to six months in 1997. As a percentage of revenue, gross margins were 19.0% for 1998 compared with 18.5% for 1997. Selling, General and Administrative Expense. Selling, general and administrative expense increased $3.7 million, or 13%, to $31.9 million for the year ended December 31, 1998 compared to $28.2 million for the year ended December 31, 1997. The increase was primarily due to the inclusion of TEST for the full year in 1998 compared to only six months in 1997, as well as the inclusion of Cynara for five weeks in 1998. In addition, non-recurring expenses totaling $1.6 million were recorded in 1998, of which $1.2 million related to our previous initial public offering effort in early 1998, and $0.4 million related to severance costs incurred. In addition, insurance reserve reductions totaling $2.5 million were recorded in 1998, reflecting revisions to previous estimates related to workers compensation and general liability claims. In 1997, we incurred non-recurring compensation expense related to the conversion of stock appreciation rights into stock options totaling $1.2 million. Depreciation and Amortization Expense. Depreciation and amortization expense increased $0.8 million, or 73%, to $1.9 million from $1.1 million for the year ended December 31, 1997. This increase was principally to goodwill amortization related to the TEST acquisition and depreciation related to Cynara gas processing plants. Interest Expense. Interest expense decreased $0.2 million, or 6%, to $2.9 million from $3.1 million for the year ended December 31, 1997. This 6% decrease in interest expense was due primarily to the conversion of 13% subordinated notes into common stock by our principal stockholders on April 1, 1998. Interest Cost on Postretirement Benefit Liability. Interest cost on postretirement benefit liability remained constant on a year-to-year basis. Revaluation Loss on Postretirement Benefit Liability. Revaluation loss decreased by $0.1 million, or 67%, from $0.2 million for the year ended December 31, 1997 to $0.1 million for the year ended December 31, 1998. This resulted from slight changes in the actuarial assumptions. Income from Continuing Operations. Income from continuing operations for 1998 increased $1.5 million, or 136%, to $2.6 million from $1.1 million for the year ended December 31, 1997. The 31 36 increase was due primarily to the $5.2 million increase in gross profit (largely due to the decrease in revenues), less a $0.8 million increase in depreciation and a $3.7 million increase in selling, general and administrative expense. Net Income. Net income for the year ended December 31, 1998 decreased $0.7 million, or 38%, to $2.6 million from $1.9 million for the year ended December 31, 1997. The decrease was due to the various factors discussed above. FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997 Revenues. Revenues for the fiscal year ended March 31, 1998 increased by $75.3 million, or 59%, to $202.0 million from $126.7 million for the fiscal year ended March 31, 1997. Of this increase, $32.7 million was attributable to the inclusion of the results of TEST in our results for the last nine months of the fiscal year ended March 31, 1998. We had revenues of $27.7 million from the BP Exploration (Alaska), Inc. alliance project compared to revenues of only $4.5 million from such alliance for the fiscal year ended March 31, 1997. Revenues for traditional production equipment and services for fiscal 1998 increased by $19.9 million, or 35%, to $76.8 million from $56.9 million for fiscal 1997. The increase in revenues resulted primarily from strong demand in the market for these products and services. Revenue for engineered systems for fiscal 1998 decreased by $9.3 million, or 21%, to $34.3 million from $43.6 million for fiscal 1997. The decrease in revenues resulted primarily from the postponement of a major project and from our increased selectivity in the bid process. Revenues for NATCO-Canada, for fiscal 1998, increased by $27.7 million, or 87%, to $59.7 million compared to $32.0 million for fiscal 1997. A significant portion of the increase in revenues was due to a substantial project for BP Exploration (Alaska), Inc. Revenues for instrumentation and electrical systems of $33.2 million was attributable to the inclusion of TEST revenues for the nine months ended March 31, 1998. Gross Profit. Gross profit for fiscal 1998, increased $14.3 million, or 56%, to $40.2 million from $25.9 million for fiscal 1997 primarily due to the increases in revenues discussed above. As a percentage of revenues, gross profits remained unchanged for fiscal 1998 compared to fiscal 1997. Gross profit for traditional production equipment and services for fiscal 1998 increased $5.1 million, or 35%, to $19.6 million from $14.5 million for fiscal 1997 primarily due to the increases in revenue discussed above. As a percentage of revenues, gross profit decreased from 25.5% for fiscal 1997 to 25.6% for fiscal 1998, primarily as a result of a shift in the mix of business, as the volume of higher margin parts business grew less rapidly than the traditional equipment business. Gross profit for engineered systems for fiscal 1998 decreased $0.8 million, or 14%, to $5.2 million from $6.0 million for fiscal 1997, primarily due to the decrease in revenue discussed above. As a percentage of revenues, gross profit increased from 13.8% for fiscal 1997 to 15.1% for fiscal 1998. Gross profit for NATCO-Canada for fiscal 1998 increased by $3.6 million, or 67%, to $9.0 million from $5.4 million for fiscal 1997 primarily due to the increase in revenue discussed above. As a percentage of revenues, gross profit decreased from 16.7% for fiscal 1997 to 15.1% for fiscal 1998, primarily as a result of a lower margin on the BP Exploration (Alaska), Inc. project. Gross profit for instrumentation and electrical systems of $6.4 million for fiscal 1998 was attributable to the inclusion of gross profit for TEST for the nine months ended March 31, 1998. Selling, General and Administrative Expense. Selling, general and administrative expense increased $5.2 million, or 22%, to $28.5 million for fiscal 1998 from $23.3 million for fiscal 1997. Of this increase, $4.7 million was attributable to the inclusion of the results of TEST, and the remainder was primarily attributable to increased expenses associated with the increase in volume in our business. In addition, insurance reserve reductions totaling $1.3 million were recorded during the year ended March 31, 1998, 32 37 reflecting a revisions to previous estimates related to workers compensation and general liability claims. For the year ended March 31, 1997, non-recurring compensation expense related to the conversion of stock appreciation rights into stock options totaling $1.2 million was recorded. Depreciation and Amortization Expense. Depreciation and amortization expense increased $0.5 million, or 53%, to $1.3 million for fiscal 1998 from $0.9 million for fiscal 1997. Of the $0.5 million increase in fiscal 1998, $0.4 million related to depreciation and amortization expense at TEST. Interest Expense. Interest expense increased by $1.1 million, or 58%, to $3.0 million for fiscal 1998 from $1.9 million for fiscal 1997, primarily as a result of increased debt incurred in connection with the acquisition of TEST. Interest Cost on Postretirement Benefit Liability. Interest cost on postretirement benefit liability increased $0.1 million, or 10%, to $1.0 million for fiscal 1998 from $1.0 million for fiscal 1997 due to increased amortization resulting from an upward revaluation of the postretirement benefit liability based on revised actuarial assumptions at March 31, 1997. Revaluation Loss on Postretirement Benefit Liability. Our revaluation of postretirement benefit liability decreased $1.3 million, or 87%, from $1.5 million for fiscal 1997 to $0.2 million for fiscal 1998. This resulted primarily from a decrease in the discount rate used in the actuarial calculations. Income (Loss) from Continuing Operations. Income from continuing operations increased $7.0 million to $5.1 million for fiscal 1998 from a loss of $1.8 million for fiscal 1997, primarily as a result of increases in gross profit and the inclusion of operations of TEST for the nine months ended March 31, 1998. Income from Discontinued Operations. Income from discontinued operations of $0.8 million for the year ended March 31, 1998 and $1.1 million for the year ended March 31, 1997 represented income from our subsidiary PTH, the capital stock of which was distributed in June 1997 to our sole stockholder. Net Income. Net income increased by $1.9 million, or 46%, to $5.9 million for fiscal 1998 from $4.1 million for fiscal 1997 primarily as a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES We primarily use cash for our working capital, capital expenditures and acquisitions. Our cash sources are cash provided by operations, cash provided by investing activities and cash provided by financing activities. To the extent our cash requirements for working capital, capital expenditures and acquisitions exceed the cash provided by operations and investing activities, we must finance our cash requirements, primarily through debt and equity financing activities. As of June 30, 1999, we had cash and working capital of $1.4 million and $30.2 million. As of June 30, 1999, after giving effect to this offering, we would have had cash and working capital of $16.9 million and $53.4 million. Net cash provided by (used in) operating activities for the fiscal years ended March 31, 1997 and 1998 was $1.1 million and $3.1 million, and for the nine months ended December 31, 1998 was $(1.5) million. For the six months ended June 30, 1999, net cash provided by operating activities was $3.2 million. Net cash used in investing activities for the years ended March 31, 1997 and 1998 was $0.8 million and $24.7 million. Net cash used in investing activities for the nine months ended December 31, 1998 was $17.1 million. Our primary use of funds in fiscal 1998 was the acquisition of TEST, which required the use of $22.4 million of cash. Our primary use of funds for the nine months ended December 31, 1998 was the acquisition of Cynara, which required the use of $15.5 million of cash. We maintain a revolving credit and term loan facility as well as a working capital facility for export sales. The revolving credit facility provides for up to $22.0 million of borrowings in the United States and up to $10.0 million of borrowings in Canada, subject to borrowing base limitations. As of August 31, 1999, 33 38 borrowings under the revolving credit facility totaled $8.7 million. In addition, we had issued $3.6 million of letters of credit under the revolving facility as of August 31, 1999. The initial term loan of $32.5 million had been reduced to $30.8 million as of August 31, 1999. Borrowings under the revolving credit facility mature in November 2001, and the term loan matures in November 2003. The revolving credit and term facility is secured by substantially all of our assets. The export sales credit facility provides for aggregate borrowings of $10.0 million, subject to borrowing base limitations, of which $0.9 million was outstanding as of August 31, 1999. In addition, we had issued letters of credit totaling $8.3 million under the export facility. The export sales credit facility is secured by specific project inventory and receivables, and is partially guaranteed by the EXIM Bank. The export sales credit facility loans mature in July 2002. As of August 31, 1999, the weighted average interest rate of our borrowings under our credit facilities was 7.9%. We will repay all outstanding borrowings under the revolving credit and term loan facility as well as the export sales credit facility, which as of August 31, 1999 totaled $39.8 million, with the net proceeds of this offering. We will use the balance of the net proceeds from this offering for general corporate purposes, including the funding of the acquisitions of Porta-Test and ESI. Total cash consideration for these acquisitions will be approximately $12.7 million, net of cash acquired. We estimate that cash generated from operations for the remainder of 1999 and all of fiscal 2000 will be sufficient to meet our cash operating requirements during that time. Our capital expenditures generally consist of renovations and expansions of our manufacturing plants, technological improvements to our management information systems and acquisitions of, and improvements to, other equipment we use in our business. Historically, these capital expenditures have ranged from $1.0 million to $2.0 million annually. Upon completion of this offering, we will have $28.4 million of credit available under our revolving credit facility and $1.7 million available under our export sales credit facility, both subject to borrowing base limitations, which will be available to fund our working capital, capital expenditures and other corporate uses. As of August 31, 1998, borrowing base limitations reduced our available borrowing capacity to $20.4 million. We believe that our operating cash flow, supported by our borrowing capacity, will be adequate to fund our operations throughout the remainder of 1999 and all of 2000. If we should decide to pursue one or more acquisition opportunities during fiscal 2000, our determination as to our ability to finance the acquisitions will be a critical element of our analysis of the opportunities. INFLATION AND CHANGES IN PRICES The costs of materials (e.g., steel) for our products rise and fall with their value in the commodity markets. Generally, increases in raw materials and labor costs are passed on to our customers. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued by the Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the accounting for derivative instruments, including derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If specified conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the 34 39 ineffective portion of the gain or loss, is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. We will adopt SFAS 133 for our fiscal year beginning January 1, 2001. We have not determined the impact that SFAS 133 will have on our financial statements and believe that the determination will not be meaningful until closer to the date of initial adoption. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks. Market risk is the potential loss arising from adverse changes in market prices and rates. We do not enter into derivative or other financial instruments for trading or speculative purposes. Our market risk could arise from changes in interest rates and foreign currency exchange rates. Interest Rate Risk. We are subject to market risk exposure related to changes in interest rates. Assuming our current level of borrowings, a 100 basis point increase in interest rates under these borrowings would decrease our 1998 pro forma net income by approximately $0.4 million and our 1998 pro forma cash flow from operations by approximately $0.4 million. In the event of an adverse change in interest rates, we could take action to mitigate our exposure. Due to the uncertainty of the actions that would be taken and their possible effects, however, this analysis assumes no such actions. Furthermore, this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment. Foreign Currency Exchange Risk. Our earnings and financial position are affected by foreign exchange rate fluctuations. The majority of our foreign currency transactions are denominated in the Canadian dollar, which is the functional currency of NATCO-Canada. As these contracts are denominated and settled in the functional currency, risks associated with currency fluctuations are minimized. We do not currently hedge against foreign currency translation risks and we believe that foreign currency exchange risk is not significant to our operations. A portion of our sales are made in Southeast Asia, where several countries have experienced significant devaluations in their currencies against the United States dollar in 1997 and early 1998. The devaluation of these currencies and the related consequences to the economies in those countries have adversely affected economic growth in the region. To the extent that the economics of countries in this region continue to be adversely affected, demand for our products and services in the region most likely will be reduced. YEAR 2000 COMPLIANCE Issues involving the Year 2000, or "Y2K," concern the business implications associated with the upcoming change in century. On January 1, 2000, all computer hardware and software systems that use outdated 2-digit year fields may experience processing errors that could result in system failures. For example, programs that have date-sensitive features may recognize 01/01/00 as January 1, 1900 instead of January 1, 2000. These failures may be limited or they may be widespread depending on the system and its software, as well as its location and function. State of Readiness. The nature of our business and our products is not dependent upon hardware and software to the extent that Y2K issues pose a significant threat. In early 1998, we nonetheless formed a Y2K task force to prepare for January 1, 2000. This task force was charged with reviewing, assessing, and ensuring compliance of hardware and software in the following areas: - current products; - manufacturing systems; - enterprise management systems; - personal computers and personal computer networks; 35 40 - engineering and design systems; - infrastructure; and - suppliers. Based upon its analysis and evaluations and written communications from vendors and licensors of company-used hardware and software, we do not believe that the risks of system malfunctions resulting from the interrelationships of our systems with those of customers, suppliers or contractors are significant. The Y2K task force is also communicating with our suppliers and customers regarding their state of Y2K readiness. Specifically, the task force has either received or is in the process of receiving written documentation from these third parties regarding their Y2K readiness and the issues they believe it raises for them. The task force has more closely scrutinized those suppliers that provide us with products that are more likely to present Y2K issues and believes that no significant Y2K issues exist. The task force has also reviewed publicly available information, if any, regarding these third-party systems and their Y2K compliance. While we expect to complete our Y2K review by October 31, 1999, we plan to continue reviewing the issue throughout the balance of 1999. Cost to Address Y2K Issues. Costs directly related to assessing Y2K issues through September 30, 1999 are less than $50,000 and have been expensed. We do not expect to incur significant additional cost related to Y2K compliance during the remainder of 1999. These estimated costs are based on our best estimates. Y2K Risk Factors. While we believe that our internal operations do not have material issues with respect to Y2K compliance, we cannot guarantee that assessment. Additionally, we may not properly identify all potential problems or all potentially affected systems. In that case, we will not have remedied all these problems within our systems. We also have no means of insuring that third parties with whom we conduct our business will be Y2K ready. The inability of these third parties to complete their Y2K assessments in a timely fashion could materially impact our results of operations and cash flows. The effect of non-compliance by these third parties is not determinable. The most likely "worst case" impacts that we could reasonably anticipate from Y2K non-compliance are as follows: - our inability to execute financial transactions with our banks or other third parties whose systems fail or malfunction; - impairment of the ability of third-party suppliers or service companies to provide needed materials or services to our planned and ongoing operations necessitating deferral or total shut down of our operation; and - impairment of our ability to deliver our products to, or receive payment from, our customers. Contingency Plans. We have a contingency plan in place to ensure the safety of our employees. While this plan covers all company employees, it is specifically directed at those employees working in offshore environments and on international assignments. Summary. We believe that we will be able to achieve substantial Y2K readiness with respect to the critical systems that we control. The extent and magnitude of the Y2K problem as it will effect us, both before and for some time after January 1, 2000, are, however, difficult to predict or quantify. We cannot assure you that all of our systems and all outside systems that we depend upon will be adequately identified and compliant so that they are Y2K ready by January 1, 2000 so as not to create a material disruption to our business. If, despite our reasonable efforts and our task force's reasonable efforts, there are mission critical Y2K related failures that create substantial disruption to our business, the adverse effects could be material. These unknown material effects and the costs associated with them are difficult to estimate accurately because of unanticipated vendor delays, technical difficulties, the impacts of test of outside systems and similar events. 36 41 BUSINESS GENERAL We are a leading provider of wellhead equipment, systems and services used in the production of oil and gas. Our production equipment and systems are primarily used at or near the wellhead to separate oil and gas within a hydrocarbon stream and to remove contaminants. Separation and decontamination at the wellhead are necessary to meet the specifications of transporters and end users. Our products and services are used in onshore and offshore fields in most major oil and gas producing regions in the world. On a pro forma basis after giving effect to our acquisition of Cynara, our revenues and EBITDA for the twelve months ended December 31, 1998 were approximately $213.7 million and $9.7 million. Our revenues and EBITDA for the six months ended June 30, 1999 were approximately $86.2 million and $5.0 million. We design and manufacture a diverse line of production equipment, including: - separators, which separate a hydrocarbon stream into oil, gas and water; - dehydration and desalting units, which remove water and salt from oil and gas; - heaters, which prevent solids from forming in gas and reduce the viscosity of oil; - gas conditioning units and membrane separation systems, which remove carbon dioxide and other contaminants from a gas stream; - water filtration systems, which remove oil and contaminants from water derived from the production process; and - control systems, which monitor and control production equipment. We offer our products and services as either integrated systems or individual components. We provide our products and services through four business segments: - traditional production equipment and services; - engineered systems; - our Canadian operations, which combine traditional production equipment and services and engineered systems; and - instrumentation and electrical systems. We have designed, manufactured and marketed production equipment and systems for over 70 years. We believe that, among our competitors, we have the largest installed base of production equipment in the industry. We have achieved our position in the industry by maintaining our technological leadership, capitalizing on our strong brand name recognition and offering a broad range of products and services. THE INDUSTRY Demand for oil and gas production equipment and services is driven primarily by: - levels of production of oil and gas in response to worldwide demand; - the discovery of new oil and gas fields; - the changing production profiles of existing fields (meaning the mix of oil, gas and water in the hydrocarbon stream and the level of contaminants); and - the quality of new hydrocarbon production. Generally, oil and gas exploration and production companies reduce exploration and development activity during periods of weak oil prices and demand and increase this activity during periods of strong oil 37 42 prices and demand. The extent to which the revenues of our industry increase depends upon the success of the exploration efforts. In general, these revenue increases lag expansion of exploration and development capital budgets in times of recovery in the oil and gas industry. These lag times can be up to several years in offshore operations but are generally shorter for onshore operations. Changing production profiles in existing fields also increase the demand for products and services in our industry. As existing fields are reworked or enhanced recovery methods are employed, additional and more complex equipment may be required to produce oil and gas from these fields. This can result from: - changes in the mix of oil and gas produced by the field; or - an increase in water, carbon dioxide or other naturally occurring contaminants or as the result of enhanced recovery techniques. In addition, many new oil and gas fields contain lower quality hydrocarbon streams that require more complex production equipment. Examples include carbon dioxide rich formations in West Texas and Southeast Asia and heavy crude in Western Canada and in the Orinoco Delta in Venezuela. STRATEGY Our strategy for future growth is to expand and improve our market position through: - Focusing on Customer Relationships. We believe that our customers increasingly prefer to work on a regular basis with a small number of leading suppliers. The objectives of our customers in establishing preferred relationships (both formal and informal) with suppliers that can provide a broad range of products and services on a cost effective and timely basis are to reduce production costs and delivery times. We believe this trend will continue, or even accelerate, as major oil companies and large independent producers downsize staffs and outsource services. We believe our size, scope of products, technological expertise and service orientation provide us with a competitive advantage in establishing preferred supplier relationships with customers. We expect to generate growth in revenue and market share by establishing and further developing new and existing customer relationships. - Providing Turnkey Integrated Systems and Solutions. We believe our turnkey design and manufacturing capabilities enable us to reduce our customers' production equipment and systems costs and shorten delivery times. Our strategy is to be involved in projects early, to provide, as among our competitors, the broadest and most complete scope of equipment and services and to focus on larger integrated systems. In some applications, we also intend to increase the degree of standardization to reduce engineering costs and to shorten delivery times. - Introducing New Technologies and Products. Since our inception, we have developed and acquired leading technologies that enable us to address the world market demand for increasingly sophisticated production equipment. We hold numerous U.S. and foreign patents and operate a modern research and development laboratory in Tulsa, Oklahoma. We will continue to pursue new technologies through licenses, acquisitions and internal development. - Pursuing Complementary Acquisitions. Our industry is highly fragmented and contains many smaller competitors with narrow product lines and geographic scope. We intend to continue acquiring companies that provide complementary technologies or enhance our ability to offer integrated systems. An example is our acquisition last year of Cynara which provided us with proprietary bulk carbon dioxide separation technology. - Expanding International Presence. We have operated in various international markets for more than 50 years. We intend to continue expanding internationally in targeted geographic regions. These are regions in which we either have a relationship with a customer or have technology that provides us with a competitive advantage. Currently, our most important international opportunity is the future development of Southeast Asian gas markets. We believe our proprietary technology for 38 43 the bulk removal of carbon dioxide provides us with a competitive advantage in pursuing projects in this region. RECENT ACQUISITION The Cynara Company. In November 1998, we acquired Cynara because it had proprietary technology for the bulk removal of carbon dioxide from gas streams. Cynara designs, constructs, operates and services membrane separation systems utilizing this technology. A primary market for this application is production from gas wells, such as those located in Southeast Asia, which have high levels of naturally occurring carbon dioxide. Another market is production from wells, such as those located in West Texas, in which carbon dioxide injection is used to enhance the recovery of oil and gas reserves. This acquisition has expanded our ability to offer integrated systems and services and complements our gas conditioning product line. In acquiring Cynara, we issued 500,000 shares of our common stock and paid $5.3 million in cash to the Cynara stockholders. We also repaid $10.1 million of Cynara's debt and agreed to issue additional shares of our common stock contingent on the occurrence of specified operational thresholds. Based on operations through September 30, 1999, approximately 300,000 of these additional shares have been earned and will be issued on November 30, 1999. Up to a total of 950,000 more of these additional shares may be earned at March 31, 2000 and December 31, 2000. PENDING ACQUISITIONS We have executed non-binding letters of intent to acquire Porta-Test International Inc. and Engineering Specialties, Inc. These acquisitions, if completed, will close subsequent to the completion of this offering. Porta-Test International Inc. Porta-Test is located in Edmonton, Alberta, Canada. Porta-Test designs and manufactures centrifugal devices used to enhance the effectiveness of separation equipment. We expect to close the acquisition of Porta-Test in late 1999. For the year ended June 30, 1999, Porta-Test had revenues of $7.3 million and EBITDA of $(0.1) million. To acquire all the outstanding Porta-Test capital stock, we have agreed: - to pay approximately $5.4 million in cash, net of cash acquired; and - to issue our one-year promissory note for approximately $0.7 million. Engineering Specialities, Inc. ESI is located in Covington, Louisiana. ESI designs and manufactures water processing equipment used to remove oil and contaminants from water produced at the wellhead, primarily on offshore facilities. We expect to close the acquisition of ESI in early 2000. For the year ended December 31, 1998, ESI had revenues of $3.9 million and EBITDA of $0.8 million. To acquire all the outstanding ESI capital stock, we have agreed: - to pay approximately $7.3 million in cash, net of cash and marketable securities acquired; and - to issue options for 25,000 shares of our common stock, exercisable at the initial offering price. 39 44 PRODUCTS AND SERVICES We operate our business in four business segments, each of which is described below. TRADITIONAL PRODUCTION EQUIPMENT AND SERVICES Our traditional production equipment and services consist of: - production equipment; - replacement parts; and - used equipment refurbishing and servicing. We had revenues of $71.0 million and EBITDA of $4.5 million for the year ended December 31, 1998 from traditional production equipment and services. For the six months ended June 30, 1999, we had revenues and EBITDA of $26.9 million and $0.9 million respectively from this business segment. We sell our traditional production equipment and services primarily onshore in North America and in the Gulf of Mexico. We typically provide traditional production equipment built for the North American oil and gas industry "off the shelf" or in customized variations of standardized equipment which requires limited engineering. We market our traditional production equipment and services through 31 sales and service centers in the United States, two in Canada and one in Venezuela. We have relationships with a number of customers for traditional production equipment and related services. See "-- Customer Relationships." Traditional production equipment includes: Separators. Separators are used for the primary separation of a hydrocarbon stream into oil, water and gas. Our separator product line includes: - horizontal separators, which are used to separate hydrocarbon streams with large volumes of gas, liquids or foam; - vertical separators, which are used to separate hydrocarbon streams containing contaminants including salt and wax; - filter separators, which are used to remove particulate contaminants from gas streams; and - Thermo Pak(TM) Units, which are used for the combined heating and separating of production in cold climates. Oil Dehydration Equipment. Oil dehydrators are used to remove water from oil. Our oil dehydration product line includes: - horizontal PERFORMAX(R) treaters, which separate oil and water mixtures using gravity and proprietary technology; - Dual Polarity(R) electrostatic treaters, which dehydrate oil using high voltage electrical pulsation; - vertical treaters, which optimize recovery of condensable, salable hydrocarbons; - Vertical Flow Horizontal (VFH(TM)) processors, which combine the advantages of horizontal and vertical vessels to remove gas and water from oil streams; and - heater-treaters, which use heat to accelerate the dehydration process. Heaters. Heaters are used to reduce the viscosity of oil to improve flow rates and to prevent hydrates from forming in the gas stream. We manufacture both indirect fired heaters and standardized and 40 45 customized direct fired heaters. In each system, heat is transferred to the hydrocarbon stream through a medium such as water, water/glycol, steam, salt or flue gas. Our heater product line includes: - water bath heaters; - vaporizers used to vaporize propane and other liquefied gases; - salt bath heaters; - steam bath heaters; and - Controlled Heat Flux Heaters (CHF(TM)), which use combustion to create a heat transfer medium. Gas Conditioning Equipment. Gas conditioning equipment removes contaminants from gas streams. Our gas conditioning equipment includes: - glycol dehydration equipment, which expose gas streams to glycol in order to remove water vapor; - amine systems, which use amine to remove acidic gases such as hydrogen sulfide and carbon dioxide from gas streams; - conditioning equipment used to remove hydrogen sulfide from gas; - Glymine(R) units, which combine the effects of glycol equipment and amine systems; - the BTEX-Buster(R), which virtually eliminates the emissions of volatile hydrocarbons associated with glycol dehydration reboilers; and - Desi-Dri(R) Systems, which use highly compressed drying agents to remove water vapor from gas streams. Gas Processing Equipment. We offer standard and custom processing equipment for the extraction of liquid hydrocarbons to meet feed gas and liquid product requirements. We manufacture several standard mechanical refrigeration units for the recovery of salable hydrocarbon liquids from gas streams. Our Low Temperature Extractor (LTX(R)) units are mechanical separation systems designed for handling high pressure gas at the wellhead. These systems remove liquid hydrocarbons from gas streams more efficiently and economically than other methods. Water Treatment Equipment. We design and manufacture water treatment and conditioning equipment for the removal of contaminants from water extracted in oil and gas production. Oil producers use our PERFORMAX(R) Matrix Plate Coalescer in primary separators of oil and water and final skimming. Our flow splitter removes gases from an oil-water dispersion, separates oil and water and discharges the oil and/or emulsion through controllable outlets. Equipment Refurbishment. We source, refurbish and integrate used oil and gas production equipment. Our customers that purchase this equipment enjoy reduced delivery times and lower equipment costs relative to new equipment. The used equipment market is focused primarily in North America, both onshore and offshore, although we have observed a growing interest internationally. We have entered into agreements with major and large independent oil companies in both the United States and Canada to evaluate, track and refurbish used production equipment. We may act as a broker between another oil company and our customer or we may purchase, refurbish and sell used equipment to our customers. We believe that we have one of the largest databases in the North American oil and gas industry of available surplus production equipment. This data base, coupled with our extensive refurbishing facilities and experience, enables us to respond to customer requests for refurbished equipment quickly and efficiently. Parts, Service and Training. We provide replacement parts for our own equipment and for equipment manufactured by others. Each branch of our marketing network also serves as a local parts and service business. We have service employees stationed in some branches of Wilson Supply Company and National-Oilwell, Inc. We also offer operational and safety training to the oil and gas production industry. We use our training programs as a marketing tool for our other products and services. 41 46 ENGINEERED SYSTEMS We design, engineer and manufacture these systems for large production development projects throughout the world. We also provide start-up services for our engineered products. Our engineered systems typically require a significant amount of technology, engineering and project management. On a pro forma basis, giving effect to our acquisition of Cynara, we had revenues of $58.4 million and EBITDA of $2.4 million for the year ended December 31, 1998 from engineered systems. For the six months ended June 30, 1999, we had revenues and EBITDA of $28.7 million and $3.8 million from this business segment. We market our engineered systems through direct sales forces based in Houston, Calgary, London, Tokyo, Kuala Lumpur and Caracas, augmented by independent representatives in other countries. We also use the unique oil testing capabilities at our research and development facility to market engineered systems. This capability enables us to determine equipment specifications that best suit customers' requirements. See "-- Technology and New Products." Our engineered systems include: Integrated Oil and Gas Processing Trains. These consist of multiple units that process oil and gas from primary separation through contaminant removal. In this aspect of our business, we provide both the engineering and the fabrication functions. For example, we designed, manufactured and assembled a module for a production facility situated off the coast of West Africa that is capable of processing 20,000 barrels of oil, 4,000 barrels of water and 24 million standard cubic feet of gas per day. Also, we designed, manufactured and installed process systems for BP Exploration (Alaska), Inc.'s 35,000 barrel per day Badami development on the North Slope of Alaska and its 65,000 barrel per day Northstar development, also located on the North Slope. Floating Production Systems. These consist of large skid-mounted processing units used in conjunction with semi-submersible, converted tanker and other floating production vessels. Floating production equipment must be specially designed to overcome the detrimental effects of wave motion on floating vessels. We pioneered and patented the first wave-motion production vessel internal system. We continue to advance this technology at our research and development facility using a wave-motion table which simulates a variety of sea states. Dehydration and Desalting Systems. Dehydration and desalting involves the removal of water and salt from an oil stream. Desalting is a specialized form of dehydration. In this process, water is injected into an oil stream to dissolve the salt and the saltwater is then removed from the stream. Large production projects often use electrostatic technology to desalt oil. We believe that we are the leading developer of electrostatic technologies for oil treating and desalting. One of our dehydration and desalting systems, the Electro Dynamic(TM) Desalter, can be used in oil refineries, where stringent desalting requirements have grown increasingly important. These requirements have increased as crude quality has declined and catalysts have become more sensitive and sophisticated, requiring lower levels of contaminants. The reduced number of vessels employed by our system is particularly important in refinery applications where space is at a premium. Large Gas Processing Facilities. We provide large gas processing facilities for the separation, heating, dehydration and removal of liquids and contaminants to produce pipeline or liquefaction-quality gas. We also design, manufacture and, in some cases, operate gas processing facilities which remove carbon dioxide from gas streams. These facilities use Cynara's membrane technology, which provides the most cost-effective separation solution for gas streams containing more than 20% carbon dioxide. A primary market for this application is production from gas wells, such as those located in Southeast Asia, which have high levels of naturally-occurring carbon dioxide. Another market is production from wells, such as those located in West Texas, in which carbon dioxide injection is used to enhance the recovery of oil and gas reserves. 42 47 Downstream Facilities. We offer several technologies that have crossover applications in the refinery and petrochemical sectors. Most involve aspects of oil treating and water treating. We discussed above the use in refineries of one of our dehydration and desalting systems. In addition, we provide our DOX(TM) units to ethylene processors that clean both heavy and light dispersed oil from water. NATCO-CANADA We have operations in Calgary and Edmonton, Alberta, Canada, that provide a combination of traditional production equipment and services and engineered systems to oil and gas producers in Western Canada. Most production equipment manufactured by NATCO-Canada is similar in design and purpose to that built in the U.S., with modifications to operate in a cold weather environment. Periodically, we use NATCO-Canada engineering and manufacturing to assist in our engineered systems projects. We had revenues of $43.5 million and EBITDA of $3.2 million for the year ended December 31, 1998 from NATCO-Canada. For the six months ended June 30, 1999, we had revenues and EBITDA of $9.6 million and $0.3 million from this business segment. INSTRUMENTATION AND ELECTRICAL SYSTEMS We had revenues of $46.6 million and EBITDA of $4.3 million for the year ended December 31, 1998 from instrumentation and electrical systems. For the six months ended June 30, 1999, we had revenues and EBITDA of $22.8 million and $3.0 million from this business segment. The primary market for our instrumentation and electrical systems is in offshore applications throughout the world. We market and service these products through a four branch network primarily located in the Gulf Coast area. Our instrumentation and electrical systems include: Control Systems. We design, assemble and install pneumatic, hydraulic, electrical and computerized control panels and systems. These systems monitor and change key parameters of oil and gas production systems. Key parameters include wellhead flow control and emergency shutdown of production and safety systems. A control system consists of a control panel and related tubing, wiring, sensors and connections. Engineering and Field Services. We provide start-up support, testing, maintenance, repair, renovation, expansion and upgrade of control systems including those designed or installed by competitors. Our design and engineering staff also provide contract electrical engineering services. SCADA Systems. Supervisory control and data acquisition (SCADA) systems provide remote monitoring and control of equipment, production facilities, pipelines and compressors via radio, cellular phone, microwave and satellite communication links. Our SCADA systems reduce the number of personnel and frequency of site visits and allow for continued production during periods of emergency evacuation, thereby reducing operating costs. CUSTOMER RELATIONSHIPS We devote a considerable portion of our marketing time and effort to developing and maintaining relationships with key customers. Some of these relationships are project-specific, such as our participation as an "alliance" partner with BP Amoco in several Alaskan projects, or with Mobil in the development of its Chinook platform in the Gulf of Mexico. In other instances, we are also preferred supplier for products and services to key customers in particular equipment lines or over large geographic areas. Examples of this preferred supplier role include our relationships with BP Amoco, UPR, Sonat Exploration, Chevron Canada, Mobil Oil Canada and Renaissance. 43 48 TECHNOLOGY AND NEW PRODUCTS We are a leader in the development of oil and gas industry production equipment technology. We pioneered many of the original separation technologies for converting unprocessed hydrocarbon fluids into salable oil and gas. We have developed: - the first high capacity oil and gas separator; - the first emulsion treating system; - Dual Polarity(TM) electrostatic oil treaters; - DOX(TM) and OSX(TM) water filtration systems; - high pressure indirect heaters; and - PERFORMAX(R) oil and water treating systems. Our wave-motion compensating separator has become the industry standard for floating production applications, and our electrostatic oil treating technology is the most advanced in the industry. As of August 31, 1999, we held 52 active U.S. patents and a number of foreign patents. We have applications pending for one U.S. patents. In addition, we are licensed under three patents held by others. We operate our own research and development facility in Tulsa, Oklahoma, where we use a number of test devices to simulate and analyze oil and gas production processes. We also use specialized computer software to simulate gas and fluid flow dynamics in equipment systems. Through Cynara, we are a recognized leader in the application of membrane technology to the bulk removal of carbon dioxide from gas streams. We have an active research and development effort ongoing in the area of membrane technology. MANUFACTURING Our major manufacturing facilities are located in: - New Iberia, Louisiana. We fabricate packaged production systems for delivery throughout the world at this 52,000 square foot and 17 acre waterfront facility, which can handle large equipment systems. We upgraded and expanded this facility in 1999. - Electra, Texas. We produce various types of low and high pressure production vessels as well as skid packages at this 130,000 square foot facility. - Pittsburg, California. We fabricate the membranes for our bulk carbon dioxide membrane separation equipment at this 8,000 square foot facility. - Calgary, Alberta, Canada. We produce heavy wall and cold weather packaged equipment and systems primarily for the Canadian and Alaskan markets at this 100,500 square foot facility. Our manufacturing operations are vertically integrated. This means we are able to fabricate, heat treat, inspect, assemble and test our products at each facility. Consequently, we are able to control the quality of our products and the cost and schedule of our manufacturing activities. Our New Iberia, Electra and Calgary facilities have been certified to ISO 9002 standards. ISO 9002 is an internationally recognized verification system for quality management overseen by the International Standards Organization based in Geneva, Switzerland. The certification is based on a review of our programs and procedures designed to maintain and enhance quality production and is subject to annual review and recertification. We fabricate to the standards of the American Petroleum Institute, the American Welding Society, the American Society of Mechanical Engineers and specific customer specifications. We use welding and fabrication procedures in accordance with the latest technology and industry requirements. Training 44 49 programs have been instituted to upgrade skilled personnel and maintain high quality standards. We believe that these programs generally enhance the quality of our products and reduce their repair rate. COMPETITION Contracts for our products and services are generally awarded on a competitive basis and competition is intense. The most important factors considered by our customers in awarding contracts include: - the availability and capabilities of our equipment; - our ability to meet the customer's delivery schedule; - our price; - our reputation; - our experience; and - our safety record. Historically, the existence of overcapacity in our industry has caused increased price competition in many areas of our business. In addition, we may encounter obstacles in our international operations that impair our ability to compete in individual countries. These obstacles may include: - subsidies granted in favor of local companies; - taxes, import duties and fees imposed on us and other foreign operators; - lower wage rates in foreign countries; and - fluctuations in the exchange value of the United States dollar compared with the local currency. Any or all these factors could adversely affect our ability to compete and thus adversely affect our results of operations. We believe that we are one of the largest oil and gas surface production equipment providers in North America and that our size, research and development capabilities, brand names and marketing organization provide us with a competitive advantage over other participants in the industry. BACKLOG As of August 31, 1999, we had backlog of $87.9 million, of which $68.8 million was related to CTOC. Backlog consists of firm customer orders for which we have been authorized to begin work or to purchase materials, satisfactory credit or financing arrangements exist and delivery is scheduled. Our backlog is based on the price of awarded fixed price projects and the estimated price of awarded cost-plus projects, in each case adjusted by management's estimate of the percentage of the project that has been completed. All projects currently included in our backlog are subject to change and/or termination at the option of the customer. Either change or termination could substantially change the amount of backlog we are currently reporting. In the case of a termination, the customer is generally required to pay us for work performed and materials purchased through the date of termination and, in some cases, to pay our termination fees. Due to the large amounts of backlog estimated for each of a small number of projects, amounts included in our backlog could decrease substantially if one or more of these projects were to be terminated by our customers. 45 50 PROPERTIES We are headquartered in Houston, Texas and have 40 sales and service, manufacturing and other facilities in the United States, two in Canada, two in Venezuela, one in the United Kingdom, one in Malaysia, one in Japan and one in Kazakhstan. We own 15 of these facilities and lease the other 33. EMPLOYEES As of August 31, 1999, we had approximately 1,158 employees. This includes approximately 56 employees located at our manufacturing facility at Calgary who are covered by a collective bargaining agreement. The most recent collective bargaining agreement in Calgary was renewed in July 1999 and extends through July 2001. No other employees are covered by collective bargaining agreements. We believe that our relationships with our employees are satisfactory. INSURANCE Our operations are subject to the risks inherent in manufacturing products and providing services to the oil and gas production industry. These risks include personal injury and loss of life, business interruptions, loss of production and property and equipment damage. Damages arising from an occurrence at a location where our products are used have in the past and may in the future result in the assertion of potentially large claims against us. We maintain comprehensive insurance covering our assets and operations, including product liability and workers' compensation insurance, at levels that we believe to be appropriate. This insurance is subject to deductibles and significant amounts of self-insurance retention per occurrence. We cannot assure you our insurance coverage will be adequate in all circumstances or against all hazards nor can we assure you that we will be able to maintain adequate insurance coverage in the future at commercially reasonable rates or on acceptable terms. ENVIRONMENTAL MATTERS Our operations are subject to environmental regulation by federal, state and local authorities in the United States and in many foreign countries. Environmental laws and regulations have changed substantially and rapidly over the last 20 years, placing more restrictions and limitations on activities that may impact the environment, such as emissions of pollutants, generation and disposal of wastes and use and handling of hazardous substances. Violation of these laws and regulations may result in civil and criminal actions. Although our efforts to comply with these laws and regulations have not materially and adversely affected our financial condition or results of operations, we cannot assure you that compliance with these laws or regulations will not do so in the future. We currently own or lease numerous properties that for many years have been used for the refurbishment of products and equipment that may contain hydrocarbons or hazardous substances. In addition, the products that we manufacture may require the use of hazardous substances. We have utilized operating and waste disposal practices that were standard in the industry at the time; nevertheless, hazardous substances may have been released on our properties or those of others or on or under other locations where hazardous wastes have been taken for disposal. In addition, we have disposed of wastes on properties operated by third parties whose treatment and disposal of these wastes was not under our control. These properties and wastes may be subject to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Resource Conservation and Recovery Act and analogous state laws. Under these laws, we may be required to remove or remediate previously disposed wastes and property contamination or to perform remedial operations to prevent future contamination. CERCLA imposes liability, without regard to fault or the legality of the original conduct, with respect to the release of a hazardous substance into the environment. Persons subject to CERCLA include the owner and operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous wastes found at the site. Persons who are responsible for 46 51 releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the resulting contamination and for damages to natural resources. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Although we believe that we are in substantial compliance with existing environmental laws and regulations, we cannot assure you that we will not incur substantial costs in the future. Moreover, it is possible that implementation of stricter environmental laws, regulations and enforcement policies could result in additional, presently unquantifiable costs or liabilities to us. SAFETY MATTERS On January 9, 1998, we received a citation and notification of penalty from the Occupational Safety and Health Administration (OSHA). OSHA levied a fine of approximately $260,000 against us following injuries sustained by two employees for safety violations. The fine was subsequently reduced to $83,160. We believe our safety program and record meet or exceed industry standards. We cannot assure you, however, that OSHA fines will not be levied against us again in the future if additional safety violations occur. LEGAL PROCEEDINGS We are a party to various routine legal proceedings. These primarily involve commercial claims, products liability claims, asbestos related personal injury claims and workers' compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of all of these proceedings, even if determined adversely, would not have a material adverse effect on our business or financial condition. 47 52 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names, ages and titles of our current directors and executive officers. The board of directors is divided into three classes. See "-- Classified Board."
NAME AGE POSITION ---- --- -------- Nathaniel A. Gregory(1)................... 51 Chairman of the Board and Chief Executive Officer Patrick M. McCarthy(1).................... 53 President and Director J. Michael Mayer.......................... 43 Senior Vice President and Chief Financial Officer C. Frank Smith............................ 47 President of NATCO-U.S. James Crittall............................ 54 President of NATCO-Canada David R. Volz, Jr. ....................... 45 President of TEST Richard D. Peters......................... 39 President of Cynara Joseph H. Wilson.......................... 47 Senior Vice President -- Marketing Robert A. Curcio.......................... 42 Senior Vice President -- Technology and Product Development Keith K. Allan(2)......................... 58 Director Howard I. Bull(3)......................... 58 Director George K. Hickox, Jr.(2).................. 40 Director E. Hale Staley............................ 69 Director Herbert S. Winokur, Jr.(1)(3)............. 55 Director
- ------------------------------ (1) Member of Executive Committee. (2) Member of Audit Committee. (3) Member of Compensation Committee. Set forth below is a brief description of the business experience of our directors and executive officers. Nathaniel A. Gregory has served as our Chairman of the Board and Chief Executive Officer since April 1, 1993. Prior to joining our company, Mr. Gregory held a number of positions in both the engineering and construction industries and in investment banking. Mr. Gregory also serves as a director of Mrs. Fields' Holding Company, Inc. Patrick M. McCarthy has served as our President since December 1997 and as a director since February 1998. Mr. McCarthy served as Executive Vice President, with marketing and operations responsibilities for our entire company, from November 1996 to December 1997 and as Senior Vice President -- Marketing from June 1994 to November 1996. Prior to joining our company in June 1994, Mr. McCarthy was Vice President -- Worldwide Oil and Gas at ABB Lummus Crest, an engineering and construction company, from October 1991 to May 1994. J. Michael Mayer joined us in September 1999 as Senior Vice President and Chief Financial Officer. Prior to joining our company, Mr. Mayer served as Chief Financial Officer of Cardinal Services, Inc., an oil-field service company, from July 1998 to July 1999. From July 1997 to June 1998, he served as Chief Financial Officer of Phoenix Energy Services, LLC, a manufacturer of drilling equipment and a provider of directional drilling services. From April 1994 to July 1997, Mr. Mayer served as Chief Financial Officer of Haltermann, Ltd., a custom chemical manufacturer. From December 1984 to April 1994, Mr. Mayer was employed by Baker Hughes Inc. in several senior financial positions within its operations. C. Frank Smith has served as President of NATCO-U.S. since January 1998. Mr. Smith served as Senior Vice President -- Sales and Service from September 1993 to December 1997 and as the Northern Region Director of the Sales and Service Centers from April 1992 to September 1993. 48 53 James Crittall has served as President of NATCO-Canada since November 1996 and was Vice President of Technical Operations from December 1992 to October 1996. Mr. Crittall joined National Tank Company in 1971 and has served in several managerial positions, including Manager of Engineering and Sales and Manager of Engineering for NATCO-Canada, Ltd. David R. Volz, Jr. has served as President of TEST since we acquired TEST. Mr. Volz joined TEST in 1976 as a Technical Specialist and has held a number of positions of increasing responsibility prior to serving as President in July 1997. Richard D. Peters has served as President of Cynara since November 1997. Mr. Peters served as Chief Financial Officer of Cynara from June 1996 to October 1997 and as Project Manager and Accounting Coordinator from February 1991 to May 1996. Joseph H. Wilson has served as Senior Vice President -- Marketing of our company since April 1999. Prior to joining our company, Mr. Wilson served as Strategic Accounts Manager of Baker Hughes Inc., with responsibilities for strategic business development, from January 1999 to April 1999. From January 1997 to January 1999, he served as Gulf Coast Region Manager of Baker Hughes INTEQ's fluids, directional drilling and MWD business. From January 1994 to January 1997, Mr. Wilson was Director of Sales and Systems Marketing for all of INTEQ. Prior to January 1994, Mr. Wilson held a number of positions in sales, operations and marketing with Baker Hughes INTEQ, Baker Sand Control and BJ Services. Robert A. Curcio has served as Senior Vice President -- Technology and Product Development of our company since May 1998. Prior to joining our company, Mr. Curcio spent 20 years at Exxon Corporation and its affiliates. Mr. Curcio was Global Markets Manager -- Heavy Duty Diesel Additives of Exxon Chemical Co.'s PARAMINS division from February 1996 to May 1998. From January 1995 to February 1996, he served as Global Markets Manager -- Specialty and Niche Additives of PARAMINS. From July 1992 to January 1995, he served as PARAMINS' Product Manager -- Large Engine Additives. Prior to July 1992, Mr. Curcio held a number of other positions in marketing, management and engineering. Keith K. Allan has been a director of our company since February 1998. Mr. Allan was a director of NATCO (U.K.) Ltd. from October 1996 to January 1998. From February 1993 to August 1996, Mr. Allan was Technical Director in the North Sea for Shell U.K. Exploration and Production. Prior thereto, Mr. Allan served in a number of positions for Royal Dutch/Shell Group, which he joined in 1965. Howard I. Bull has been a director of our company since February 1998. From April 1994 to June 1997, Mr. Bull was President, Chief Executive Officer and a director of Dal-Tile International, Inc., a manufacturer and distributor of ceramic tile. From May 1992 to February 1993, Mr. Bull was President of the Air Conditioning Group of York International Corporation, a producer of heating, air conditioning and refrigeration systems and equipment, and was President of its Applied Systems Division from November 1990 to May 1992. From February 1979 to November 1990, Mr. Bull was employed by Baker Hughes, Inc. in several executive positions. Mr. Bull is a director of Marine Drilling Companies, Inc. and National-Oilwell, Inc. George K. Hickox, Jr. has been a director of our company since November 1998. Since September 1991, Mr. Hickox has served as a general partner of Heller Hickox Dimeling Schreiber and Park, a partnership specializing in energy investments. Mr. Hickox has also served as a director of Cynara prior to its acquisition by our company. Mr. Hickox presently serves as an officer and director of several privately held companies. E. Hale Staley has been a director of our company since February 1998. He has served as a consultant to our company since August 1995. Mr. Staley joined our predecessor in 1952 and served as President and Chief Executive Officer from July 1985 to July 1995. Herbert S. Winokur, Jr. has been a director of our company since its formation in 1989. Mr. Winokur is Chairman and Chief Executive Officer of Capricorn Holdings, Inc., a private investment company, and Managing General Partner of Capricorn Investors, L.P. and Capricorn Investors II, L.P., private 49 54 investment partnerships concentrating on investments in restructure situations, organized by Mr. Winokur in 1987 and 1994, respectively. Prior to his current appointment, Mr. Winokur was Senior Executive Vice President and director of Penn Central Corporation. Mr. Winokur is also a director of Enron Corp., The WMF Group, Ltd., Mrs. Fields' Holding Company, Inc., CCC Information Services Group, Inc. and DynCorp. CLASSIFIED BOARD Our board of directors is divided into three classes. The directors serve staggered three-year terms. The Class I directors were reelected by written consent of stockholders in lieu of the 1999 annual meeting of stockholders. The terms of the directors of the other two classes expire at the annual meetings of stockholders to be held in 2000 (Class II) and 2001 (Class III). At each annual meeting of stockholders, one class of directors will be elected for a full term of three years to succeed that class of directors whose terms are expiring. The current classification of directors is as follows: - Class I -- Messrs. McCarthy and Staley; - Class II -- Messrs. Allan, Bull and Hickox; and - Class III -- Messrs. Gregory and Winokur. COMMITMENTS TO ELECT DIRECTORS We have entered into an agreement with Capricorn I and Capricorn II regarding the election of Class III directors. We have agreed that, so long as Capricorn I and Capricorn II together own 20% or more of our outstanding common stock, we will nominate the individuals designated by Capricorn I and Capricorn II for election as the Class III directors when that class stands for election. If the class should be enlarged, we will be obligated to nominate only the two individuals so designated. If it should be reduced to one, our obligation will be to nominate one individual so designated as a Class III director and one as a Class II director. If a vacancy should arise in Class III, we have agreed to elect an individual designated by Capricorn I and Capricorn II to fill the vacancy. In connection with our acquisition of Cynara, we amended our charter to provide for both Class A and Class B common stock and to provide specified rights to holders of Class B common stock. Following this offering, the two classes will have the same rights, except that holders of the Class B common stock will continue to have the right, voting separately as a class, to elect, by majority vote, one person to our board of directors and to hold a class vote on any amendment to our charter that would authorize additional Class B common stock or would adversely affect their right to elect a director. The person so elected may be removed only by the affirmative vote of the holders of a majority of the Class B common stock. The individual currently elected to that position on our board is George K. Hickox, Jr. The Class B common stock converts to Class A common stock constituting a single class of common stock on January 1, 2002. The class of directors of which Mr. Hickox is a member stands for reelection at the annual stockholders meeting to be held during 2001. Accordingly, it is likely that Mr. Hickox will continue to serve on our board until at least 2004 when his class will again stand for election. COMMITTEES Our audit committee consists of Messrs. Allan and Hickox, each of whom is a non-employee director. The audit committee, which is chaired by Mr. Allan, meets separately with representatives of our independent auditors and with representatives of senior management in performing its functions. The audit committee reviews the general scope of audit coverages, the fees charged by the independent auditors, matters relating to our internal control systems and other matters related to accounting and reporting functions. Our compensation committee consists of Messrs. Bull and Winokur, each of whom is a non-employee director. The compensation committee, which is chaired by Mr. Winokur, administers our stock option plans, and in this capacity makes all option grants or awards to our employees, including executive officers, 50 55 under the plans. In addition, the compensation committee is responsible for making recommendations to the board of directors with respect to the compensation of our chief executive officer and our other executive officers and for establishing compensation and employee benefit policies. Our executive and nominating committee consists of Messrs. Gregory, McCarthy and Winokur. The executive committee, which is chaired by Mr. Gregory, is authorized to exercise the powers of the board during the intervals between the meetings of the board. The executive committee also reviews the qualifications of potential candidates for the board, evaluates the performance of incumbent directors and recommends to the board nominees to be elected at the annual meeting of stockholders. EXECUTIVE COMPENSATION The following table sets forth information for the twelve months ended December 31, 1998 with respect to our chief executive officer and each of our four other most highly compensated executive officers: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------- SECURITIES ANNUAL COMPENSATION UNDERLYING ------------------- STOCK ALL OTHER SALARY BONUS OPTIONS(#)(1) COMPENSATION(3) ------- -------- ------------- --------------- Nathaniel A. Gregory...................... $350,000 $234,990(2) -- $6,000 Chairman and Chief Executive Officer Patrick M. McCarthy....................... 215,000 136,338 16,667 6,000 President and Director William B. Wiener III(4).................. 148,407 81,926 -- 6,000 Senior Vice President and Chief Financial Officer C. Frank Smith............................ 158,818 73,130 -- 6,000 President of NATCO-U.S. David R. Volz, Jr. ....................... 124,319 122,842 -- 4,861 President of TEST
- ------------------------------ (1) Excludes options awarded during the fiscal year ended March 31, 1997 as a result of conversion of SARs granted in previous periods or, in the case of Mr. Gregory, pursuant to prior option grants. See "-- Individual Employee Stock Options" and "-- Stock Option Grants." For information concerning the aggregate holdings of stock options by the named executive officers, see "-- Stock Option Grants." (2) See "-- Employment Agreement" for the terms of an additional bonus to be paid in connection with the completion of the offering. (3) Includes our contractual and discretionary contributions to the named executive officer's 401(k) plan account. (4) Mr. Wiener resigned from our company effective May 31, 1999. EMPLOYMENT AGREEMENT Mr. Gregory serves as our chairman and chief executive officer under an employment agreement. This agreement is renewed annually unless terminated by Mr. Gregory or us. The agreement provides for an annual base salary in the amount of $350,000, an annual bonus with a target award of 60% of Mr. Gregory's base salary based on such targeted performance criteria and additional discretionary bonuses as are determined annually by our board. 51 56 In July 1999, we amended Mr. Gregory's employment agreement to delete a provision requiring us to pay him a bonus of 1.5% of the value of our company at the time of our initial public offering. In exchange, we agreed: - to lend Mr. Gregory $1,205,490 in cash with which he would purchase from us 136,832 shares of our common stock; - that Mr. Gregory's borrowings would be evidenced by his full recourse promissory note for the same amount bearing interest at 6% per year; and - that we would pay Mr. Gregory a bonus equal to the principal of and interest accrued on the promissory note at the time of our initial public offering. This bonus will be due upon completion of this offering. Payment of the principal and interest on Mr. Gregory's note is due upon completion of this offering, except for an amount equal to taxes on the bonus. That amount will become due upon the lapse of Mr. Gregory's holding period under Rule 144 with respect to the shares of our common stock he acquired in July 1999. For information regarding a stock option that we granted to Mr. Gregory at the time he joined our company, as well as a subsequent amendment to that stock option, see "-- Individual Employee Stock Options." If we terminate Mr. Gregory's employment for any reason other than just cause, he is entitled to severance pay in accordance with any severance plan or policy that we then have in effect. If Mr. Gregory terminates his employment agreement for any reason, other than for a material breach of the agreement by us, he will not be entitled to receive any bonus compensation or severance pay, and we will have no further obligations except to pay base salary previously earned. COMPENSATION OF DIRECTORS Directors who are our employees do not receive a retainer or fees for service on the board or any committees. We pay non-employee members of the board for their service as directors. Directors who are not employees receive a quarterly fee of $6,500 and a fee of $500 for attendance at each meeting of the board. In addition, pursuant to the 1998 Director Stock Option Plan, following completion of this offering, each non-employee director who is reelected as a director after completing at least one year of service as a director will receive, on the date of reelection, a stock option to purchase 2,667 shares of our common stock at the market price on the date of grant. Some non-employee directors have also been awarded initial stock options, which vest over a period of two and one-half years, to purchase 6,667 shares of our common stock at a price of $8.81 per share. Directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the board or committees and for other reasonable expenses. INDIVIDUAL EMPLOYEE STOCK OPTIONS General. Beginning in June 1989, we issued stock appreciation rights to some of our employees. In June 1997, we terminated that plan and converted all those stock appreciation rights into individual employee stock options to purchase common stock on terms consistent with those of the stock appreciation rights. The related stock option agreements provide for vesting of the individual employee stock options equally over three or four years, except with respect to those granted to Mr. Gregory. Individual employee stock options become fully vested in certain circumstances upon a sale of our company and upon the death or disability of the recipient while employed by us. Individual employee stock options terminate upon the earliest to occur of: - the termination of employment with us for cause; - thirty days after termination of employment with us for any reason other than cause; 52 57 - thirty days after an alteration of employment; or - the expiration of the option period provided in each stock option agreement. We are obligated to purchase vested options under specified circumstances. Individual employee stock options are not transferable and may be exercised only by the recipient or his estate. The shares of our common stock subject to the stock option agreements and the related exercise prices are subject to adjustment in specified events. As of September 30, 1999, individual employee stock options, including those granted to Mr. Gregory and discussed below, have been granted with respect to a total of 1,782,613 shares of our common stock. Of these: - 720,558 are exercisable at $1.47 per share and expire between March 2001 and June 2001; - 50,001 are exercisable at $2.22 per share and expire on October 15, 2002; - 185,186 are exercisable at $3.58 per share and expire on July 31, 2003; - 384,367 are exercisable at $5.03 per share and expire on July 1, 2007; - 370,834 are exercisable at $8.81 per share and expire between July 2006 and June 2008; and - 71,667 are exercisable at the initial public offering price or, if this offering is not completed by February 2000, at $10.50 per share and expire between August 2009 and September 2009. Mr. Gregory. Mr. Gregory's stock option agreement supersedes options previously granted to him. Mr. Gregory's stock option agreement provides that all options granted to him, including his individual employee stock options, are fully vested and exercisable at the time of grant. Mr. Gregory's individual employee stock options terminate upon the earliest to occur of: - the termination of his employment with us for cause; - one year after the termination of his employment due to death or disability; - in specified circumstances, the sale of all of our outstanding common stock; and - the expiration of the various seven year option periods provided in his stock option agreement. Mr. Gregory's individual employee stock options are subject to adjustments for stock dividends, stock splits, stock combinations or other recapitalizations. In July 1999, we redeemed an option to purchase 75,000 shares of our common stock from Mr. Gregory for $550,500. We arrived at this amount by multiplying the number of shares underlying the option (75,000) by the difference between the fair market value of our common stock at the time ($8.81 per share) and the exercise price of the shares ($1.47 per share). In connection with the redemption of Mr. Gregory's option, our board granted Mr. Gregory another fully vested option to purchase 50,000 shares of our common stock exercisable until July 2006 at a price of $8.81 per share. Concurrently, Mr. Gregory relinquished specified rights under his employment and stock option agreements with us. These rights include: - a preemptive right to participate to the extent of 5% in future equity financings by our company; and - anti-dilution protection with respect to future issuances of our securities. 53 58 STOCK OPTION PLANS Directors Compensation Plan. We adopted the Directors Compensation Plan as of January 1, 1998. The plan provides for: - compensation in the form of an annual retainer payable quarterly; - cash fees for attendance at meetings of the board; and - grants of stock options, both discretionary and by formula. We may pay up to 50% of the annual retainer by issuing shares of our common stock with a fair market value at the time equal to the amount of the fee. The plan is administered by our board. Our board may delegate all of its power of administration, with the exception of the power to authorize issuance of options. No director may vote on or decide any matter relating solely to him under the plan. No director may vote in any case in which his individual right to claim any benefit under the plan is particularly involved. The maximum number of shares issuable under the Directors Compensation Plan is 60,000. Options granted under the plan will have a term of 10 years and will be subject to earlier termination if the optionee's membership on our board terminates for cause. If the optionee's membership on the board is terminated for any reason other than cause, his options may be exercised for up to three years from the date of termination, but only as to the number of shares that were vested on the date of termination. Discretionary option grants will be exercisable as determined by our board. Formula option grants will be fully exercisable on the first anniversary of the date of grant. The exercise price of an option will be the price determined by our board in the case of discretionary option grants and the fair market value in the case of formula option grants. The Directors Compensation Plan allows our board to make adjustments in the number of shares to be acquired upon exercise of options in the event of a stock split, combination or stock dividend. Our board may amend or terminate the plan at any time. Any amendment or termination will not affect options previously granted and outstanding under the plan. As of August 31, 1999, options have been granted under the Directors Compensation Plan with respect to a total of 13,334 shares of our common stock, all of which are exercisable at $8.81 per share. All of the currently outstanding options vest quarterly over a period of 2 1/2 years from the date of grant. No stock appreciation rights have been granted under the plan. Employee Stock Incentive Plan. We adopted the Employee Stock Incentive Plan in February 1998. The purpose of the plan is to attract qualified consultants, advisors and employees and to give our key employees who are responsible for administration and management a proprietary interest in our company. The maximum number of shares issuable under the plan is 700,000, subject to adjustment. The maximum number of shares and options to purchase shares that an individual may receive in a single year under the plan is 100,000. The Employee Stock Incentive Plan provides for the award of: - "incentive stock options" within the meaning of section 422 of the Internal Revenue Code; - non-qualified stock options (options that do not qualify under section 422); - restricted stock awards; - stock appreciation rights; and - any combination of the foregoing. 54 59 Awards may be granted only to employees, advisors and consultants. Our board has authorized the compensation committee to administer the Employee Stock Incentive Plan. The compensation committee has the authority, in its discretion, to determine: - which employees, consultants or advisors will receive an award; - the time or times when the awards will be made; - what type of award will be granted; - the number of shares subject to each award; and - the vesting conditions of each award. Options. The exercise price per share of our common stock under each option is determined by the compensation committee. The exercise price may not, however, be less than the fair market value of a share of common stock on the date the option is granted. To the extent that the fair market value of our common stock underlying incentive stock options exceeds $100,000, the incentive stock options will be treated as non-qualified stock options. No incentive stock option may be granted to an individual if, at the time of grant, the individual owns stock possessing more than 10% of the total combined voting power of all classes of our capital stock unless: - the option price is at the time equal to 110% of the fair market value of our common stock subject to the option; and - the option is not exercisable after the fifth anniversary of the date of grant. The Employee Stock Incentive Plan provides that, if any of several specified corporate changes should occur, the compensation committee may, in its discretion: - accelerate the vesting of outstanding options; - require the surrender of outstanding options in exchange for a cash payment based on a formula specified in the plan; - make adjustments to outstanding options to reflect the corporate change; or - provide that the outstanding options will cover securities or property that the optionee would have received in a corporate change if the optionee were then the holder of the common stock covered by the option. For this purpose, the specified corporate changes are: - a merger, consolidation or reorganization of our company in which our common stock is converted into cash, property or a different class of securities of our company or any other company; - a sale, lease or exchange of all or substantially all of our assets; - the adoption by our stockholders of a plan of liquidation and dissolution; - the acquisition by a person or group of beneficial ownership of 20% or more of our outstanding capital stock (measured by voting power); or - an election contest in which individuals who were, prior to the election, directors of our company cease to constitute a majority of our board. SARs. Stock appreciation rights may be granted either in conjunction with an option grant or independently of any option grant. The compensation committee determines the terms of each stock appreciation right. The exercise price may not, however, be less than the fair market value of a share of common stock on the date the stock appreciation right is granted. 55 60 Restricted Stock. Restricted stock awards consist of awards of our common stock that are subject to restrictions on disposition and an obligation to forfeit and surrender those shares under specified circumstances. The compensation committee is authorized to establish these restrictions and obligations which may vary from award to award. The compensation committee may also provide for the lapse of any or all these restrictions and obligations upon: - the achievement by our company of prescribed performance goals; - the achievement by the holder of a prescribed employment period; or - the occurrence of other specified conditions. The compensation committee may also fully vest any or all common stock subject to a restricted stock award upon the occurrence of any of the specified corporate changes listed above with respect to options. Amendment. The board may terminate or amend the Employee Stock Incentive Plan at any time. No termination or amendment will materially impair the rights of a holder of an award previously made. The board may not, without stockholder approval, amend the plan to increase the maximum aggregate number of shares that may be issued under the plan or change the class of individuals eligible to receive awards under the plan. CHANGE OF CONTROL AND SEVERANCE PLANS Our executive officers have entered into change of control agreements with us that provide for us to pay them 150% of base salary plus accrued bonuses upon a change of control of our company. The percentage is 200% in the case of Mr. McCarthy. A "change of control" means the acquisition by any party unrelated to Capricorn I or Capricorn II of 50% or more of our outstanding common stock or securities which may be converted to common stock or assets of our company. If the acquiring company agrees to employ our executive officers on substantially similar terms, no change of control will occur. Our senior executive officers participate in an executive severance plan we adopted in September 1990. The purpose of the plan is to provide severance pay to the executive if we should terminate his employment. The plan covers all our senior executives. It does not apply to voluntary separations, terminations for cause, sale of our company or the death of the employee. Under this plan, a senior executive would receive severance pay equal to one month's pay for each $10,000 of base salary, up to a maximum of twelve months' pay. Senior executives also receive earned vacation pay at the time of involuntary termination. DEFERRED COMPENSATION PLAN TEST adopted a deferred compensation plan in July 1995 to provide incentives and rewards to key individuals. Awards are payable in five equal annual installments plus any earnings that have been allocated to a participant's account. We have not made any additional awards since January 1, 1998. We intend to terminate the plan upon completion of this offering and to pay out all accrued amounts to each participant. As of August 31, 1999, the total amount owed under the plan was $405,229. This balance presently accrues interest at the prime rate plus 1%. 56 61 STOCK OPTION GRANTS The following table contains certain information concerning stock options held by the named executive officers as of August 31, 1999. No stock options have been exercised as of that date.
POTENTIAL REALIZABLE VALUE AT INDIVIDUAL GRANTS ASSUMED ANNUAL -------------------------------------------------------- RATES OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED EXERCISE OPTION TERM OPTIONS TO PRICE PER --------------------- NAME GRANTED(#) EMPLOYEES SHARE EXPIRATION DATE 5% 10% ---- ---------- ----------- --------- ----------------- --------- --------- Nathaniel A. Gregory... 480,555 28.1% $1.47 July 31, 2003 $287,582 $670,189 185,186 10.8% $3.58 July 31, 2003 269,894 628,967 164,363 9.6% $5.03 July 31, 2004 336,568 784,348 50,000 2.9% $8.81 July 31, 2006 179,328 417,910 Patrick M. McCarthy.... 133,334 7.8% $1.47 December 21, 2001 86,603 204,592 16,667 1.0% $8.81 June 1, 2008 92,345 234,019 50,000 2.9% $8.81 May 1, 2009 277,028 702,044 William B. Wiener III(1)............... -- -- -- -- -- -- C. Frank Smith......... 33,334 2.0% $1.47 December 21, 2001 21,651 51,149 33,334 2.0% $5.03 January 1, 2005 74,085 175,019 David R. Volz, Jr. .... 66,667 4.0% $5.03 January 1, 2005 148,167 350,033
- ------------------------------ (1) Mr. Wiener resigned from our company effective May 31, 1999. RELATED PARTY TRANSACTIONS SECURITIES TRANSACTIONS Capricorn I and Capricorn II, which are private investments funds, are limited partnerships organized under the laws of Delaware. Capricorn I is managed by its general partner, Capricorn Holdings, G.P., which in turn is managed by Capricorn Holdings, Inc. Herbert S. Winokur, Jr., a director of our company, is Chairman and Chief Executive Officer of Capricorn Holdings, Inc. Capricorn II is managed by Capricorn Holdings, LLC, a Delaware limited liability company. Mr. Winokur and Mr. Gregory, our Chairman of the Board and Chief Executive Officer, are members of Capricorn Holdings, LLC. Mr. Winokur is its managing member. Our company was incorporated in 1988 by Capricorn I. In 1989, Capricorn I and a group of investors provided us with sufficient funds to enable us to acquire all the outstanding capital stock of National Tank Company, now our principal subsidiary, together with Tyler and another company, from C-E for cash. In December 1991, Capricorn I loaned us approximately $5.0 million. In exchange, we issued to Capricorn I our subordinated promissory notes in an equal principal amount. In 1992, we organized PTH as our subsidiary and thereafter contributed to PTH all the outstanding stock of Tyler. During the period from June 1989 through January 1997, both we and Capricorn I, on various occasions, acquired shares of our common stock from our original investor group other than Capricorn I. By the end of January 1997, Capricorn I was our sole stockholder. Between 1992 and 1997, Capricorn I consented to the addition of accrued but unpaid interest to the principal of our subordinated promissory notes and to various extensions of the maturities of the notes. 57 62 On June 30, 1997, we undertook a significant financing and reorganization. At that time: - PTH, with the consent of Capricorn I, assumed $4.6 million in principal amount of our subordinated promissory notes; - we distributed all the outstanding capital stock of PTH to Capricorn I; - we refinanced our portion of the original subordinated promissory notes by issuing a new $5.1 million 13% subordinated promissory note due 2000 in exchange for the old notes; - Capricorn II acquired from us a new $2.4 million 13% subordinated promissory note due 2000 and 2,113,334 shares of our common stock for $13.0 million in cash; and - we acquired all the outstanding capital stock of TEST by using the proceeds from the Capricorn II financing and proceeds from borrowings under a bank credit facility. In March 1998, we issued 1,010,333 shares of our common stock to Capricorn I and 468,925 shares of our common stock to Capricorn II in exchange for the surrender and cancellation of our subordinated promissory notes. In November 1998, we acquired Cynara by merging it into National Tank Company. In connection with our acquisition of Cynara, we entered into a registration rights agreement with Capricorn I and Capricorn II and a separate registration rights agreement with the former stockholders of Cynara. Under these agreements, Capricorn I, Capricorn II and the stockholders of Cynara are entitled to demand and "piggy-back" registration rights under the Securities Act with respect to the shares of our common stock that they own. In connection with our acquisition of Cynara in November 1998, Capricorn II invested $5.3 million in our company in exchange for our convertible promissory note. We used the proceeds to finance a portion of the acquisition costs. In December 1998, Capricorn II elected to convert the note, and we issued 504,762 shares of our common stock to Capricorn II. See "Management -- Employment Agreement" and "-- Individual Employee Stock Options" for information regarding: - a loan by us to Mr. Gregory; - his purchase of shares of our common stock with the proceeds of the loan; - our agreement to pay him a bonus on completion of this offering sufficient to allow him to pay his loan; and - our redemption of a portion of the options held by Mr. Gregory to purchase shares of our common stock and the issuance of a new option to Mr. Gregory. CAPRICORN MANAGEMENT, G.P. Capricorn Management, G.P. is an entity controlled by Mr. Winokur. It provides management services to Capricorn I and Capricorn II. We agreed in 1989 to pay $350,000 per year plus specified out-of-pocket expenses to Capricorn Management to reimburse it for costs and expenses incurred by it and its employees to perform specified management and other responsibilities. These services included, during periods of their common ownership, services to PTH, whose capital stock we distributed to Capricorn I on June 30, 1997, and to another affiliate which has been sold. Effective July 1, 1997, we amended the contract to limit the services provided by Capricorn Management to advisory information and research services and administrative services and to reduce the cost reimbursement to $75,000 a year. The services provided include office space and parking in Connecticut for our Chief Executive Officer and reception, 58 63 telephone and computer services and other normal office support relating to that space. We paid Capricorn Management: - $350,000 for fiscal 1996; - $144,000 for fiscal 1997; - $163,000 for fiscal 1998; and - $56,000 for the nine months ended December 31, 1998. Our agreement with Capricorn Management has been extended to June 30, 2000. In June 1989, we entered into an agreement with Capricorn Management that was assigned by Capricorn Management to Capricorn Holdings. Mr. Winokur is the Chairman and Chief Executive Officer of Capricorn Holdings. Under the agreement, we were required to pay a fee to Capricorn Holdings, contingent upon the occurrence of specified events. During 1997, those events occurred and we paid a fee of $374,000. We do not owe any further amounts under this agreement. Employees of Capricorn Management participated in some of our medical insurance and benefit plans in 1996 and 1997, for which Capricorn Management reimbursed us. The balances for reimbursement due at the end of fiscal 1996, 1997 and 1998 were $25,800, $115,700 and $229,900, respectively. All of these expenses have been fully reimbursed and there is currently no outstanding balance. SUBSIDIARIES OF CAPRICORN I PTH. PTH was a wholly owned subsidiary of ours until June 30, 1997. As a consequence, we filed consolidated federal income tax returns that included PTH through that date. On that day, we distributed all the outstanding capital stock of PTH as a dividend on our common stock, all of which was then owned by Capricorn I. For additional information regarding this distribution, see "Risk Factors." At the time of the distribution, we obtained an opinion of our counsel to the effect that the distribution would not be subject to federal income tax either to us or to Capricorn I. We also entered into a tax allocation agreement under which PTH agreed to accept liability for any federal income tax resulting from the failure of the distribution to qualify as a tax free spin-off, other than any liability resulting from specific actions by us during the two years following the distribution. In September 1999, our board approved a transaction in which PTH will pay us $0.4 million and we agreed, in connection with a reorganization and liquidation of PTH, to terminate PTH's obligation under the tax allocation agreement to accept liability for federal income tax resulting from the distribution. As an unrelated matter, we currently provide tax consulting and analysis services to PTH for which we are paid $7,000 per month. These services will no longer be required following completion of the reorganization of PTH. Tyler. Tyler, a subsidiary of PTH, is one of three companies, including National Tank Company, that were acquired by us from C-E in 1989. At that time, we assumed the obligations for retired employee health and life insurance discussed under "Risk Factors." In 1996, these obligations were assumed severally by Tyler, our subsidiary National Tank Company and the other company so acquired. In September 1999, our board approved a transaction in which we agreed, in connection with the reorganization and liquidation of PTH, to assume responsibility for Tyler's portion of these retired employee health and life insurance obligations. In consideration of our agreement to that effect, Tyler will pay us $1.0 million, representing the accrued liability with respect to these obligations, as determined by an independent actuarial firm. MISCELLANEOUS Winokur Note and Option. On November 7, 1997, we loaned $1.5 million to Mr. Winokur. The purpose of the loan was to provide a portion of the funds that Mr. Winokur used to purchase the limited 59 64 partnership interests of the former co-general partner of Capricorn I. The portion of our common stock held by Capricorn I that was attributable to those interests was 173,050 shares. The arrangements that we entered into with Mr. Winokur were designed to allow us to acquire those shares of our common stock when distributed to Mr. Winokur by Capricorn I. The price of those shares was $8.81 per share plus the interest expense incurred by Mr. Winokur in financing the purchase of the co-general partner's interest. Those arrangements were as follows: Mr. Winokur issued his full recourse promissory note to us in the amount of $1.5 million. The note bore interest at 10% per year or, at our election, a rate determined by formula. The note matured on March 31, 1998. At that time, Mr. Winokur refinanced the note obligation by issuing a new promissory note payable to us in the amount of $1.6 million, consisting of the original principal plus accrued but unpaid interest. The new promissory note bears interest at 11% per year and is due on the date on which the 173,050 shares of our common stock described above have been distributed by Capricorn I to Mr. Winokur. As of the same date, March 31, 1998, we purchased, for $200,000, an option from Mr. Winokur to purchase 173,050 shares of our common stock at a price of $8.81 per share. The option becomes exercisable on the date on which Capricorn I's holdings of our common stock have been distributed to its partners. We anticipate that we will exercise this option promptly after Capricorn I makes a distribution of our common stock to its partners. Our total cost of those 173,050 shares will be $1,724,571 or $9.97 per share. This is composed of the $1,524,571 we must pay to exercise the option in full and the $200,000 we paid for the option. We anticipate that we will offset the exercise price of the option against Mr. Winokur's obligations to pay the principal and interest on his note. Cynara Management Fee. Prior to our acquisition of Cynara, Cynara paid a monthly management fee of $25,000 to Heller Hickox Dimeling Schreiber and Park. George K. Hickox, Jr., who is director of our company, is a general partner of Heller Hickox Dimeling Schreiber and Park. Cynara paid management fees of $75,000 during 1996, $187,500 during 1997, and $250,000 during 1998 and reimbursed expenses of Mr. Hickox's firm. The management agreement was terminated upon completion of the acquisition of Cynara. We believe that the transactions described above were no less favorable to us than those that would have otherwise been obtainable in arms' length transactions with unaffiliated third parties. 60 65 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of August 31, 1999, and as adjusted to reflect the sale of our common stock in this offering. The following table presents information on: - each director; - each named executive officer; - each person who is known by us to own beneficially 5% or more of our common stock; - all our directors and executive officers as a group; and - Capricorn I, as the selling stockholder.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO THE OFFERING SHARES TO BE AFTER THE OFFERING ---------------------- SOLD IN THE ------------------- NAME OF BENEFICIAL OWNER(1)(2) NUMBER PERCENT OFFERING NUMBER PERCENT ------------------------------ ----------- -------- ------------ --------- ------- Capricorn I(3)............................ 5,563,667 59.9% -- -- % Capricorn II(4)........................... 3,087,021 33.2% -- 3,087,021 21.6% Herbert S. Winokur, Jr.(5)................ 8,650,688 93.1% -- -- % Nathaniel A. Gregory(6)(7)................ 4,103,957 44.2% -- 4,103,957 26.8% E. Hale Staley(7)......................... 33,334 * -- 33,334 * Patrick M. McCarthy(7).................... 137,501 * -- 137,501 * William B. Wiener III(8).................. -- -- -- -- -- C. Frank Smith(7)......................... 50,001 * -- 50,001 * R. Volz, Jr.(7)........................... 33,334 * -- 33,334 * Howard I. Bull............................ 4,000 * -- 4,000 * Keith K. Allan............................ 4,000 * -- 4,000 * George K. Hickox, Jr. .................... 83,708 * -- 83,708 * All directors and executive officers as a group (14 persons)(5)(6)(7)............. 10,057,252 100% -- %
- ------------------------------ * Less than 1%. (1) Except as otherwise noted, each stockholder has sole voting and investment power with respect to the shares beneficially owned. (2) The address of Capricorn I, Capricorn II and Mr. Winokur is 30 East Elm Street, Greenwich, Connecticut 06830. (3) A Delaware limited partnership of which Capricorn Holdings L.P. is the general partner. Mr. Winokur, a director of our company, controls the general partner of Capricorn Holdings L.P. (4) A Delaware limited partnership of which Capricorn Holdings LLC is the general partner. Messrs. Winokur and Gregory, directors of our company, are the managing member and a member of Capricorn Holdings LLC, respectively. (5) The 8,650,688 shares indicated as beneficially owned by Mr. Winokur are owned directly by Capricorn I and Capricorn II and are included due to Mr. Winokur's affiliation with Capricorn I and Capricorn II. (6) Of the 4,103,957 shares indicated as beneficially owned by Mr. Gregory, 3,087,021 are owned directly by Capricorn II and are included because of Mr. Gregory's affiliation with Capricorn II. (7) The shares beneficially owned by Messrs. Gregory, Staley, McCarthy, Smith and Volz include 880,104, 33,334, 137,501, 50,001 and 33,334 shares, respectively, that may be acquired within 60 days through the exercise of stock options. The shares owned by the executive officers and directors as a group include 1,186,024 shares that may be acquired within 60 days through the exercise of stock options. (8) Mr. Wiener resigned from our company effective May 31, 1999. 61 66 DESCRIPTION OF CAPITAL STOCK GENERAL Our authorized capital stock consists of 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. Of the 50,000,000 shares of common stock, 45,000,000 shares are designated Class A common stock and 5,000,000 shares are designated Class B common stock. As of August 31, 1999, 9,287,520 shares of common stock were outstanding, of which 500,000 shares were Class B common stock and the balance were Class A common stock. The shares to be sold in this offering are Class A common stock. Prior to this offering, there has been no public market for our common stock. Although we have made application to list the common stock on the NYSE, we cannot assure you that a market for our common stock will develop or, if one develops, that it will be sustained. COMMON STOCK We amended our charter in connection with the acquisition of Cynara to divide our common stock into two classes. The shares issued to the former Cynara stockholders were shares of Class B common stock. There will be, until the completion of this offering, significant differences between the Class A and Class B common stock. At that time, however, these differences will terminate, except the rights of the holders of Class B common stock: - to elect a director to our board; and - to vote as a class with respect to any charter amendment that would authorize additional Class B common stock or would adversely affect their right to elect a director. The rights attaching to the Class B common stock are personal to the initial holders of shares of that class and will not, with express exceptions, continue to attach to shares transferred to others. Each share of Class B common stock may be converted at any time into one share of Class A common stock. On January 1, 2002, the Class B common stock converts automatically into Class A common stock to constitute a single class of common stock. There being no other differences between the classes of our common stock, we do not, in the description that follows, distinguish between those classes. Each holder of common stock is entitled to one vote for each share of common stock on all matters voted on by our stockholders. The holders of common stock do not have cumulative voting rights in the election of directors. Subject to any preferences accorded to the holders of the preferred stock, holders of common stock are entitled to receive ratably any dividends that our board declares out of legally available funds. NATCO Group Inc. has never paid cash dividends on our common stock, and we do not intend to pay dividends in the foreseeable future. Our credit facilities contain provisions that have the effect of restricting us from paying dividends on the common stock. Holders of common stock will share equally in our assets on the liquidation, dissolution or winding up of our company, after payment of debts, expenses and the liquidation preference plus any accrued dividends on any outstanding shares of preferred stock. The holders of common stock have no preemptive, subscription, redemptive or conversion rights. The outstanding shares of common stock are, and the shares of common stock being sold in this offering will be, validly issued, fully paid and nonassessable. PREFERRED STOCK General. Our board has authority, without stockholder approval, to issue shares of preferred stock in one or more series and to fix the number of shares and terms of each such series. The board may determine the designation and other terms of each series, including: - dividend rights; - conversion rights; 62 67 - voting powers; - redemption rights; and - liquidation preferences. The issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could adversely affect the voting power of holders of common stock. It could also affect the likelihood that holders of common stock will receive dividend payments and payments upon liquidation. We have no present plans to issue any preferred stock. One of the consequences of our authorized but unissued common stock and undesignated preferred stock may be to enable our board to make more difficult or to discourage an attempt to obtain control of our company. Use of the common or preferred stock for this purpose might also protect incumbent management. If, in the exercise of its fiduciary obligations, our board were to determine that a takeover proposal was not in our best interest, the board could authorize the issuance of those shares without stockholder approval. The shares could be issued in one or more transactions that might prevent or make the completion of the change of control transaction more difficult or costly by: - diluting the voting or other rights of the proposed acquiror or insurgent stockholder group; - creating a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent board; and - effecting an acquisition that might complicate or preclude the takeover. In this regard, our charter grants our board broad power to establish the rights and preferences of the authorized and unissued preferred stock. Our board could establish one or more series of preferred stock which entitle holders: - to vote separately as a class on any proposed merger or consolidation; - to cast a proportionately larger vote together with the common stock on any transaction or for all purposes; - to elect directors having terms of office or voting rights greater than those of other directors; - to convert preferred stock into a greater number of shares of common stock or other securities; - to demand redemption at a specified price under prescribed circumstances related to a change of control of our company; or - to exercise other rights designed to impede a takeover. Series A Junior Participating Preferred Stock. Our board has, in conjunction with its adoption of our rights agreement, designated 500,000 shares of preferred stock as the Series A Junior Participating Preferred Stock. The terms of this Series A preferred stock are designed so that the value of each one-hundredth of a share that may be purchased upon exercise of a right will approximate the value of one share of common stock. The Series A preferred stock is nonredeemable and will rank junior to all other series of preferred stock. Each whole share of Series A preferred stock is entitled to receive a cumulative quarterly preferential dividend in an amount per share equal to the greater of: - $1.00 in cash, or - 100 times the dividend declared on the common stock. 63 68 Upon liquidation, the holders of the Series A preferred stock are entitled to receive a preferential liquidation payment equal to the greater of: - $100.00 per share, or - 100 times the payment made on the common stock, plus, in either case, the accrued and unpaid dividends and distributions on the Series A preferred stock. Upon any merger, consolidation or other transaction in which the common stock is exchanged for or changed into other stock or securities, cash or other property, each whole share of Series A preferred stock is entitled to receive 100 times the amount received per share of common stock. Each whole share of Series A preferred stock is entitled to 100 votes on all matters submitted to a vote of the stockholders of our company. Holders of Series A preferred stock will generally vote together as one class with the holders of common stock and any other capital stock on all matters submitted to a vote of stockholders of our company. CHARTER AND BYLAW PROVISIONS Stockholder Action by Written Consent. Our bylaws provide that, except as may otherwise be provided with respect to the rights of the holders of preferred stock, no action that is required or permitted to be taken by our stockholders at any annual or special meeting may be effected by written consent of stockholders in lieu of a meeting of stockholders, unless the action to be effected by written consent of stockholders and the taking of such action by such written consent have expressly been approved in advance by our board. This provision makes it difficult for stockholders to initiate or effect an action by written consent that is opposed by our board. Amendment of the Bylaws. Under Delaware law, the power to adopt, amend or repeal bylaws is conferred upon the stockholders. A corporation may, however, in its certificate of incorporation also confer upon the board of directors the power to adopt, amend or repeal its bylaws. Our charter and bylaws grant our board the power to adopt, amend and repeal our bylaws at any regular or special meeting of the board on the affirmative vote of a majority of the directors then in office. Our stockholders may adopt, amend or repeal our bylaws but only at any regular or special meeting of stockholders by an affirmative vote of a majority of the common stock present at the meeting or by unanimous written consent. Special Meetings of Stockholders. Our bylaws provide that a special meeting of stockholders may be called only by a written request signed by the holders of at least 10% of our outstanding common stock. RIGHTS TO PURCHASE PREFERRED STOCK On May 5, 1998, our board declared a dividend of one preferred share purchase right for each outstanding share of common stock held of record on May 15, 1998. It also approved the further issuance of rights with respect to all shares of common stock that we issue after that date and prior to the rights becoming exercisable. The rights were issued under a rights agreement between our company and ChaseMellon Shareholder Services, L.L.C., as rights agent. When the rights become exercisable, each right will entitle the registered holder to purchase from us one-hundredth of a share of Series A preferred stock at a price of $72.50 in cash, subject to adjustment. Until the occurrence of specified events, the rights: - are not exercisable; - will be evidenced by the certificates for our common stock; and - will not be transferable apart from our common stock. 64 69 Detachment of Rights; Exercise. The rights are currently attached to all certificates representing outstanding shares of common stock and no separate right certificates have been distributed. The rights will separate from the common stock on a distribution date, which will occur upon the earlier of: - ten business days following the public announcement that a person or group has acquired beneficial ownership of 15% or more of our outstanding voting securities; or - ten business days following the commencement or announcement of an intention to commence a tender offer or exchange offer, which, if completed, would result in the beneficial ownership by a person or group of 15% or more of our outstanding voting securities. The rights are not exercisable until the distribution date. As soon as practicable following the distribution date, separate certificates evidencing the rights will be mailed to holders of record of our common stock as of the close of business on the distribution date. After mailing, the separate certificates alone will evidence the rights. If a person or group were to acquire 15% or more of our voting securities, each right then outstanding would become a right to buy that number of shares of common stock that at the time of the acquisition of 15% or more of our voting securities would have a market value of two times the purchase price of the right. Rights beneficially owned by the acquiring person or group would, however, become null and void. If, following the occurrence of a distribution date, we were acquired in a merger or other business combination transaction, the rights agreement requires that the documents relating to the business combination must contain provisions relating to the rights. Those documents must provide that, after the merger or other business combination, each holder of a right would have the right to receive, upon exercise at the then current purchase price, that number of shares of common stock of the acquiring company that at the time would have a market value of two times the purchase price of the right. Antidilution and Other Adjustments. The number of shares or fractions of Series A preferred stock or other securities or property issuable upon exercise of the rights, and the purchase price payable, are subject to customary adjustments from time to time to prevent dilution. The number of outstanding rights and the number of shares or fractions of Series A preferred stock issuable upon exercise of each right are also subject to adjustment if any of the following events occurs prior to the distribution date: - a stock dividend on our common stock payable in our common stock; or - any subdivision, consolidation or combination of our common stock. Exchange Option. At any time after the acquisition by a person or group of beneficial ownership of 15% or more but less than 50% of our outstanding voting securities, our board may, at its option, issue common stock in mandatory redemption of all or part of the rights. Any rights owned by the acquiring person or group would become null and void. The redemption must be at an exchange ratio of one share of our common stock for each two shares of our common stock for which each right is then exercisable, subject to adjustment. Redemption of Rights. At any time prior to the first public announcement that a person or group has become the beneficial owner of 15% or more of our outstanding voting securities, our board may redeem all but not less than all the then outstanding rights at a price of $.01 per right. The redemption of the rights may be made effective at the time, on the basis and with the conditions that the board may establish. Immediately after our board's decision to redeem the rights, the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the redemption price. Expiration; Amendment of Rights. The rights will expire on May 15, 2008, unless earlier extended, redeemed or exchanged. Our board may amend the terms of the rights without the consent of the holders of the rights. This includes amendments to extend the expiration date of the rights, and, if a distribution date has not occurred, to extend the period during which the rights may be redeemed. After the first public announcement that a person or group has become the beneficial owner of 15% or more of our 65 70 outstanding voting securities, no amendment may materially and adversely affect the interests of holders of the rights. DELAWARE ANTITAKEOVER LAW We are subject to Section 203 of the Delaware General Corporation Law. That section prohibits Delaware corporations from engaging in a wide range of specified transactions with any interested stockholder. An interested stockholder is any person, other than the corporation and any of its majority- owned subsidiaries, who owns 15% or more of any class or series of stock entitled to vote generally in the election of directors. EFFECTS OF RIGHTS AND ANTITAKEOVER LAW The rights have anti-takeover effects. The rights will cause substantial dilution to a person or group that attempts to acquire us without the approval of our board. Moreover, the rights and the above provisions of the Delaware law may tend to deter any potential unfriendly offers or other efforts to obtain control of our company that are not approved by our board. This may deprive the stockholders of opportunities to sell shares of our common stock at prices higher than the prevailing market price. On the other hand, the rights and these provisions will tend to assure continuity of management and corporate policies and to induce any person seeking control of our company or a business combination with our company to negotiate on terms acceptable to our board of directors. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have 14,287,520 shares of common stock outstanding ( shares if the underwriters fully exercise their over-allotment option). Of these outstanding shares of common stock, the shares to be sold in this offering ( if the underwriters fully exercise their over-allotment option) will be freely tradeable without restriction or further registration under the Securities Act. This assumes none of them is purchased by an "affiliate" of our company, as that term is defined in Rule 144 under the Securities Act. The remaining shares of common stock outstanding after this offering will be "restricted securities" within the meaning of Rule 144 and may not be sold in a public distribution except in compliance with the registration requirements of the Act or an applicable exemption under the Act, including an exemption pursuant to Rule 144. Restricted securities are eligible for sale in the public market pursuant to Rule 144 no sooner than one year from the date of acquisition. Sales may be effected after expiration of this "holding period" in compliance with specified volume and transactional limitations of Rule 144. After completion of this offering, the current stockholders will own the shares of our common stock shown below subject to the "holding-period" shown:
STOCKHOLDER OR GROUP NUMBER OF SHARES HOLDING PERIOD - -------------------------------------------- ---------------- ------------------------------------ Capricorn I................................. Expired Capricorn II................................ 3,087,021 Expired as to 2,582,259 shares; holding period as to balance expires November 1999 Former Cynara Stockholders.................. 500,000* Expires November 1999 Nathaniel A. Gregory........................ 136,832 Expires July 2000
- --------------- * Based on operations through September 30, 1999, approximately 300,000 additional shares have been earned and will be issued on November 30, 1999. Up to a total of 950,000 additional shares may be earned at March 31, 2000 and December 31, 2000. 66 71 All these stockholders have agreed with the underwriters that they will not, without the consent of Donaldson, Lufkin & Jenrette Securities Corporation, sell any shares of our common stock for a period of 180 days following the date of this prospectus. An aggregate of shares of our common stock that are currently outstanding will be available for sale in Rule 144 transactions following expiration of that 180 day period. Moreover, all the stockholders listed above, including the former Cynara stockholders, are entitled to rights of registration of the offering and sale of their shares under the Securities Act. As of September 30, 1999, we have reserved an aggregate of 1,795,947 shares of common stock for issuance upon exercise of options of which 1,347,527 are exercisable immediately upon completion of this offering. See "Management -- Executive Compensation -- Stock Option Plans." UNDERWRITING Subject to the terms and conditions of an underwriting agreement, dated , 1999, the underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Smith Barney Inc. and Simmons & Company International, have severally agreed to purchase an aggregate of shares from us and shares from the selling stockholder. The number of shares of common stock that each underwriter has agreed to purchase is set forth opposite its name below.
NUMBER OF UNDERWRITERS SHARES - ------------ --------- Donaldson, Lufkin & Jenrette Securities Corporation......... Salomon Smith Barney Inc. .................................. Simmons & Company International............................. -------- Total............................................. ========
The underwriting agreement provides that the obligations of the underwriters to purchase and accept delivery of the shares of common stock included in this offering are subject to approval by their counsel of certain legal matters and to certain other conditions. The underwriters are obligated to purchase and accept delivery of all the shares of common stock (other than those covered by the over-allotment option described below) if they purchase any of the shares of common stock. The underwriters initially propose to offer some of the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares of common stock to certain dealers (including the underwriters) at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share on sales to certain other dealers. After the initial offering of the common stock to the public, the representatives may change the public offering price and other selling terms at any time without notice. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. We have granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to additional shares of common stock at the public offering price less underwriting fees. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with this offering. To the extent that the underwriters exercise this option, each underwriter will become obligated, subject to certain conditions, to purchase a number of additional shares of common stock approximately proportionate to its initial purchase commitment. 67 72 The following table shows the underwriting fees we will pay to the underwriters in connection with this offering. The amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of our common stock.
NO EXERCISE FULL EXERCISE Per share................................................... $ $ Total....................................................... $ $
We estimate our expenses relating to the offering to be $800,000. We and the selling stockholder have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make with respect to these liabilities. Our officers, directors and stockholders (including the selling stockholder) have agreed that they will not, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, offer, sell or otherwise dispose of: (1) any shares of common stock; (2) options or warrants to acquire shares of common stock; or (3) securities convertible into or exchangeable for shares of common stock owned by them, for a period of 180 days after the date of this prospectus. We have agreed not to offer, sell or otherwise dispose of any of the above securities for a period of 180 days after the date of this prospectus. See "Shares Eligible for Future Sale." At our request, the underwriters have reserved up to 5% of the shares offered hereby for sale at the initial public offering price to certain of our employees and members of their immediate families. The number of shares available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. Application will be made to list our common stock on the NYSE under the symbol "NTG." In order to meet the requirements for listing the common stock on the NYSE, the underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners. Other than in the United States, no action has been taken by us, the selling stockholder or the underwriters that would permit a public offering of the shares of common stock included in this offering in any jurisdiction where action for that purpose is required. The shares of common stock included in this offering may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any shares of common stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to this offering of our common stock and the distribution of this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy any shares of common stock included in this offering in any jurisdiction where that would not be permitted or legal. DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation and a member of the selling group, is facilitating the distribution of the shares sold in the offering over the Internet. The underwriters have agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its brokerage account holders. In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot this offering, creating a syndicate short position. The underwriters may also bid for and purchase shares of common stock in the open market to cover syndicate short positions or to stabilize the price of the common stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members and selected dealers if they repurchase previously distributed common stock in syndicate covering transactions, in stabilizing transactions or otherwise. These activities may stabilize or maintain the market 68 73 price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. Prior to this offering, there has been no established market for our common stock. The initial public offering price for the shares of common stock offered by this prospectus will be determined by negotiation between us and the representatives of the underwriters. The factors to be considered in determining the initial public offering price include: - the history of and the prospects for the industry in which we compete; - our past and present operations; - our historical results of operations; - the recent market prices of securities of generally comparable companies; and - general conditions of the securities market at the time of this offering. Affiliates of Donaldson, Lufkin & Jenrette Securities Corporation own limited partnership interests in Capricorn I and Capricorn II. Affiliates of Salomon Smith Barney Inc. own limited partnership interests in Capricorn II. LEGAL MATTERS The validity of the shares of common stock offered by this prospectus is being passed upon for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters in connection with the shares of common stock offered by this prospectus will be passed upon for the underwriters by Akin, Gump, Strauss, Hauer & Feld, L.L.P. EXPERTS The consolidated financial statements of NATCO Group Inc. and its subsidiaries as of March 31, 1998 and December 31, 1998 and for each of the fiscal years in the two-year period ended March 31, 1998 and the nine-month period ended December 31, 1998 have been included herein and in the registration statement of which this prospectus is a part in reliance upon the reports of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of The Cynara Company at December 31, 1997 and 1996, and for the year ended December 31, 1997 and for the period from March 5, 1996 (date of inception) to December 31, 1996, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of Porta-Test International Inc. as of June 30, 1999 and for the year then ended have been included herein and in the registration statement of which this prospectus is a part in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The combined financial statements of Engineering Specialties, Inc. and Engineering Specialties FSC, Inc. as of December 31, 1998 and for the year then ended have been included herein and in the registration statement of which this prospectus is a part in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 69 74 AVAILABLE INFORMATION This prospectus is part of a registration statement we have filed with the SEC relating to our common stock. As permitted by SEC rules, this prospectus does not contain all of the information we have included in the registration statement and the accompanying exhibits and schedules we filed with the SEC. You may refer to the registration statement, exhibits and schedules for more information about us and our common stock. You can read and copy the registration, exhibits and schedules at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices located at Seven World Trade Center, New York, New York 10048, and at 500 West Madison Street, Chicago, Illinois 60661. You can obtain information about the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov. Following this offering, we will be required to file current reports, quarterly reports, annual reports, proxy statements and other information with the SEC. You may read and copy those reports, proxy statements and other information at the SEC's Public Reference Room and regional offices or through its Internet site. We intend to furnish our stockholders with annual reports that will include a description of our operations and audited consolidated financial statements certified by an independent public accounting firm. 70 75 INDEX TO FINANCIAL STATEMENTS
PAGE ---- NATCO GROUP INC. AND SUBSIDIARIES Independent Auditors' Report................................ F-2 Consolidated Balance Sheets as of March 31, 1998, December 31, 1998, and June 30, 1999 (unaudited)................... F-3 Consolidated Statements of Operations for the years ended March 31, 1997 and 1998, for the nine months ended December 31, 1998, and for the six months ended June 30, 1998 and 1999 (unaudited)................................. F-4 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended March 31, 1997 and 1998, for the nine months ended December 31, 1998, and for the six months ended June 30, 1999 (unaudited)........ F-5 Consolidated Statements of Cash Flows for the years ended March 31, 1997 and 1998, for the nine months ended December 31, 1998, and for the six months ended June 30, 1998 and 1999 (unaudited)................................. F-6 Notes to Consolidated Financial Statements.................. F-7 THE CYNARA COMPANY Report of Independent Auditors.............................. F-30 Balance Sheets as of December 31, 1996 and 1997, and September 30, 1998 (unaudited)............................ F-31 Statements of Operations for the period from March 5, 1996 (date of inception) to December 31, 1996 and for the year ended December 31, 1997, and for the nine months ended September 30, 1997 and 1998 (unaudited)................... F-32 Statements of Stockholders' Equity as of December 31, 1996 and 1997, and September 30, 1998 (unaudited).............. F-33 Statements of Cash Flows for the period from March 5, 1996 (date of inception) to December 31, 1996, and for the year ended December 31, 1997, and for the nine months ended September 30, 1997 and 1998 (unaudited)................... F-34 Notes to Financial Statements............................... F-35 PORTA-TEST INTERNATIONAL INC. Independent Auditors Report................................. F-42 Balance Sheet as of June 30, 1999........................... F-43 Statement of Operations for the year ended June 30, 1999.... F-44 Statement of Stockholders' Equity and Comprehensive Loss as of and for the year ended June 30, 1999................... F-45 Statement of Cash Flows for the year ended June 30, 1999.... F-46 Notes to Financial Statements............................... F-47 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. Independent Auditors Report................................. F-52 Combined Balance Sheets as of December 31, 1998 and June 30, 1999 (unaudited).......................................... F-53 Combined Statements of Operations for the year ended December 31, 1998 and for the six months ended June 30, 1998 and 1999 (unaudited)................................. F-54 Combined Statements of Stockholders' Equity and Comprehensive Income for the year ended December 31, 1998 and for the six months ended June 30, 1999 (unaudited).... F-55 Combined Statements of Cash Flows for the year ended December 31, 1998 and for the six months ended June 30, 1998 and 1999 (unaudited)................................. F-56 Notes to Combined Financial Statements...................... F-57
F-1 76 INDEPENDENT AUDITORS' REPORT The Board of Directors NATCO Group Inc.: We have audited the accompanying consolidated balance sheets of NATCO Group Inc., and subsidiaries as of March 31, 1998 and December 31, 1998 and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for the years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NATCO Group Inc. and subsidiaries as of March 31, 1998 and December 31, 1998 and the results of their operations and their cash flows for the years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Houston, Texas March 5, 1999 F-2 77 NATCO GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, JUNE 30, 1998 1998 1999 (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 941 $ 2,380 $ 1,428 Restricted cash........................................... 549 883 -- Trade accounts receivable, less allowance for doubtful accounts of $965, $579 and $560 as of March 31, 1998, December 31, 1998, and June 30, 1999 respectively....... 43,945 42,585 35,208 Inventories............................................... 20,096 22,254 19,731 Notes receivable from director............................ 1,576 1,717 1,803 Net deferred income tax assets............................ 2,590 2,871 1,894 Income tax receivable..................................... -- 1,055 1,671 Prepaid expenses and other current assets................. 1,655 857 1,138 ------- -------- -------- Total current assets............................... 71,352 74,602 62,873 Property, plant and equipment, net.......................... 9,332 18,294 18,120 Goodwill.................................................... 7,416 18,194 16,648 Net deferred income tax assets.............................. 6,162 6,230 6,797 Other assets, net........................................... 1,151 1,092 1,030 ------- -------- -------- Total assets....................................... $95,413 $118,412 $105,468 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt.................... $ 1,682 $ 4,693 $ 4,693 Revolving credit bank loan................................ 4,147 1,585 1,929 Accounts payable.......................................... 24,182 20,351 14,533 Accrued expenses and other................................ 13,573 13,758 10,825 Customer advances......................................... 2,057 2,749 721 Income taxes payable...................................... 1,269 -- -- ------- -------- -------- Total current liabilities.......................... 46,910 43,136 32,701 Long-term debt, excluding current installments.............. 27,890 35,499 32,443 Postretirement benefit liability............................ 15,194 15,587 15,986 ------- -------- -------- Total liabilities.................................. 89,994 94,222 81,130 ------- -------- -------- Stockholders' equity: Preferred stock $.01 par value. 5,000,000 shares authorized; no shares outstanding....................... -- -- -- Class A Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding 6,666,668, 8,650,688 and 8,650,688 shares as of March 31, 1998, December 31, 1998 and June 30, 1999, respectively....... 67 86 86 Class B Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 0, 500,000 and 500,000 shares as of March 31, 1998, December 31, 1998, and June 30, 1999, respectively.................................. -- 5 5 Additional paid-in capital................................ 20,272 38,888 38,651 Accumulated deficit....................................... (9,470) (8,818) (8,672) Treasury stock, 470,188 shares at cost.................... (4,350) (4,550) (4,550) Accumulated other comprehensive loss...................... (1,100) (1,421) (1,182) ------- -------- -------- Total stockholders' equity......................... 5,419 24,190 24,338 ------- -------- -------- Commitments and contingencies Total liabilities and stockholders' equity......... $95,413 $118,412 $105,468 ======= ======== ========
See accompanying notes to consolidated financial statements. F-3 78 NATCO GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FOR THE YEAR ENDED NINE MONTHS FOR THE SIX MONTHS MARCH 31, ENDED ENDED JUNE 30, ------------------- DECEMBER 31, ------------------ 1997 1998 1998 1998 1999 (UNAUDITED) Revenues................................ $126,657 $202,023 $145,611 $106,658 $86,175 Cost of goods sold...................... 100,803 161,801 115,521 85,635 65,821 -------- -------- -------- -------- ------- Gross profit.......................... 25,854 40,222 30,090 21,023 20,354 Selling, general and administrative expense............................... 23,313 28,553 24,530 15,274 15,321 Depreciation and amortization expense... 862 1,322 1,473 795 2,311 Interest expense........................ 1,861 2,992 2,215 1,347 1,673 Interest cost on postretirement benefit liability............................. 957 1,048 786 524 523 Revaluation loss on postretirement benefit liability..................... 1,466 159 53 -- -- Interest income......................... (116) (140) (227) (101) (99) -------- -------- -------- -------- ------- Income (loss) from continuing operations before income taxes..... (2,489) 6,288 1,260 3,184 625 Income tax provision (benefit).......... (659) 1,141 608 594 479 -------- -------- -------- -------- ------- Income (loss) from continuing operations......................... (1,830) 5,147 652 2,590 146 Gain on disposal of PTH division (net of applicable income taxes of $3,807).... $ 4,788 -- -- -- -- Income from discontinued operations (net of applicable income tax expense (benefit) of $(825) and $395, respectively)......................... 1,100 767 -- -- -- -------- -------- -------- -------- ------- Net income............................ $ 4,058 $ 5,914 $ 652 $ 2,590 $ 146 ======== ======== ======== ======== ======= Basic earnings per share: Continuing operations................. $ (0.31) $ 0.68 $ 0.08 $ 0.32 $ 0.02 Discontinued operations............... 0.98 0.10 -- -- -- -------- -------- -------- -------- ------- Net income............................ 0.67 0.78 0.08 $ 0.32 0.02 ======== ======== ======== ======== ======= Diluted earnings per share: Continuing operations................. (0.28) 0.64 0.07 $ 0.29 0.01 Discontinued operations............... 0.92 0.09 -- -- -- -------- -------- -------- -------- ------- Net income............................ 0.64 0.73 0.07 $ 0.29 0.01 ======== ======== ======== ======== ======= Basic weighted average number of shares of common stock outstanding........... 6,032 7,623 8,243 8,146 9,151 Diluted weighted average number of shares of common stock outstanding.... 6,371 8,067 8,942 8,876 9,824
See accompanying notes to consolidated financial statements. F-4 79 NATCO GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
COMMON COMMON STOCK ACCUMULATED SHARES CLASS ADDITIONAL OTHER ------------------- --------- PAID-IN ACCUMULATED TREASURY COMPREHENSIVE A B A B CAPITAL DEFICIT STOCK LOSS Balances at March 31, 1996....... 4,553,334 -- $ 1 -- $11,142 $(14,673) $(4,350) $ (563) Purchase of warrant.............. -- -- -- -- (2,889) (211) -- -- Stockholder note repayment....... -- -- -- -- -- -- -- -- Employee stock compensation...... -- -- -- -- 1,241 -- -- -- Change of equity of minority interest....................... -- -- -- -- 129 -- -- -- Comprehensive income Net income.. -- -- -- -- -- 4,058 -- -- Foreign currency translation adjustment................... -- -- -- -- -- -- -- (201) --------- ------- --- --- ------- -------- ------- ------- Total comprehensive income....... -- -- -- -- -- -- -- -- --------- ------- --- --- ------- -------- ------- ------- Balances at March 31, 1997....... 4,553,334 -- $ 1 -- $ 9,623 $(10,826) $(4,350) $ (764) Issue common stock............... 2,113,334 -- 16 -- 10,624 -- -- -- Stock split...................... -- -- 50 -- (50) -- -- -- Change in equity of minority interest....................... -- -- -- -- (11) -- -- -- Dividends paid................... -- -- -- -- -- (4,558) -- -- Comprehensive income Net income.. -- -- -- -- -- 5,914 -- -- Foreign currency translation adjustment................... -- -- -- -- -- -- -- (336) --------- ------- --- --- ------- -------- ------- ------- Total comprehensive income....... -- -- -- -- -- -- -- -- --------- ------- --- --- ------- -------- ------- ------- Employee stock compensation...... -- -- -- -- 86 -- -- -- Note repayment................... -- -- -- -- -- -- -- -- --------- ------- --- --- ------- -------- ------- ------- Balances at March 31, 1998....... 6,666,668 -- $67 -- $20,272 $ (9,470) $(4,350) $(1,100) Conversion of subordinated debt........................... 1,479,258 -- 14 -- 8,172 -- -- -- Issue common stock for acquisition.................... -- 500,000 -- 5 5,245 -- -- -- Issue common stock............... 504,762 -- 5 -- 5,295 -- -- -- Employee stock compensation...... -- -- -- -- 23 -- -- -- Stock options repurchased........ -- -- -- -- (119) -- -- -- Call option on common stock...... -- -- -- -- -- -- (200) -- Comprehensive income Net income..................... -- -- -- -- -- 652 -- -- Foreign currency translation adjustment................... -- -- -- -- -- -- -- (321) --------- ------- --- --- ------- -------- ------- ------- Total comprehensive income....... -- -- -- -- -- -- -- -- --------- ------- --- --- ------- -------- ------- ------- Balances at December 31, 1998.... 8,650,688 500,000 $86 $ 5 $38,888 $ (8,818) $(4,550) $(1,421) Employee stock compensation (unaudited).................... -- -- -- -- -- -- -- -- Stock options repurchased (unaudited).................... -- -- -- -- (237) -- -- -- Comprehensive income Net income (unaudited)......... -- -- -- -- -- 146 -- -- Foreign currency translation adjustment (unaudited)....... -- -- -- -- -- -- -- 239 --------- ------- --- --- ------- -------- ------- ------- Total comprehensive income (unaudited).................... -- -- -- -- -- -- -- -- --------- ------- --- --- ------- -------- ------- ------- Balances at June 30, 1999 (unaudited).................... 8,650,688 500,000 $86 $ 5 $38,651 $ (8,672) $(4,550) $(1,182) ========= ======= === === ======= ======== ======= ======= NOTES RECEIVABLE TOTAL FROM STOCKHOLDERS' STOCKHOLDERS EQUITY (DEFICIT) Balances at March 31, 1996....... $(425) $(8,868) Purchase of warrant.............. -- (3,100) Stockholder note repayment....... 4 4 Employee stock compensation...... -- 1,241 Change of equity of minority interest....................... -- 129 Comprehensive income Net income.. -- 4,058 Foreign currency translation adjustment................... -- (201) ----- ------- Total comprehensive income....... -- 3,857 ----- ------- Balances at March 31, 1997....... $(421) $(6,737) Issue common stock............... -- 10,640 Stock split...................... -- -- Change in equity of minority interest....................... -- (11) Dividends paid................... -- (4,558) Comprehensive income Net income.. -- 5,914 Foreign currency translation adjustment................... -- (336) ----- ------- Total comprehensive income....... -- 5,578 ----- ------- Employee stock compensation...... -- 86 Note repayment................... 421 421 ----- ------- Balances at March 31, 1998....... -- $ 5,419 Conversion of subordinated debt........................... -- 8,186 Issue common stock for acquisition.................... -- 5,250 Issue common stock............... -- 5,300 Employee stock compensation...... -- 23 Stock options repurchased........ -- (119) Call option on common stock...... -- (200) Comprehensive income Net income..................... -- 652 Foreign currency translation adjustment................... -- (321) ----- ------- Total comprehensive income....... -- 331 ----- ------- Balances at December 31, 1998.... -- $24,190 Employee stock compensation (unaudited).................... -- -- Stock options repurchased (unaudited).................... -- (237) Comprehensive income Net income (unaudited)......... -- 146 Foreign currency translation adjustment (unaudited)....... -- 239 ----- ------- Total comprehensive income (unaudited).................... -- 385 ----- ------- Balances at June 30, 1999 (unaudited).................... -- $24,338 ===== =======
See accompanying notes to consolidated financial statements. F-5 80 NATCO GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE NINE FOR THE SIX FOR YEAR ENDED MONTHS MONTHS MARCH 31, ENDED ENDED JUNE 30, ------------------ DECEMBER 31, ----------------- 1997 1998 1998 1998 1999 (UNAUDITED) Cash flows from operating activities: Net income................................................ $ 4,058 $ 5,914 $ 652 $ 2,590 146 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Change in equity of minority interest................... 129 (11) -- -- -- Deferred income tax provision........................... (408) (565) (16) 306 410 Depreciation and amortization expense................... 862 1,322 1,473 795 2,311 Noncash interest expense................................ 925 1,031 -- 290 76 Interest cost on postretirement benefit liability....... 957 1,048 786 524 523 Gain on sale of property, plant and equipment........... (285) (397) (49) -- 1 Loss on revaluation of postretirement benefit liability............................................. 1,466 159 53 -- -- Noncash compensation expense............................ 1,241 86 23 86 (237) Write off of accrued IPO fees........................... -- -- 380 -- -- Other, net.............................................. 107 242 (37) 80 -- Change in assets and liabilities: (Increase) decrease in restricted cash................ 45 (141) (334) -- 883 (Increase) decrease in trade accounts receivable...... (9,297) 347 2,853 (544) 7,377 (Increase) decrease in inventories.................... (3,433) (3,172) 570 (1,064) 3,263 (Increase) decrease in prepaid expense and other current assets...................................... (13) (361) 874 1,031 (281) Decrease in net assets of discontinued operations..... (537) 349 -- -- -- Increase (decrease) in other current liabilities, net................................................. 1,861 (243) (1,642) (1,768) (616) Increase (decrease) in accounts payable............... 3,425 (3,765) (5,834) 2,009 (6,044) Increase (decrease) in accrued expenses and other..... (246) 757 (1,894) (2,949) (2,536) Increase (decrease) in customer advances and other.... 202 513 692 1,183 (2,028) ------- -------- -------- ------- Net cash provided by (used in) operating activities........................................ 1,059 3,113 (1,450) 2,569 3,248 ------- -------- -------- ------- Cash flows from investing activities: Capital expenditures for property, plant and equipment.... (1,159) (1,256) (1,636) (609) (1,574) Proceeds from sales of property, plant and equipment...... 361 1,075 66 -- -- Acquisitions, net of working capital acquired............. -- (22,955) (15,499) (507) -- Increase in due from director............................. -- (1,576) -- (1,576) -- ------- -------- -------- ------- Net cash used in investing activities............... (798) (24,712) (17,069) (2,692) (1,574) ------- -------- -------- ------- Cash flows from financing activities: Net advances (repayments) under revolving credit agreements.............................................. 6,843 8,867 (2,562) 2,316 344 Change in bank overdrafts................................. (823) 2,435 (156) 864 132 Proceeds from notes receivable............................ -- 421 -- -- -- Proceeds from long-term debt.............................. 2,500 10,000 39,477 -- -- Proceeds from shareholder debt............................ -- 2,360 -- -- -- Repayments of long-term debt.............................. (5,947) (11,529) (20,631) (1,193) (3,056) Purchase of warrants...................................... (3,100) -- -- -- -- Issuance of common stock.................................. -- 10,640 5,300 -- -- Payments on postretirement benefit liability.............. (510) (621) (446) (345) (124) Other, principally bank and IPO fees...................... 4 (913) (803) (1,053) (93) ------- -------- -------- ------- Net cash provided by financing activities........... (1,033) 21,660 20,179 589 (2,797) ------- -------- -------- ------- Effect of exchange rate changes on cash and cash equivalents............................................... (201) (336) (221) (142) 171 ------- -------- -------- ------- Increase (decrease) in cash and cash equivalents............ (973) (275) 1,439 324 (952) Cash and cash equivalents at beginning of period............ 2,189 1,216 941 1,447 2,380 ------- -------- -------- ------- Cash and cash equivalents at end of period.................. $ 1,216 $ 941 $ 2,380 $ 1,771 $ 1,428 ======= ======== ======== ======= Cash payments for: Interest.................................................. $ 2,973 $ 2,101 $ 2,045 $ 1,436 $ 1,668 Income taxes.............................................. $ 260 $ 1,104 $ 2,093 $ 117 $ 693 Significant non cash financing activities: Issuance of common stock for acquisition.................. -- -- $ 5,250 -- -- Conversion of subordinated debt........................... -- -- $ 8,172 $ 8,172 --
See accompanying notes to consolidated financial statements. F-6 81 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED) (DOLLARS IN THOUSANDS) (1) ORGANIZATION NATCO Group Inc. (the Company) was formed in June 1988 by Capricorn Investors, L.P. (Capricorn). Capricorn led a group of investors who invested sufficient funds in the Company to enable the Company to acquire several businesses from Combustion Engineering, Inc. (C-E). On June 21, 1989, the Company acquired from C-E all of the outstanding common stock of W. S. Tyler, Incorporated (Tyler), and National Tank Company (NATCO), and the net assets of certain foreign affiliates of the Company. The accompanying consolidated financial statements and all related disclosures include the results of operations of the Company and its majority-owned subsidiaries for the nine months ended December 31, 1998 and the two years ended March 31, 1998. During 1992, the Company contributed its common stock investment in Tyler and $5,500 in cash to Process Technology Holdings, Inc. (PTH) in exchange for all of the issued and outstanding common stock of PTH. In 1992 and 1993, PTH and the Company sold certain shares of PTH common stock to third parties and, during 1997, the Company completed a tax-free spin off of PTH to its stockholder. The results of operations of PTH are shown as discontinued operations in the consolidated statement of operations. On June 30, 1997, NATCO acquired Total Engineering Services Team, Inc. (TEST), and on November 20, 1998, NATCO acquired The Cynara Company (CYNARA). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unaudited interim periods. The interim financial statements as of June 30, 1999 and for the six months ended June 30, 1999 and 1998 are unaudited. These interim financial statements have been prepared on the same basis as the annual financial statements included herewith. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the balance sheet, results of operations and cash flows with respect to the interim financial statements, have been included. The results of the operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. Fiscal Year Change. Effective April 1, 1998, the Company changed its fiscal year end from March 31 to December 31. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Concentration of Credit Risk. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base and their geographic dispersion. The Company had revenues from one customer that represented 14% of revenues for the year ended March 31, 1998. There was no single company that had revenues in excess of 10% of total revenues for the year ended March 31, 1997, the nine months ended December 31, 1998 or the six months ended June 30, 1999. Cash Equivalents. The Company considers all highly-liquid investment instruments with original maturities of three months or less to be cash equivalents. Restricted Cash. At March 31, 1998, December 31, 1998, and June 30, 1999, $549, $883, and $0, respectively, of cash was pledged as collateral on outstanding letters of credit related to performance and warranty guarantees, and was classified as restricted cash on the balance sheet. F-7 82 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the last in, first out (LIFO) method for NATCO domestic inventories, average cost for TEST inventories and the first in, first out (FIFO) method for all other inventories. Property, Plant and Equipment. Property, plant and equipment are stated at cost less an allowance for depreciation. Depreciation on plant and equipment is calculated using the straight-line method over the estimated useful lives. Maintenance and repair costs are expensed as incurred; renewals and betterments are capitalized. Upon the sale or retirement of properties, the accounts are relieved of the cost and the related accumulated depreciation; and any resulting profit or loss is included in income. The carrying values of property, plant and equipment by location are reviewed annually and more often if there are indications that these assets may be impaired. Goodwill. Goodwill is being amortized on a straight-line basis over periods of 20 and 40 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization over its remaining life can be recovered through undiscounted future operating cash flows. Based on its most recent analysis, the Company believes that no material impairment of goodwill exists at December 31, 1998. Amortization expense for the years ended March 31, 1997 and 1998, the nine months ended December 31, 1998, and the six months ended June 30, 1999 was $13, $128, $167, and $503, respectively. Accumulated amortization at March 31, 1998, December 31, 1998, and June 30, 1999 was $227, $394, and $897, respectively. Other Assets, Net. Other assets consist of prepaid pension assets, deposits of a long-term nature, and deferred financing costs. Deferred financing costs relating to the Company's various loan agreements have been capitalized and are being amortized over the term of the related debt agreements. Amortization expense for the years ended March 31, 1997 and 1998, for the nine months ended December 31, 1998, and the six months ended June 30, 1999 was $38, $262, $244, and $155, respectively. Environmental Remediation Costs. The Company accrues environmental remediation costs based on estimates of known environmental remediation exposure. Such accruals are recorded when the cost of remediation is probable and estimable, even if significant uncertainties exist over the ultimate cost of the remediation. Ongoing environmental compliance costs, including maintenance and monitoring costs, are expensed as incurred. Revenue Recognition. Revenues from significant contracts (NATCO contracts greater than $250 and longer than four months in duration and all TEST contracts and orders) are recognized on the percentage of completion method. Earned revenue is based on the percentage that incurred costs to date bear to total estimated costs after giving effect to the most recent estimates of total cost. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the year in which these changes become known. Earned revenue reflects the original contract price adjusted for agreed claims and change order revenues, if any. Losses expected to be incurred on jobs in progress, after consideration of estimated minimum recoveries from claims and change orders, are charged to income as soon as such losses are known. Customers typically retain an interest in uncompleted projects. Other revenues and related costs are recognized when products are shipped or services are rendered to the customer. Stock-Based Compensation. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provision of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. F-8 83 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Research and Development. Research and development costs are charged to operations in the year incurred. The cost of equipment used in research and development activities, which has alternative uses, is capitalized as equipment and not treated as an expense of the period. Such equipment is depreciated over estimated lives of 5 to 10 years. Research and development expenses totaled $617, $738, $1,001, and $818 for the years ended March 31, 1997 and 1998, for the nine months ended December 31, 1998, and the six months ended June 30, 1999, respectively. Warranty Costs. Estimated future warranty obligations related to products are charged to cost of goods sold in the period in which the related revenue is recognized. Additionally, the Company provides some of its customers with letters of credit covering potential warranty claims. At March 31, 1998, December 31, 1998 , and June 30, 1999, the Company had $1,883, $2,528, and $1,853, respectively, in outstanding letters of credit related to warranties. Income Taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the future generation of taxable income during the periods in which those temporary differences become deductible. Management has considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Translation of Foreign Currencies. Financial statement amounts related to foreign operations are translated into their United States dollar equivalents at exchange rates as follows: (1) balance sheet accounts at year-end exchange rates and (2) statement of operations accounts at the weighted average exchange rates for the period. The gains or losses resulting from such translations are deferred and included in accumulated other comprehensive income as a separate component of stockholders' equity. Gains or losses from foreign currency transactions are reflected in the consolidated statements of operations. Use of Estimates. Management of the Company has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the amounts of revenues and expenses recognized during the period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Earnings per Common Share. In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings per Share, which replaced primary and fully diluted earnings per share with basic and diluted earnings per share. The Company adopted the provisions of SFAS No. 128 in the fourth quarter of 1997 and all previously reported earnings per share data have been restated. Under SFAS No. 128, the basic earnings per share calculation excludes the dilutive effect of common stock equivalents in determining basic earnings per share. The diluted earnings per common and common equivalent share are computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. For the purposes of this calculation, outstanding employee stock options are considered common stock equivalents. In conformity with Securities and Exchange Commission requirements, common stock, options and warrants, or other potentially dilutive instruments which have been issued for nominal consideration during the periods covered by income statements presented are reflected in earnings per share calculations for all periods presented. F-9 84 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents earnings per common share amounts computed using SFAS 128:
NET PER SHARE PERIOD ENDED INCOME SHARES AMOUNTS Year ended March 31, 1997 Basic EPS.................................................. $4,058 6,032 $ 0.67 Effect of dilutive securities: Options.................................................... -- 339 (0.03) ------ ----- ------ Diluted EPS................................................ $4,058 6,371 $ 0.64 ====== ===== ====== Year ended March 31, 1998 Basic EPS.................................................. $5,914 7,623 $ 0.78 Effect of dilutive securities: Options.................................................... -- 444 (0.05) ------ ----- ------ Diluted EPS................................................ $5,914 8,067 $ 0.73 ====== ===== ====== Nine months ended December 31, 1998 Basic EPS.................................................. $ 652 8,243 $ 0.08 Effect of dilutive securities: Options.................................................... -- 699 (0.01) ------ ----- ------ Diluted EPS................................................ $ 652 8,942 $ 0.07 ====== ===== ====== Six months ended June 30, 1998 Basic EPS.................................................. $2,590 8,146 $ 0.32 Effect of dilutive securities: Options.................................................... -- 730 (0.03) ------ ----- ------ Diluted EPS................................................ $2,590 8,876 $ 0.29 ====== ===== ====== Six months ended June 30, 1999 Basic EPS.................................................. $ 146 9,151 $ 0.02 Effect of dilutive securities Options.................................................... -- 673 (0.01) ------ ----- ------ Diluted EPS................................................ $ 146 9,824 $ 0.01 ====== ===== ======
(3) CAPITAL STOCK Common Stock. On June 25, 1997, the Board of Directors of the Company approved an increase in the number of authorized common shares from 3,000 to 20,000,000. On that date, the directors declared a 7,503 for one common stock split to be effected by the distribution of 7,502 additional shares for each share of common stock held by stockholders of record as of that date. On March 6, 1998, the Company's charter was amended to increase the number of authorized shares of capital shares from 20,000,000 to 55,000,000, of which 5,000,000 are shares of preferred stock, par value $0.01, and 50,000,000 are shares of common stock. On that date, the board of directors declared a common stock split to be effected by the exchange of four shares for every three shares of common stock outstanding. All share data has been restated to reflect the effects of this transaction. On November 18, 1998, the Company's charter was again amended to divide the common stock into two classes: Class A common stock (45,000,000 shares) and Class B common stock (5,000,000 shares). F-10 85 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The two classes of common stock have the same relative rights and preferences with the following exceptions: - The holders of the Class B common stock have the right, voting separately as a class, to elect one member of the Company's board of directors; and - unless the Company has previously effected an initial public offering of its Class A common stock, holders of Class B common stock will have: - the option, during the period from June 30, 2000 to December 31, 2001, to require the Company to purchase their Class B shares at a cash price of $13.00 per share; and - a liquidation preference over the Class A common stock equal to the amount then due with respect to any option previously exercised. Class B shares may be converted by the holder to Class A shares at any time, and will automatically convert to Class A shares on January 1, 2002. (4) ACQUISITIONS On June 30, 1997, NATCO completed the acquisition of TEST from Weatherford Enterra, Inc. for $22,475 in cash. The funds used for the acquisition of TEST were provided by $10,640 in additional equity and a $2,360 loan from Capricorn Investors II, L.P. (Capricorn II) and proceeds from a new senior credit facility. The acquisition has been accounted for as a purchase and the results of TEST have been included in the consolidated financial statements since the date of the acquisition. The purchase agreement allowed for purchase price adjustments and included a guarantee of collectibility for TEST accounts receivable acquired at the purchase price date. The Company subsequently received cash of $1,387 and $1,690 related to purchase price adjustments and the reimbursement of uncollected accounts receivable of TEST, respectively, at the end of the purchase price adjustment period. Goodwill amounted to $6,237 and is being amortized over a forty-year period. On November 20, 1998, the Company completed the acquisition of Cynara from a group of private investors for $5,250 in cash, the assumption of $10,118 in Cynara bank debt, and the issuance of 500,000 shares of NATCO Class B common stock valued at $5,250. In addition, the Company may be required to issue up to an additional 1,400,000 shares to Cynara's former shareholders based on performance criteria defined in the purchase agreement. The Company has placed 450,000 shares in escrow related to this provision. The Company estimates that 300,000 shares have been earned subsequent to June 30, 1999. Should additional shares be issued, a corresponding increase will be made to cost in excess of fair value of net assets acquired. The funds used for the acquisition of Cynara were provided by $5,300 in additional equity and proceeds from a new senior credit facility provided by a syndicate of major international banks. The acquisition has been accounted for as a purchase and the results of Cynara have been included in the consolidated financial statements since the date of acquisition. Goodwill amounted to $10,841 and is being amortized over a twenty-year period. F-11 86 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The unaudited pro forma results including Cynara for the nine months ended December 31, 1998, below assume the acquisition occurred on April 1, 1998.
NINE MONTHS ENDED DECEMBER 31, 1998 Revenues.................................................... $149,481 Income from continuing operations........................... 236 Net income (loss)........................................... (1,150) Net income (loss) per share: Basic..................................................... $ (0.14) Diluted................................................... $ (0.13)
This pro forma data does not purport to be indicative of the actual results that would have been achieved if these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results. The pro forma results include the amortization of goodwill ($444 annually). As part of their arrangement with their former parent company, Cynara was charged an amount to offset parent company overhead for corporate management, accounting, human resources, and legal services. NATCO corporate overhead has not increased as a result of the acquisition of these companies. Such amounts would be duplicative or redundant to the overhead already incurred by NATCO, and accordingly $221 has been eliminated for Cynara for the nine months ended December 31, 1998. (5) INVENTORIES Inventories consisted of the following amounts:
MARCH 31, DECEMBER 31, JUNE 30, 1998 1998 1999 Finished goods....................................... $ 4,487 $ 7,153 $ 6,127 Work-in-process...................................... 5,810 5,642 4,856 Raw materials and supplies........................... 10,064 9,725 9,014 ------- ------- ------- Inventories at FIFO................................ 20,361 22,520 19,997 Excess of FIFO over LIFO cost........................ (265) (266) (266) ------- ------- ------- $20,096 $22,254 $19,731 ======= ======= =======
At March 31, 1998, December 31, 1998 and June 30, 1999, inventories valued using the LIFO method included in the above numbers amounted to $15,628, $15,855 and $15,129, respectively. During the years ended March 31, 1997 and 1998, the nine months ended December 31, 1998, and the six months ended June 30, 1999 there were no reductions in the LIFO layers. F-12 87 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Cost and estimated earnings on uncompleted contracts are as follows:
MARCH 31, DECEMBER 31, JUNE 30, 1998 1998 1999 Cost incurred on uncompleted contracts............... $54,396 $35,704 $42,564 Estimated earnings................................... 10,653 10,265 12,576 ------- ------- ------- 65,049 45,969 55,140 Less billings to date................................ 54,427 36,116 46,552 ------- ------- ------- $10,622 $ 9,853 $ 8,588 ======= ======= ======= Included in accompanying balance sheets under the following captions: Trade accounts receivable.......................... $11,596 $ 9,904 $ 8,588 Customer advances.................................. (974) (51) -- ------- ------- ------- $10,622 $ 9,853 $ 8,588 ======= ======= =======
(7) PROPERTY, PLANT AND EQUIPMENT, NET The components of property, plant and equipment, were as follows:
ESTIMATED USEFUL MARCH 31, DECEMBER 31, JUNE 30, LIVES (YEARS) 1998 1998 1999 Land and improvements................ -- $ 1,232 $ 1,395 1,408 Buildings and improvements........... 20 to 40 7,093 7,441 7,638 Machinery and equipment.............. 3 to 12 6,910 15,956 17,412 Office furniture and equipment....... 3 to 12 3,023 3,490 3,490 Less accumulated depreciation........ (8,926) (9,988) (11,828) ------- ------- -------- $ 9,332 $18,294 $ 18,120 ======= ======= ========
Depreciation expense was $811, $1,168, $1,291, and $1,815, respectively, for the years ended March 31, 1997 and 1998, for the nine months ended December 31, 1998, and for the six months ended June 30, 1999. The Company leases certain pieces of machinery and equipment to its customers, generally for periods of one month to one year. The cost of leased machinery and equipment is $2,332, $2,351, and $2,371 and the related accumulated depreciation is $1,785, $1,863, and $1,942 at March 31, 1998, December 31, 1998 and June 30, 1999, respectively. Lease and rental income of $688, $648, $468, and $206 for the years ended March 31, 1997 and 1998, the nine months ended December 31, 1998, and the six months ended June 30, 1999, respectively, are included in revenues. (8) OTHER ASSETS, NET Other assets consisted of the following:
MARCH 31, DECEMBER 31, JUNE 30, 1998 1998 1999 Deferred financing costs............................. $ 407 $ 760 698 Deferred costs of public offering.................... 380 -- -- Prepaid pension asset................................ 283 246 246 Other assets......................................... 81 86 86 ------ ------ ------ $1,151 $1,092 $1,030 ====== ====== ======
F-13 88 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred financing costs are amortized over the life of the related debt instruments (three and five years). Accumulated amortization amounted to $132, $129, and $158 at March 31, 1998, December 31, 1998, and June 30, 1999, respectively. (9) ACCRUED EXPENSES AND OTHER Accrued expense and other consisted of the following:
MARCH 31, DECEMBER 31, JUNE 30, 1998 1998 1999 Accrued compensation and benefits.................... $ 7,700 $ 8,802 $ 7,292 Accrued insurance reserves........................... 2,148 905 949 Warranty and product reserves........................ 1,685 1,715 1,102 Taxes................................................ 684 527 682 Other................................................ 1,356 1,809 800 ------- ------- ------- Totals..................................... $13,573 $13,758 $10,825 ======= ======= =======
During the year ended March 31, 1998 and the nine months ended December 31, 1998, the Company revised its previous estimate of accrued insurance reserves resulting in a reduction of insurance expense of $1,326 and $1,207, respectively. (10) SHORT-TERM DEBT At March 31, 1998 and December 31, 1998, NATCO had a $5,000 working capital facility for export sales. The loans bear interest at prime, which was 8.5% and 7.75% at March 31, 1998 and December 31, 1998, respectively. Borrowings are based on the value of inventory and accounts receivable. The bank facility is secured by specific project inventory and receivables, a 90% guarantee from EXIM bank, and a second lien on the assets pledged to the NATCO revolving credit bank loan. The working capital facilities and loans are annual programs. The facility in place during the year ended March 31, 1998, matured on June 30, 1998 and was extended to August 31, 1998. The facility in place at December 31, 1998 will mature on August 31, 1999. At March 31, 1998 and December 31, 1998, $17, and $1,585, respectively, had been drawn against these facilities. The Company had letters of credit outstanding under this facility totaling $1,270 and $523 at March 31, 1998 and December 31, 1998, respectively. Subsequent to December 31, 1998, the working capital facility was increased to $10,000. At March 31, 1998, NATCO-Canada had $4,130 outstanding under a revolving credit agreement that was due on demand and bears interest at prime plus 0.5% per annum (7.0% at March 31, 1998). As of March 31, 1998, the maximum availability under the agreement was $4,931 ($7,000 Canadian). Availability is based on the collateral value of accounts receivable and inventory, as defined in the agreement. The loan is secured by collateral mortgages on the subsidiary's property and plant, a general security agreement over all equipment, and a general assignment of accounts receivable. The loan contains various restrictive covenants which include, among others, restrictions on capital asset additions, incurrences of additional debt, the requirement to maintain certain financial ratios and restrictions on the aggregate of capital expenditures and dividends paid in any one fiscal year not to exceed 50% of net cash flow, which is defined as the sum of after-tax net profit plus depreciation and amortization and taxes less payments made on long-term debt. In connection with the refinancing of the Company's bank debt described in note 11, NATCO-Canada paid this loan off in full prior to December 31, 1998. F-14 89 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (11) LONG-TERM DEBT The consolidated borrowings of the Company are as follows:
MARCH 31, DECEMBER 31, JUNE 30, 1998 1998 1999 RELATED PARTIES 13% subordinated notes, with interest and principal payable at maturity, due June 30, 2000............. $ 8,226 $ -- $ -- BANK DEBT Term loan with variable interest rate (7.68% at December, 31, 1998) quarterly payments of principal ($1,161) and interest, due November 30, 2003....... -- 32,500 30,179 Revolving credit bank loans with variable interest rate (8.04% at December 31, 1998) quarterly payment of interest, due November 30, 2001................. -- 6,977 6,242 Term loan with variable interest rate (8.69% at March 31, 1998) quarterly payments of principal ($357) and interest, due November 30, 2002................ 8,929 -- -- Revolving credit bank loan with variable interest rate (8.73% at March 31, 1998) quarterly payment of interest, due June 30, 2000........................ 10,580 -- -- Industrial revenue bond, $50 due annually with balance due September 1, 2005...................... 765 715 715 Mortgage, with interest at prime plus 1%, (7.5% at March 31, 1998) quarterly payments of principal ($33) and interest through May 2000................ 936 -- -- Term loan with interest at prime plus 1% (7.5% at March 31, 1998) monthly payments of principal ($6) and interest through February 2000................. 136 -- -- ------- ------- ------- Total...................................... 29,572 40,192 37,136 Less current installments.................. (1,682) (4,693) (4,693) ------- ------- ------- Long-term debt............................. $27,890 $35,499 $32,443 ======= ======= =======
The aggregate annual future maturities of long-term debt for the next five years ended December 31 are as follows: 1999 -- $4,693, 2000 -- $4,693, 2001 -- $11,670, 2002 -- $4,693, 2003 -- $13,987, thereafter $456. Parent Company. On December 11, 1991, the Company issued its promissory notes to Capricorn to evidence borrowings of $5,000,000. The notes were subordinated to all senior debt of the Company. Thereafter, interest payments were deferred and added to the principal amount of the notes. During the period prior to June 1997, the maturity dates of these notes were extended to 2000 and $4,600 thereof was assumed, with the consent of Capricorn, by PTH in connection with the distribution by the Company of the capital stock of PTH to Capricorn. In conjunction with the refinancing of its domestic debt facility, the remaining notes plus accrued but unpaid interest held by Capricorn were exchanged for $5,100 in principal amount of the Company's 13% Subordinated Promissory Note due 2000 (the "Cap I Note"). In June 1997, the Company completed the refinancing of its domestic debt facility, in part to finance the acquisition of TEST. At that time, Capricorn II invested an aggregate of $13,000 in the Company and received in exchange 2,113,334 shares of Common Stock and $2,400 in principal amount of the F-15 90 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's 13% Subordinated Promissory Note due 2000 (the "Cap II Note"), the terms of which are, except for the principal amount, identical to the Cap I Note. The 13% subordinated notes are convertible into 1,479,258 shares of Company common stock. Effective April 1, 1998, the Cap I and Cap II Notes were converted into common stock of the Company. NATCO. On November 20, 1998, new revolving credit and term loan facilities were put into place with a syndicate of major international banks. The new credit facilities provide for a $32,000 revolving credit line ($22,000 available in the U.S., $10,000 available in Canada) to finance eligible accounts receivable and inventories, and a $32,500 term loan. Indebtedness under the credit facilities bears interest at a floating rate based (at the Company's option) upon (i) the Base Rate, or Canadian prime rate with respect to Base Rate Loans, plus the Margin Percentage or (ii) the London Interbank Offered Rate for one, two, three or six months, plus the Margin Percentage. The Margin Percentage for Base Rate and Canadian prime rate loans varies from 1.00% to 0.00% depending on the Company's debt to capitalization ratio; and the Margin Percentage for Eurodollar loans varies from 2.50% to 1.00% depending on the Company's debt to capitalization ratio. The term borrowings mature on November 30, 2003, and the revolving borrowings mature on November 30, 2001. These agreements contain affirmative covenants including financial requirements related to minimum net worth, debt to capitalization ratio, and fixed charge coverage ratio, as well as restrictions on NATCO making any distributions of any property or cash to the Company in excess of an agreed sum without prior lender approval, and requires commitment fees in accordance with standard banking practices. The loan is collateralized by substantially all assets of the Company and its subsidiaries as well as a guarantee of the Company. As of December 31, 1998, the Company was in compliance with all restrictive covenants. NATCO had letters of credit outstanding under the revolving credit facilities totaling $2,592 at December 31, 1998. These letters of credit constitute contract performance and warranty collateral and expire at various dates through September 2002. At March 31, 1998 and until November 20, 1998, NATCO and the Company participated in a revolving credit agreement, which was collateralized by all of the assets of the Company and NATCO, and was guaranteed by the Company. The agreement provided for maximum revolver borrowings of $18,000 and an additional term loan of $10,000. At March 31, 1998, the interest rate on the revolving credit facility was 8.73%. The interest rate on the term loan was 7.5% (prime plus 1%), and interest was payable quarterly along with quarterly principal payments of $357. The revolving credit agreement contained various restrictive covenants, which included, among others, restrictions on capital asset additions, incurrence of additional debt and the requirements to maintain certain financial ratios. The maturity date of the revolver loan was June 30, 2000, and the term loan was due June 30, 2002. NATCO had letters of credit outstanding under the revolving credit facility totaling $2,101 at March 31, 1998. These letters of credit constitute contract performance and warranty collateral and expire at various dates through August 1999. The industrial revenue bond is secured by plant, real property, and equipment of NATCO and is also guaranteed by NATCO. Interest ranges from 7.9% to 8.5%, payable semiannually. The net book value of the related property was $408 at December 31, 1998. NATCO-Canada borrowed $1,283 and $61 under a bankers' acceptance and mortgage, respectively, to finance the purchase of land and buildings from Tyler. This was done to simplify the corporate structure, reduce borrowing costs and foreign exchange risk, and enhance the overall corporate tax position. The bankers' acceptance matured on May 18, 1995, and was paid with the proceeds of an additional borrowing on the mortgage of the land and buildings in the amount of $1,283. The bankers' acceptance, mortgage and term loan are secured by collateral mortgages on a NATCO subsidiary's property and plant, a general security agreement over all equipment, and a general assignment of accounts receivable. The bank loan, mortgage and term loan contain various restrictive covenants which include, among others, restrictions on F-16 91 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) capital asset additions and incurrence of additional debt, and the requirements to maintain certain financial ratios. As part of the Company's debt refinancing in 1998, these notes were paid off. Dividend Restrictions. With respect to its new credit facilities, NATCO has agreed that it will not make any distributions of any property or cash to the Company or its stockholders' in excess of $1,500 for 1998, $2,000 for 1999, and $2,200 for any year thereafter, plus 50% of excess cash flow beginning in 2001. The Company's previous Canadian loan facility contained various restrictive covenants which included, but were not limited to, restrictions on the aggregate of capital expenditures and/or dividends paid in any one fiscal year not to exceed 50% of net cash flow, defined as the sum of after tax net profit plus depreciation/amortization and deferred taxes less payments made on long term debt. For the fiscal year ended March 31, 1998, NATCO-Canada was restricted from making any such payments in excess of $1,699. (12) INCOME TAXES Income tax expense (benefit) consisted of the following components:
YEAR ENDED NINE MONTHS MARCH 31, ENDED -------------- DECEMBER 31, 1997 1998 1998 Current: Federal............................................... $(711) $ (319) $ -- State................................................. -- -- 129 Foreign............................................... 460 2,025 495 ----- ------ ----- (251) 1,706 624 ----- ------ ----- Deferred: Federal............................................... (323) (511) 77 State................................................. (85) (54) 36 Foreign............................................... -- -- (129) ----- ------ ----- (408) (565) (16) ----- ------ ----- $(659) $1,141 $ 608 ===== ====== =====
F-17 92 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Temporary differences related to the following items that give rise to deferred tax assets and liabilities are as follows:
MARCH 31, DECEMBER 31, 1998 1998 Deferred tax assets: Postretirement benefit liability.......................... $ 5,774 $ 5,923 Accrued liabilities....................................... 3,420 3,017 Net operating loss carryforward........................... 493 1,113 Accounts receivable....................................... 334 192 Property, plant and equipment............................. 40 -- ------- ------- Total deferred tax assets......................... $10,061 $10,245 ------- ------- Deferred tax liabilities: Inventory................................................. $ 1,201 $ 992 Property, plant and equipment............................. -- 59 Pension assets............................................ 108 93 ------- ------- Total deferred tax liabilities.................... 1,309 1,144 ------- ------- Net deferred tax assets........................... $ 8,752 $ 9,101 ======= =======
At March 31, 1998 and December 31, 1998, the Company did not record a valuation allowance related to its deferred tax assets because it is the opinion of management that future operations will more likely than not generate sufficient taxable income to realize the deferred tax assets. At December 31, 1998, the Company has net operating loss carryforwards for federal income tax purposes of $3,172 which are available to offset future federal income tax, if any, through 2018. Income tax expense (benefit) differs from the amount computed by applying the U.S. federal income tax rate of 34% to income (loss) from continuing operations before income taxes as a result of the following:
NINE MONTHS YEAR ENDED MARCH 31, ENDED --------------------- DECEMBER 31, 1997 1998 1998 Income tax expense (benefit) computed at statutory rate............................................... $(846) $ 2,138 $428 State income tax expense (benefit) net of federal income tax effect.................................. (85) (54) 87 Foreign income tax expense net of federal income tax effect............................................. 10 278 31 Foreign losses for which no tax benefit is currently available.......................................... 530 31 49 Tax benefit of foreign losses not previously claimed............................................ -- (1,507) (79) Permanent differences, primarily meals and entertainment and amortization..................... 60 130 122 Other................................................ (328) 125 (30) ----- ------- ---- $(659) $ 1,141 $608 ===== ======= ====
A provision has not been made for U.S. income taxes that would be payable if undistributed earnings of foreign subsidiaries were distributed to the Company in the form of dividends, since it is management's intention to reinvest such earnings permanently in the related foreign operations. At December 31, 1998, such amounts were not significant. F-18 93 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Federal income tax returns for fiscal years beginning with 1996 are open for review by the Internal Revenue Service. (13) STOCKHOLDERS' EQUITY CEO Stock Options. In connection with the engagement of Nathaniel A. Gregory as the chief executive officer of the Company, the Company granted to him options to purchase NATCO common stock that were subsequently converted to options to purchase common stock of the Company. At March 31, 1997 and 1998 and at December 31, 1998, these options related to an aggregate of 905,104 shares of Company common stock. Stock Appreciation Rights. During 1994, NATCO adopted the National Tank Company Stock Appreciation Rights Plan (the National Tank Plan). The National Tank Plan provided for grants to officers and key employees of NATCO of rights to the appreciation in value of a stated number of shares of NATCO common stock. Value was to be determined by a committee of the NATCO board of directors. The maximum number of rights issuable under the National Tank Plan was 500,000. Rights vested over a three year period. At March 31, 1997, there were 390,005 rights outstanding, of which 290,080 were vested. Compensation expense has been adjusted in connection with the plan for the years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998 to reflect expense of $1,241, $86 and $23, respectively. Individual Stock Options. On July 1, 1997, the board of directors of the Company approved the exchange of rights outstanding under the National Tank Plan for individual options to purchase common stock of the Company. The exercise price of these options was equal to fair market value of the common stock. Accordingly, no compensation expense was recorded. The individual stock options granted on July 1, 1997 vested ratably over a period of three or four years. The maximum term of these options was 7.5 years. The Company reserved an aggregate of 390,005 shares of common stock for issuance upon exercise of these individual stock options. Stock Options Plans. In January 1998 and February 1998, the Company adopted the Directors Compensation Plan and the Employee Stock Incentive Plan. These plans authorize the issuance of options to purchase up to an aggregate of 760,000 shares of Company common stock. The options vest over periods of up to four years. The maximum term under these options is ten years. At March 31, 1998 and December 31, 1998, options relating to an aggregate of 260,006 shares and 464,672 shares were outstanding under these plans. F-19 94 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the transactions of the company's stock option plans for the years ended March 31, 1997 and 1998, the nine months ended December 31, 1998 and the six months ended June 30, 1999:
WEIGHTED STOCK OPTIONS AVERAGE SHARES EXERCISE PRICE Balance at March 31, 1996................................. 555,555 $ 1.47 Granted................................................. 185,186 $ 3.58 Exercised............................................... -- -- Canceled................................................ -- -- --------- ------ Balance at March 31, 1997................................. 740,741 $ 1.85 Granted................................................. 424,369 $ 5.15 Exercised............................................... -- -- Canceled................................................ -- -- Conversion of Stock Appreciation Rights to Stock Options................................................. 390,005 -- --------- ------ Balance at March 31, 1998................................. 1,555,115 $ 2.75 Granted................................................. 262,751 $ 8.81 Exercised............................................... (38,333) $ 8.81 Canceled................................................ (19,752) $ 6.71 --------- ------ Balance at December 31, 1998.............................. 1,759,781 $ 3.48 Granted................................................. 72,500 $ 8.81 Exercised............................................... (68,334) $ 1.56 Canceled................................................ (13,667) $ 7.43 --------- ------ Balance at June 30, 1999.................................. 1,750,280 $ 3.90 Price range $1.47 -- $2.22 (weighted average remaining contractual life of 3.62 years)......................... 845,559 $ 1.51 Price range $3.58 -- $5.03 (weighted average remaining contractual life of 4.93 years)......................... 569,553 $ 4.56 Price $8.81 (weighted average remaining contractual life of 8.99 years).......................................... 335,168 $ 8.81
WEIGHTED STOCK OPTIONS AVERAGE SHARES EXERCISE PRICE Exercisable Options March 31, 1997......................... 1,030,745 $1.86 March 31, 1998............................................. 1,279,778 $2.26 December 31, 1998.......................................... 1,379,638 $2.69 June 30, 1999.............................................. 1,374,402 $2.87
Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the minimum value method of this statement under the assumptions of a risk free rate of 5.5% and an expected life of options of 10 years for options issued during the year ended December 31, 1998. For options issued prior to March 31, 1998, the risk free rate of return used was 7% and the expected life used was 7.5 years. F-20 95 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net earnings and earnings per share for the years ending March 31, 1997 and 1998 and the nine months ending December 31, 1998 were as follows:
NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------- ----------------- 1997 1998 1998 Net earnings -- as reported.................... $4,058 $5,914 $ 652 Net earnings -- pro forma...................... $4,007 $5,844 $ 495 Earnings per share -- as reported.............. $ 0.67 $ 0.78 $0.08 Earnings per share -- pro forma................ $ 0.66 $ 0.77 $0.06
Because the statement provides for pro forma amounts for options granted beginning in 1995, the pro forma expense will likely increase in future years as the new option grants become subject to the pricing model. Preferred Stock Purchase Rights In May 1998, the board of directors of the Company declared a dividend of one preferred share purchase right (right) for each outstanding share of common stock and for each share of common stock thereafter issued prior to the time the rights become exercisable. When the rights become exercisable, each right will entitle the holder to purchase one one-hundredth of one share of Series A Junior Participating Preferred Stock at a price of $72.50 in cash. Until the rights become exercisable, they will be evidenced by the certificates or ownership of our common stock and they will not be transferable apart from the common stock. The rights will become exercisable following the tenth day after a person or group announces acquisition of 15% or more of the Company's common stock or announces commencement of a tender offer the consummation of which would result in ownership by the person or group of 15% or more of the common stock. If a person or group were to acquire 15% or more of the Company's common stock, each right would become a right to buy that number of shares of common stock that would have a market value of two times the exercise price of the right. Rights beneficially owned by the acquiring person or group would, however, become void. At any time prior to the time the rights become exercisable, the board of directors may redeem the rights at a price of $0.01 per right. At any time after the acquisition by a person or group of 15% or more but less than 50% of the common stock, the board may redeem all or part of the rights by issuing common stock in exchange for them at the rate of one share of common stock for each two shares of common stock for which each right is then exercisable. The rights will expire on May 15, 2008 unless previously extended or redeemed. (14) PENSION AND OTHER POSTRETIREMENT BENEFITS The Company has adopted SFAS 132, which revised disclosures about pension and other postretirement benefit plans. Disclosures regarding pension benefits represent the plan for certain union employees of a foreign subsidiary. Disclosures regarding postretirement benefits represent health care and life insurance benefits for employees who were retired at the time the Company was acquired from C-E. F-21 96 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the plan's benefit obligation, fair value of plan assets, and funded status at March 31, 1998 and December 31, 1998.
PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------ --------------------------- MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1998 1998 1998 1998 CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of the period...................................... $385 $418 $ 14,608 $ 15,194 Service cost.................................. 34 39 -- -- Interest cost................................. 31 33 1,048 786 Participant contributions..................... -- -- 142 83 Actuarial loss................................ 14 106 159 53 Foreign currency exchange rate differences.... (15) (34) -- -- Contribution from former plan holder.......... -- -- 1,047 1,104 Benefit payments.............................. (31) (35) (1,810) (1,633) ---- ---- -------- -------- Benefit obligation at end of period........... $418 $527 $ 15,194 $ 15,587 ==== ==== ======== ======== CHANGE IN FAIR VALUE OF PLAN ASSETS Fair value of plan assets at beginning of period...................................... $613 $647 $ -- $ -- Actual return on plan assets.................. 88 54 -- -- Foreign currency exchange rate differences.... (23) (49) -- -- Employer contributions........................ -- -- 621 446 Participant contributions..................... -- -- 142 83 Contribution from former plan holder.......... -- -- 1,047 1,104 Benefit payments.............................. (31) (35) (1,810) (1,633) ---- ---- -------- -------- Fair value of plan assets at end of period.... 647 617 -- -- ---- ---- -------- -------- Funded status................................. 229 90 (15,194) (15,587) Unrecognized loss............................. 54 156 -- -- ---- ---- -------- -------- Prepaid (accrued) benefit cost................ $283 $246 $(15,194) $(15,587) ==== ==== ======== ======== WEIGHTED AVERAGE ASSUMPTIONS Discount rate................................. 8.5% 7.5% 7.0% 6.75% Expected return on plan assets................ 9.0% 7.5% N/A N/A Rate of compensation increase................. N/A N/A N/A N/A Health care trend rates....................... -- -- 4.5%-7.5% 4.5%-6.5% COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost.................................. $ 34 $ 39 $ -- $ -- Interest cost................................. 31 33 1,048 786 Recognized gains.............................. (51) (54) -- -- ---- ---- -------- -------- Net periodic benefit cost..................... $ 14 $ 18 $ 1,048 $ 786 ==== ==== ======== ======== 1% DECREASE 1% INCREASE Effect on interest cost component............. $ (41) $ 85 Effect on the health care component of the accumulated postretirement benefit obligation.................................. $ (611) $ 1,266
Deferred Compensation Plan. TEST adopted a deferred compensation plan (the TEST Plan) effective July 1, 1995 to provide incentives and rewards to certain individuals. Awards are payable in five equal annual installments plus any earnings, which have been allocated to a participant's account. The Company has elected not to make any additional awards for the plan year beginning January 1, 1998. As F-22 97 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of December 31, 1998, the total amount owed under the TEST Plan was $578. This balance presently accrues interest at the prime rate plus 1%. Defined Contribution Plans. The Company and its subsidiaries each have defined contribution pension plans covering substantially all nonunion hourly and salaried employees who have completed three months of service. Employee contributions of up to 4% of each covered employee's compensation are matched 100% by the Company. In addition, the Company may at its discretion, contribute up to an additional 2% of such compensation as a profit sharing contribution. Company contributions to the plan totaled $1,912 and $912 for the year ended March 31, 1998 and the nine months ended December 31, 1998, respectively. (15) OPERATING LEASES The Company and its subsidiaries lease various facilities and equipment under noncancellable operating lease agreements. These leases expire on various dates through 2003. Future minimum lease payments required under operating leases that have remaining noncancellable lease terms in excess of one year at December 31, 1998, are as follows: 1999 -- $2,901, 2000 -- $2,376, 2001 -- $1,405, 2002 -- $420, 2003 -- $48. Total expense for operating leases for the years ended March 31, 1997 and 1998, for the nine months ended December 31, 1998, and the six months ended June 30, 1999 was $2,241, $2,563, $2,298, and $1,621, respectively. Lease and rental income of $688, $648, $486, and $206 are included in revenues for years ended March 31, 1997 and 1998, the nine months ending December 31, 1998 and the six months ended June 30, 1999, respectively. (16) RELATED PARTIES The Company agreed in 1989 to pay $350,000 per year plus specified out-of-pocket expenses to Capricorn Management to perform management and other services for the Company and PTH. At the time of the spin-off of PTH, the agreement was modified to limit the services to administrative services and to reduce the fee to $75,000 per year plus expenses. Fees paid to Capricorn Management totaled $374, $163 and $56 for the years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998, respectively. Employees of Capricorn Management have participated in various NATCO employee benefit plans and the Company has from time to time been billed by vendors for services provided to Capricorn Management personnel acting for the benefit of the Company. Capricorn Management reimburses the Company for the foregoing expenses. At December 31, 1998, Capricorn Management owed the Company $16 for these expenses. For the year ended March 31, 1998 and the nine months ended December 31, 1998, PTH paid $95, and $49, respectively to the Company for tax consulting and analysis services. The Company currently provides tax consulting and analysis services to PTH for $7 per month. On November 1, 1989, two former officers purchased 420,168 shares of common stock from the Company for $285 in cash and personal notes of $419. The interest rates on the notes were based on the three-month commercial paper rate until the officers left the Company and entered into option agreements (see below), at which time the interest rate became 18%. Interest is payable annually in arrears and the notes were due November 15, 1996. Accrued interest receivable of $2 is included with the notes receivable balance at March 31, 1997. During the fiscal year ended March 31, 1998 both notes were paid in full. Effective December 31, 1994, Capricorn entered into an option agreement with a former officer and 2.5% stockholder of the Company (see above). The option, which enabled the stockholder to exchange F-23 98 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) common stock for a specified interest in a note from the Company, was exercised on May 10, 1995 for an 18% subordinated note for $1,330 (see note 11). Also, during fiscal year 1997, Capricorn purchased $1,079 of the note from the note holder. During the fiscal year ended March 31, 1998, Capricorn purchased the remaining portion of the note. During 1997, the Company loaned the amount of $1,525 to a director of the Company who is also an affiliate of Capricorn. The promissory note given by the director bears interest until maturity at 11% per annum. The principal is due on the date on which Capricorn has distributed its holding of Company common stock to its partners. During 1998, the Company acquired an option at a cost of $200 to purchase 173,050 shares of Company common stock from the director at a price of $8.81 per share. At the Company's option, the note may be repaid with shares of the common stock of the Company. The cost to acquire the option has been recorded as treasury stock in the accompanying consolidated balance sheet. An executive officer of the Company has an employment agreement pursuant to which he was entitled to a bonus upon the occurrence of any sale or public offering of the Company. Such bonus was to equal one and one-half percent (1.5%) of the value of all securities owned by stockholders of the Company prior to the sale or offering, including Common Stock valued at the price per share received in either the sale or public offering, and any debt held by such stockholders. In July 1999, we amended the agreement to eliminate the bonus. Instead the Company agreed to lend the officer $1,205 to purchase 136,832 shares of common stock. The loan accrues interest at 6% annually. The officer will receive a bonus equal to the outstanding principal and interest of the note upon the sale or public offering of the Company. (17) DISCONTINUED OPERATIONS -- PTH PTH manufactures vibrating screens, rock crushing equipment, conveyor components and screening media with operations in the United States, Canada, and Scotland. On June 30, 1997 the Company completed the tax-free spin-off of PTH by distributing the 14,250 shares of PTH stock that it owned to Capricorn I as the holder of its common stock. Capricorn I was the sole stockholder of the Company at the time of distribution, and accordingly this transaction was recorded on a historical cost basis. The spin-off distribution reduced stockholders' equity by $4,558 that represents the net assets of PTH at the date of spin-off including the assumption of $4,576 of debt owed by the Company to Capricorn and the forgiveness of $2,347 of intercompany balances. The historical results for discontinued operations include an allocation of the Company's nonspecific interest expense based on the ratio of net assets for PTH divided by the sum of net assets of the Company, plus all the Company's debt. Debt and interest expense directly incurred by NATCO was excluded from the ratio. Interest expense for the Company attributable to the PTH operations and included in the profit and loss from discontinued operations for the year ending March 31, 1998, up to and including the disposal date of June 30, 1997; this amount was $285. At the time of the spin-off, the Company and PTH entered into a tax sharing agreement with provisions for determining responsibility for tax liabilities of PTH for the years that PTH was included in the Company's consolidated tax returns. Income taxes have been allocated to PTH based on its pretax income and calculated on a separate company basis pursuant to the requirements of SFAS No. 109, Accounting for Income Taxes. Income tax allocated to PTH for the year ended March 31, 1997 and 1998 were $2,982 and $395, respectively. F-24 99 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized financial data for the discontinued operations are as follows:
YEARS ENDED MARCH 31, ----------------- DISCONTINUED OPERATIONS 1997 1998 Revenues.................................................... $86,664 $13,541 Income before income taxes and minority interest............ 314 1,162 Income tax provision (benefit).............................. (825) 395 Minority interest........................................... 39 -- ------- ------- Income from operations...................................... 1,100 767 Gain on disposal of division of discontinued operations net of income taxes........................................... 4,788 -- ------- ------- Total net discontinued operations................. $ 5,888 $ 767 ======= =======
The financial statements and related notes have been reclassified to present financial information for these businesses as discontinued operations. The results of operations for both businesses have been classified as discontinued operations in the consolidated statements of income and are shown net of related income tax expense. (18) COMMITMENTS AND CONTINGENCIES In June 1997, the Company, in connection with a financing effected to provide funds for the acquisition of TEST and other corporate purposes, distributed all of the outstanding stock of PTH then owned by the Company to its then sole stockholder, Capricorn. In connection with the distribution, the Company received an opinion of counsel to the effect that the distribution would be tax-free to both the Company and Capricorn. Tax-free treatment of the distribution depends, in part, upon the underlying facts and circumstances at the time of the distribution. There can be no assurance that the Internal Revenue Service will agree with the Company's and its counsel's interpretation of such facts and circumstances. If the Internal Revenue Service were to challenge the tax-free treatment of the distribution and such challenge were ultimately to prevail, the Company would be treated as recognizing gain with respect to the distribution in an amount equal to the excess of the fair market value of the PTH stock at the time of the distribution over its tax basis to the Company. Such treatment could have a material adverse effect on the Company's results of operations and financial condition. (19) LITIGATION We are a party to various routine legal proceedings. These primarily involve commercial claims, products liability claims, asbestos related personal injury claims and workers' compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of all of these proceedings, even if determined adversely, would not have a material adverse effect on our business or financial condition. (20) INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION The Company has adopted the provisions of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Company's eight business units have separate management teams and infrastructures that offer different products and services. The business units have been aggregated into four reportable segments (described below) since the long-term financial performance of these reportable segments is affected by similar economic conditions. Engineered Systems: This segment consists of five business units; U.S. Engineered Systems, Cynara, NATCO Japan, NATCO Venezuela, and NATCO London, that provide design, engineering, manufactur- F-25 100 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ing and start-up services for engineered process systems. The principal markets for this segment include all major oil and gas producing regions of the world including North America, Latin America, Europe, Africa and the Far East. Customers include major multi-national, independent and national or state-owned companies. Traditional Production Equipment and Services: U.S. Sales & Service is the sole business unit reported in this segment. This unit designs, engineers, manufactures, and provides start-up services for production equipment, which is generally less complex than those units provided by Engineered Systems. This segment also provides replacement parts, field and shop servicing of equipment, and used equipment refurbishing. The principal market for this segment is the U.S. onshore and offshore market; however this segment does cover international markets also. Customers include major multi-national, independent and national or state-owned companies. Instrumentation and Electrical Systems: TEST is the sole business unit reported in this segment. This unit designs, manufactures, installs and services instrumentation and electrical control systems. The principal markets for this segment include all major oil and gas producing regions of the world including North America, Latin America, Europe, Kazakhstan, Africa and the Far East. Customers include major multi-national, independent and national or state-owned companies. NATCO Canada: This segment consists of our subsidiary in Canada. NATCO Canada provides design, engineering, manufacturing and start-up services for engineered process systems. It also provides replacement parts, field and shop servicing of equipment, and used equipment refurbishing. NATCO Canada has also done selective manufacturing for the Engineered Systems segment in the past. The principal markets for this segment are the oil and gas producing regions of Canada. Customers include major multi-national and independent companies. The accounting policies of the reportable segments are the same as those described in Note 2. The Company evaluates the performance of its operating segments based on income before net interest expense, income taxes, depreciation and amortization expense, accounting changes, and nonrecurring items. F-26 101 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized financial information concerning the Company's reportable segments is shown in the following table.
TRADITIONAL PRODUCTION INSTRUMENTATION ENGINEERED EQUIPMENT & & ELECTRICAL NATCO CORPORATE & SYSTEMS SERVICES SYSTEMS CANADA ELIMINATIONS CONSOLIDATED March 31, 1997 Revenues............. $43,607 $56,899 -- $31,995 $(5,844) $126,657 Segment profit (loss)............ 633 4,214 -- 3,018 (5,054) 2,811 Total assets......... 14,203 22,739 -- 13,740 9,879 60,561 Capital expenditures...... 511 372 -- 163 113 1,159 Depreciation and amortization...... 197 400 -- 120 145 862 March 31, 1998 Revenues............. 34,250 76,782 33,181 59,721 (1,911) 202,023 Segment profit (loss)............ (1,131) 7,251 3,485 6,465 (4,401) 11,669 Total assets......... 11,778 30,214 23,668 17,264 12,489 95,413 Capital expenditures...... 419 383 301 139 14 1,256 Depreciation and amortization...... 204 392 445 130 151 1,322 December 31, 1998 Revenues............. 35,205 51,858 35,553 28,277 (5,282) 145,611 Segment profit (loss)............ 1,500 3,031 3,944 2,425 (3,420) 7,480 Total assets...... 37,022 27,543 24,137 14,052 15,658 118,412 Capital expenditures.... 191 391 169 871 14 1,636 Depreciation and amortization.... 436 295 445 187 110 1,473
F-27 102 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's geographic data for continuing operations for the years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998 are as follows:
UNITED UNITED CORPORATE & STATES CANADA KINGDOM OTHER ELIMINATIONS CONSOLIDATED MARCH 31, 1997 Revenues from unaffiliated customers.................... $ 92,518 $28,099 $ 3,464 $2,576 $ -- $126,657 Revenues from affiliates....... 1,385 3,896 443 120 (5,844) -- -------- ------- ------- ------ ------- -------- Revenues....................... $ 93,903 $31,995 $ 3,907 $2,696 $(5,844) $126,657 -------- ------- ------- ------ ------- -------- Operating income (loss)........ $ 416 $ 2,076 $(1,247) $ 294 $(2,283) $ (744) Identifiable assets............ $ 45,357 $13,740 $ 2,408 $1,165 $(2,109) $ 60,561 Discontinued assets............ 9,483 -------- $ 70,044 -------- MARCH 31, 1998 Revenues from unaffiliated customers.................... $132,004 $59,701 $ 4,772 $5,546 $ -- $202,023 Revenues from affiliates....... 909 20 327 202 (1,458) -- -------- ------- ------- ------ ------- -------- Revenues....................... $132,913 $59,721 $ 5,099 $5,748 $(1,458) $202,023 -------- ------- ------- ------ ------- -------- Operating income (loss)........ $ 6,458 $ 6,074 $(1,793) $1,179 $(2,778) $ 9,140 Identifiable assets............ $ 73,884 $17,264 $ 4,792 $1,582 $(2,109) $ 95,413 DECEMBER 31, 1998 Revenues from unaffiliated Customers.................... $113,396 $25,793 $ 2,152 $4,270 $ -- $145,611 Revenues from affiliates....... 2,494 2,484 78 226 (5,282) -- -------- ------- ------- ------ ------- -------- Revenues....................... $115,890 $28,277 $ 2,230 $4,496 $(5,282) $145,611 -------- ------- ------- ------ ------- -------- Operating income (loss)........ $ 3,328 $ 2,173 $ (505) $ 959 $(2,707) $ 3,248 Identifiable assets............ $100,671 $14,052 $ 1,750 $4,048 $(2,109) $118,412
Corporate expenses consist of corporate overhead and research and development expenses. Revenue from one customer in Canada for the year ended March 31, 1998 amounted to $19,923. The contract was awarded to NATCO Canada principally as the result of sales efforts made by NATCO Corporate personnel located in the United States. (21) OFFICE CLOSURE During 1997, the Company began winding down the operations of Natco U.K. Ltd. These activities include, transferring the net assets and employees at the Company's parts and service business to a new U.S. subsidiary, Natco London, Inc., and resolving pending severance, office closure and leasehold issues. Included in the March 31, 1998 statement of operations is a charge of $282 recognized as the estimated cost to exit these activities, which principally consists of lease termination costs, and professional fees associated with winding down the operation. During the six months ended June 30, 1999, the Company completed the closure and reached favorable settlements related to various amounts owed to and by customers and vendors related to a number of contracts entered into between 1993 and 1995. The accrual for the costs associated with these various claims had been accrued in fiscal years 1995 through 1998 based on the best available information at that time. In connection with these favorable settlements, the Company reversed $509 of these accruals. F-28 103 NATCO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (22) SUBSEQUENT EVENTS On August 4, 1999, the Company sold a non-utilized facility which had been leased under a long-term agreement for $950. The net book value of the facility at June 30, 1999 was approximately $385. Proceeds from the sale were used to retire the industrial development revenue bond related to the facility which amounted to $715, with the remaining amount applied to the Company's outstanding revolver balances. In September 1999, the Company executed non-binding letters of intent to acquire Porta-Test International Inc. and Engineering Specialties, Inc. Porta-Test will be acquired for cash and a note totaling approximately $6.1 million, net of cash acquired. Engineering Specialties, Inc. will be acquired for cash totaling approximately $7.3 million, net of cash and marketable securities acquired. Both of these transactions are subject to negotiation and execution of definitive agreements. F-29 104 REPORT OF INDEPENDENT AUDITORS Board of Directors The Cynara Company We have audited the accompanying balance sheets of The Cynara Company (the "Company") as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity, and cash flows for the year ended December 31, 1997 and the period from March 5, 1996 (date of inception) to December 31, 1996. 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for the year ended December 31, 1997 and the period from March 5, 1996 (date of inception) to December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Houston, Texas February 27, 1998, except for Note 15, as to which the date is May 29, 1998 F-30 105 THE CYNARA COMPANY BALANCE SHEETS
DECEMBER 31 ------------------------ SEPTEMBER 30 1996 1997 1998 (UNAUDITED) ASSETS Current assets: Cash................................................. $ 646,714 $ 2,556,540 $ 390,645 Restricted cash...................................... -- 262,000 262,000 Accounts receivable.................................. 1,089,524 347,270 2,483,166 Stockholder advances................................. 101,579 -- -- Inventories.......................................... 1,545,493 2,631,753 2,640,183 Costs and estimated earnings in excess of billings on uncompleted contracts............................. 191,788 620,579 1,098,953 Prepaids and other current assets.................... 200,395 210,955 266,401 ---------- ----------- ----------- Total current assets......................... 3,775,493 6,629,097 7,141,348 Property, plant, and equipment, net.................. 4,055,091 8,798,151 8,838,884 Loan origination fees................................ 161,662 92,625 88,529 Other assets......................................... 67,500 52,500 40,000 ---------- ----------- ----------- Total assets................................. $8,059,746 $15,572,373 $16,108,761 ========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 883,845 $ 1,836,602 $ 1,909,286 Accrued compensation and benefits.................... 308,707 442,794 431,262 Stockholder distributions payable.................... -- 263,189 -- Billings in excess of costs and estimated earnings on uncompleted contracts............................. -- 235,878 179,863 Other accrued liabilities............................ 425,022 943,759 802,105 Common stock warrants liability...................... 60,903 493,480 294,655 Current maturities of long-term debt................. 969,599 1,300,000 1,300,000 ---------- ----------- ----------- Total current liabilities.................... 2,648,076 5,515,702 4,917,171 Long-term debt....................................... 3,784,798 7,138,000 9,566,282 Stockholders' equity: Class A common stock, voting, $.001 par value: Authorized shares -- 90,000 Issued and outstanding shares -- 50,000........... 50 50 50 Class B common stock, nonvoting, $.001 par value: Authorized shares -- 10,000 Issued and outstanding shares -- None............. -- -- -- Additional paid-in capital........................... 1,659,377 1,659,377 1,659,377 Retained earnings (accumulated deficit).............. (32,555) 1,259,244 (34,119) ---------- ----------- ----------- Total stockholders' equity................... 1,626,872 2,918,671 1,625,308 ---------- ----------- ----------- Total liabilities and stockholders' equity... $8,059,746 $15,572,373 $16,108,761 ========== =========== ===========
See accompanying notes. F-31 106 THE CYNARA COMPANY STATEMENTS OF OPERATIONS
PERIOD FROM MARCH 5, 1996 NINE MONTHS ENDED (DATE OF INCEPTION) YEAR ENDED SEPTEMBER 30, TO DECEMBER 31, DECEMBER 31, -------------------------- 1996 1997 1997 1998 (UNAUDITED) Revenues: Construction projects and module revenues............................ $ 996,125 $13,814,684 $ 8,813,553 $ 8,553,129 Processing services and other revenues............................ 3,041,497 4,811,948 3,812,399 3,549,436 ---------- ----------- ----------- ------------ 4,037,622 18,626,632 12,625,952 12,102,565 Cost of revenues: Construction projects and module revenues............................ 701,552 8,339,673 5,065,826 5,227,476 Processing services and other revenues............................ 1,566,211 3,276,574 2,696,547 4,494,591 ---------- ----------- ----------- ------------ 2,267,763 11,616,247 7,762,373 9,722,067 ---------- ----------- ----------- ------------ Gross profit............................. 1,769,859 7,010,385 4,863,579 2,380,498 Operating expenses: Research and development............... 116,656 309,237 150,103 252,005 Management fees to related party....... 86,624 327,940 225,000 294,565 Selling, general, and administrative... 1,183,625 3,150,287 1,808,270 2,474,633 ---------- ----------- ----------- ------------ Total operating expenses....... 1,386,905 3,787,464 2,183,373 3,021,203 ---------- ----------- ----------- ------------ Operating income (loss).................. 382,954 3,222,921 2,680,206 (640,705) Interest expense......................... (341,712) (1,233,989) (486,712) (505,361) Other income, net........................ 3,352 43,637 57,798 25,176 Equity loss in Partnership............... (9,082) -- -- -- ---------- ----------- ----------- ------------ Net income (loss).............. $ 35,512 $ 2,032,569 $ 2,251,292 $ (1,120,890) ========== =========== =========== ============
See accompanying notes. F-32 107 THE CYNARA COMPANY STATEMENTS OF STOCKHOLDERS' EQUITY
RETAINED CLASS A CLASS A ADDITIONAL EARNINGS TOTAL COMMON STOCK COMMON PAID-IN (ACCUMULATED STOCKHOLDERS' SHARES STOCK CAPITAL DEFICIT) EQUITY Common stock issued at March 5, 1996 (date of inception)...... 16,320 $16 $ 59,411 $ -- $ 59,427 Issuance of common stock...... 33,680 34 1,599,966 -- 1,600,000 Distributions to stockholders............... -- -- -- (68,067) (68,067) Net income.................... -- -- -- 35,512 35,512 ------ --- ---------- ----------- ----------- Balance at December 31, 1996.... 50,000 50 1,659,377 (32,555) 1,626,872 Distributions to stockholders............... -- -- -- (740,770) (740,770) Net income.................... -- -- -- 2,032,569 2,032,569 ------ --- ---------- ----------- ----------- Balance at December 31, 1997.... 50,000 50 1,659,377 1,259,244 2,918,671 Distributions to stockholders (unaudited)................ -- -- -- (172,473) (172,473) Net loss (unaudited).......... -- -- -- (1,120,890) (1,120,890) ------ --- ---------- ----------- ----------- Balance at September 30, 1998 (unaudited)................... 50,000 $50 $1,659,377 $ (34,119) $ 1,625,308 ====== === ========== =========== ===========
See accompanying notes. F-33 108 THE CYNARA COMPANY STATEMENTS OF CASH FLOWS
PERIOD FROM MARCH 5, 1996 (DATE OF NINE MONTHS INCEPTION) TO YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, ------------------------ 1996 1997 1997 1998 (UNAUDITED) OPERATING ACTIVITIES Net income (loss)......................... $ 35,512 $2,032,569 $2,251,292 $(1,120,890) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........... 429,600 1,175,780 705,003 1,610,348 Amortization of loan origination fees and debt discount.................... 69,188 212,140 103,629 15,795 Loss on disposal of fixed assets........ -- 52,365 -- (198,825) Common stock warrants revaluation....... -- 432,577 -- -- Equity loss in Partnership.............. 9,082 -- -- -- Change in assets and liabilities: Restricted cash...................... -- (262,000) (262,000) -- Accounts receivable.................. 482,608 742,254 942,188 (2,135,896) Inventory............................ 67,774 (1,086,260) (456,125) (8,430) Costs and estimated earnings in excess of billings on uncompleted contracts.......................... (191,788) (428,791) (215,289) (478,374) Prepaids and other current assets.... (184,738) (10,560) (139,336) (55,446) Accounts payable..................... 453,534 952,757 718,525 72,684 Billings in excess of costs and estimated earnings on uncompleted contracts.......................... -- 235,878 -- (56,015) Other accrued liabilities............ 411,183 652,824 651,884 (416,373) Other................................ -- -- 101,578 -- ----------- ---------- ---------- ----------- Net cash provided by (used in) operating activities.............................. 1,581,955 4,701,533 4,401,349 (2,771,422) INVESTING ACTIVITIES Capital expenditures...................... (360,848) (3,601,205) (2,182,838) (1,638,582) Acquisition, net of cash acquired......... (6,589,297) (2,355,000) -- -- ----------- ---------- ---------- ----------- Net cash used in investing activities..... (6,950,145) (5,956,205) (2,182,838) (1,638,582) FINANCING ACTIVITIES Proceeds from revolving loans and term loans................................... 6,700,000 13,288,000 2,050,000 5,865,589 Payments on revolving loans and long-term loans................................... (1,900,000) (9,650,000) (1,850,000) (3,437,307) Loan origination fees..................... (215,550) (97,500) (46,875) (11,700) Issuance of common stock.................. 1,600,000 -- -- -- Issuance of common stock warrants......... 100 -- -- -- Distributions to stockholders............. (169,646) (376,002) (477,580) (172,473) ----------- ---------- ---------- ----------- Net cash provided by (used in) financing activities.............................. 6,014,904 3,164,498 (324,455) 2,244,109 ----------- ---------- ---------- ----------- Increase (decrease) in cash............... 646,714 1,909,826 1,894,056 (2,165,895) Cash at beginning of period............... -- 646,714 646,714 2,556,540 ----------- ---------- ---------- ----------- Cash at end of period..................... $ 646,714 $2,556,540 $2,540,770 $ 390,645 =========== ========== ========== ===========
See accompanying notes. F-34 109 THE CYNARA COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. ORGANIZATION AND BASIS OF PRESENTATION The Cynara Company, formerly RHRK Holdings, Inc., was incorporated on March 5, 1996 as an S corporation by Robert J. Hamaker ("Hamaker") and Ralph M. Kelly ("Kelly"). Hamaker and Kelly each contributed his 5% limited interest in a partnership known as The Cynara Company (the "Partnership") in exchange for 8,160 shares each of Class A common stock of the company. Effective July 1, 1996, concurrent with the acquisition described in Note 3, the company changed its name to The Cynara Company (the "Company"). The Company uses hollow fiber membranes to separate CO(2) from streams of fluids produced from oil and gas reservoirs. The Company designs, constructs, sells, leases, or owns and operates commercial CO(2) separation plants using this process in the Gulf Coast region of the U.S., Southeast Asia, and South America. The Company either sells equipment to or contracts with operators of such reservoirs to perform such separations on a fee basis. Effective July 1, 1996, concurrent with the acquisition described in Note 3, a group of individual investors (collectively, "HHDS&P" or the "Majority Stockholders") individually purchased a total of 33,680 shares of the Company's Class A common stock for $1.6 million. Concurrently, Hamaker and Kelly each individually sold certain of his Class A common stock to an individual HHDS&P investor, resulting in the Majority Stockholders controlling 80% of the outstanding shares of Class A common stock, with Hamaker and Kelly each controlling 10%. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTERIM INFORMATION The financial statements included herein as of September 30, 1998, and for the nine months ended September 30, 1998 and 1997 are unaudited, and, in the opinion of management, the information furnished reflects all material adjustments, consisting of normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. REVENUE RECOGNITION The Company accounts for earnings from long-term construction contracts on the percentage-of-completion method of accounting. Under the percentage-of-completion method, earnings on contracts-in-process are recognized based on the percentage of estimated total earnings that costs incurred bear to currently estimated total costs on each contract, commencing when sufficient progress has been made to estimate final results with reasonable accuracy. Provisions are made for the full amounts of anticipated losses in the period in which they are first determinable. Costs and estimated earnings on contracts-in- process in excess of amounts billed are reported as a current asset. Amounts billed on contracts-in-process in excess of related costs and estimated earnings are reported as a current liability. Revenues from CO(2) separation services are based on volumes processed and revenues from membrane module sales are recognized when the modules are shipped. CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. F-35 110 THE CYNARA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Expenditures for major improvements which extend the lives of property and equipment are capitalized, while minor replacements, maintenance, and repairs are charged to operations as incurred. RESEARCH AND DEVELOPMENT COSTS The costs of materials and equipment that are acquired for research and development activities, and which have alternative future uses, are capitalized and depreciated over the period of future benefit. All other research and development costs are charged to operations as incurred. INVENTORIES Inventories are stated at the lower of cost or market value, using average cost for raw materials and standard cost for work-in-progress and finished membrane modules, which approximates actual cost. USE OF ESTIMATES Management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CONCENTRATIONS OF CREDIT RISK Financial instruments which subject the Company to concentrations of credit risk consist principally of trade receivables. The Company's policy is to evaluate each customer's financial condition and determine the amount of credit to be extended. The Company sells to a limited number of customers, primarily in the petrochemical industry. Collateral is generally not required on these receivables. At December 31, 1997 and 1996, there were no allowances for doubtful accounts. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. 3. ACQUISITION Effective July 1, 1996, the Company purchased Dow's 90% interest in the Partnership and certain other assets (primarily inventory and certain Pittsburgh, California, membrane manufacturing plant assets) from Dow. The acquisition was accounted for under the purchase method of accounting, whereby all of the assets and liabilities acquired were adjusted to their fair values at the acquisition date, which approximated the purchase price. The tentative purchase price at July 1, 1996 was $7.1 million and consisted of $6.3 million in cash, assumption of certain liabilities of $454,000, and acquisition costs of $300,000. Effective immediately prior to the acquisition on July 1, 1996, the Partnership distributed certain net liabilities of approximately $174,000 to the Company. The final purchase price was contingent upon the resolution of an operating agreement with Pennzoil for CO(2) separation services at the SACROC Unit, as more fully described in Note 4. In August 1997, the Company negotiated a new operating agreement with Pennzoil and was required to pay an additional cash consideration of $2,355,000, resulting in a total purchase price of $9,455,000. The additional purchase price was allocated to the SACROC Unit. The financial statements reflect all operations of the acquired entity from July 1, 1996 through December 31, 1997. F-36 111 THE CYNARA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. CO(2) SEPARATION SERVICES The Partnership had an operating agreement with Pennzoil (assumed from Chevron U.S.A., Inc., in 1994) to provide CO(2) separation services at a facility in Snyder, Texas (the "SACROC Unit"). Separation services began at the SACROC Unit in December 1983 and the agreement expired in August 1993, with automatic annual renewals. In May 1996, Pennzoil notified the Partnership of its intent to terminate the agreement effective September 1, 1996. The Company, as successor to the Partnership, continued to provide CO(2) separation services at the SACROC Unit on a month-to-month basis until August 1997. In August 1997, the Company entered into a new agreement with Pennzoil to provide such services. The agreement expires February 2008, with automatic annual renewals unless either party provides written notice of termination at least 90 days prior to the renewal date. In August 1996, the Company began operations under an agreement with Texaco to provide CO(2) separation services at a facility in Paradis, Louisiana (the "Paradis Unit"). The agreement expires July 31, 2001, with automatic annual renewals unless either party provides written notice of termination at least 90 days prior to the renewal date. Approximately $3.3 million and $1.3 million of total revenues resulted from separation services at the SACROC Unit and Paradis Unit, respectively, for the year ended December 31, 1997. Approximately $2.3 million and $500,000 of total revenues resulted from separation services at the SACROC Unit and Paradis Unit, respectively, for the period from March 5, 1996 (date of inception) to December 31, 1996. 5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS In January 1997, the Company entered into a long-term construction contract valued at approximately $18.2 million with Unocal Thailand, Ltd. ("Unocal"). The contract is estimated to be completed in the second quarter of 1998. At December 31, 1997, the Company has issued a $1.5 million letter of credit for the benefit of Unocal, which reduces the available borrowing base under the revolving loan described in Note 8. In July 1997, the Company entered into a long-term construction contract valued at approximately $2.6 million with Total Exploration and Production Thailand ("Total"). The contract is estimated to be completed in the second quarter of 1998. At December 31, 1997, the Company has restricted cash of $262,000 to secure its performance on this contract. For the year ended December 31, 1997, approximately $12.6 million and $601,000 of the Company's revenues resulted from the contracts with Unocal and Total, respectively. UNAUDITED In March 1998, management lowered the estimated cost to complete the Unocal contract. As a result, the Company determined the contract to be approximately 92% complete for purposes of revenue recognition compared to 84% complete prior to the revision in estimate. This change in estimate resulted in a $1.5 million revenue recognition adjustment. F-37 112 THE CYNARA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. INVENTORIES Inventories consist of the following at December 31 and September 30:
SEPTEMBER 30, 1996 1997 1998 (UNAUDITED) Raw materials................................... $ 171,375 $ 335,895 $ 581,288 Work-in-progress................................ 183,155 420,458 146,390 Finished goods.................................. 1,190,963 1,875,400 1,912,505 ---------- ---------- ---------- $1,545,493 $2,631,753 $2,640,183 ========== ========== ==========
7. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consist of the following at December 31:
ESTIMATED USEFUL LIFE 1996 1997 Leasehold improvements....................... Up to 5 years $ 184,269 $ 188,446 Machinery and equipment...................... 5 years 4,054,932 8,854,407 Furniture and fixtures....................... 7 years 58,134 112,311 Computers and office equipment............... 5 years 158,566 296,156 Construction-in-progress..................... 21,290 907,269 ---------- ----------- 4,477,191 10,358,589 Less accumulated depreciation................ 422,100 1,560,438 ---------- ----------- Property, plant, and equipment, net.......... $4,055,091 $ 8,798,151 ========== ===========
Depreciation expense for the year ended December 31, 1997 and for the period from March 5, 1996 (date of inception) to December 31, 1996 was $1,161,000 and $436,000, respectively. During 1997, the Company disposed of certain fixed assets which were used primarily in an older manufacturing process. The loss on disposal of such assets was approximately $52,000 and is netted with other income in the statement of operations. F-38 113 THE CYNARA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. LONG-TERM DEBT Long-term debt consists of the following at December 31:
1996 1997 Term loan with Bank One Capital Partners II, LTD ("BOCP"); interest payable quarterly at a rate of 12%, principal payable in quarterly installments of $250,000 commencing March 31, 1997, due July 1, 2001, secured by all assets of the Company............................................... $4,500,000 -- Revolving loan with BOCP; interest payable monthly at a rate of prime plus 1 1/2%, due the earlier of July 1, 1998 or the date the term loan is paid in full, secured by all assets of the Company..................................... 300,000 -- Term loan with Bank One; interest payable quarterly at a rate of 9.5%, principal payable in quarterly installments of $325,000 commencing March 31, 1998, due December 31, 2002, secured by all assets of the Company................ -- $7,000,000 Revolving loan with Bank One; interest payable monthly at a rate of 8.5%, due October 8, 1999, secured by all assets of the Company............................................ -- 1,438,000 Less debt discount.......................................... (45,603) -- ---------- ---------- 4,754,397 8,438,000 Less current maturities, including related debt discount.... 969,599 1,300,000 ---------- ---------- Long-term debt due after one year........................... $3,784,798 $7,138,000 ========== ==========
Upon resolution of the SACROC operating agreement, as more fully described in Note 4, the Company refinanced all of its outstanding borrowings with Bank One. The debt agreement provides for a term loan of $7.0 million and a revolving loan not to exceed $6.0 million. The Company has issued a $1.5 million letter of credit which reduces the available borrowing base under the revolving loan. A commitment fee of 0.5% is charged on the unused portion of the revolving loan. In 1997, the Company paid loan origination fees of approximately $98,000, which are being amortized to interest expense over five years. The revolving loan is subject to certain borrowing base requirements based primarily on current asset balances. The existing debt agreement provides, among other things, for the maintenance of certain minimums, as defined, for working capital, net worth, liquidity, and cash flow coverage of debt service. Scheduled maturities of the Company's long-term debt are as follows for the years ending December 31: 1998.................................................... $1,300,000 1999.................................................... 2,738,000 2000.................................................... 1,300,000 2001.................................................... 1,300,000 2002 and thereafter..................................... 1,800,000 ---------- $8,438,000 ==========
The Company paid interest of $464,000 and $259,000 during the year ended December 31, 1997 and for the period from March 5, 1996 (date of inception) to December 31, 1996, respectively. The carrying value of the Company's long-term debt approximates its fair value, as the interest rates on outstanding borrowings approximate the market rate. F-39 114 THE CYNARA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES The stockholders have elected to treat the Company as an S corporation, as defined by the Internal Revenue Code. In general, the corporate income or loss of an S corporation is allocated to the stockholders for inclusion in their personal federal income tax returns. As a result, federal income taxes are not reflected in these financial statements. 10. COMMITMENTS The Company leases certain equipment and facilities under operating leases that expire at various dates through 2002. Minimum rental commitments under all noncancelable leases with an initial term in excess of one year are payable as follows: 1998.................................................... $ 493,035 1999.................................................... 244,255 2000.................................................... 152,530 2001.................................................... 152,530 2002.................................................... 152,530 ---------- $1,194,880 ==========
Total rental expense charged to operations during the year ended December 31, 1997 and for the period from March 5, 1996 (date of inception) to December 31, 1996 was $523,775 and $233,174, respectively. From time to time, the Company is subject to claims arising in the ordinary course of business. In the opinion of management, the ultimate outcome of these claims is not expected to have a material adverse effect on the financial statements. 11. RELATED PARTY TRANSACTIONS The Company entered into a management services agreement with HHDS&P whereby the Company pays monthly management fees to HHDS&P for certain management services provided. Unpaid management fees and expenses were approximately $188,000 and $38,000 at December 31, 1997 and 1996, respectively. 12. STOCKHOLDERS AGREEMENT The Company entered into a Stockholders Agreement (the "Agreement") on July 1, 1996 with the holders of its outstanding shares of common stock and BOCP. The Agreement provides the stockholders and BOCP the right of first refusal to purchase the selling stockholder's shares. The Agreement also provides the stockholders and BOCP the right of co-sale when a selling stockholder elects a third-party offer when such selling shares are not purchased under the right of first refusal. The Agreement further states that the Majority Stockholders may require, with 30 days' written notice, the other stockholders and BOCP to sell their shares to a purchaser on the same terms and for the same price that the Majority Stockholders have agreed to sell their shares. The Agreement provides Hamaker and Kelly the right, if terminated for any reason other than for cause, to require the Company to purchase all of their outstanding shares. Conversely, the Agreement also provides the Company the option, if Hamaker or Kelly is terminated for cause, to purchase all of the outstanding shares held by the terminated employee. The put or call option price per share shall be the fair market value per share of the Company on a fully diluted basis, as mutually determined by the parties or a financial institution. F-40 115 THE CYNARA COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Agreement allows quarterly distributions to be made to the stockholders, to the extent permitted under the Company's debt agreement, to satisfy the stockholder's aggregate federal and state income tax liability incurred in respect to the income of the Company. The Company may require stockholders to refund distributions in excess of the stockholders' aggregate tax liability, or the Company may reduce the first distribution of the following year. During the year ended December 31, 1997, the Company distributed cash of $376,000, and an additional $263,000 is recorded as stockholder distributions payable in the balance sheet. During the period from March 5, 1996 (date of inception) to December 31, 1996, the Company distributed cash of $170,000 to stockholders, of which $102,000 is recorded as stockholder advances in the balance sheet. The Agreement allows stockholders to exchange their shares of Class A voting common stock for Class B nonvoting common stock and vice versa upon written request. The Agreement shall terminate upon the earlier of the following: (1) the sale, transfer, or disposition by Hamaker, Kelly, and BOCP of all their shares; (2) an initial public offering of the Company's common stock; (3) the sale or transfer of all of the outstanding common stock to a third-party offeror; or (4) June 30, 2006. 13. COMMON STOCK WARRANTS AND OPTIONS Concurrent with the execution of its debt agreement with BOCP, the Company issued 1,282 common stock warrants to BOCP in exchange for $100. The proceeds of the debt and detachable warrants were allocated between the debt and warrants, resulting in a debt discount. The common stock warrants entitle BOCP the right to purchase 1,282 shares of Class B nonvoting common stock at $.01 per share. The warrants also have put rights, which entitle the holder to require the Company to purchase all of the outstanding warrants or warrant shares at the put price. The put price is determined based on the fair value, as mutually agreed by the parties or based on defined formulas. The warrants are recorded at their estimated put price at December 31, 1997, based on the consideration expected to be received in conjunction with the proposed merger (as more fully described in Note 15), and are included in liabilities in the balance sheet. The warrants expire on October 8, 2002. BOCP also has common stock options to purchase 3,846.15 shares of Class B common stock from the Majority Stockholders at an exercise price of $52.26 per share. 14. BENEFIT PLAN The Company has a 401(k) defined contribution retirement plan covering all eligible employees. This plan allows for employees to defer up to 16% of their compensation, with the Company matching 50% of the first 10% of the participant's contribution. In addition, the Company may make a discretionary contribution at the end of the plan year. Participants are immediately and fully vested in employer contributions. The Company's matching contribution charged to operations for the year ended December 31, 1997 and for the period from March 5, 1996 (date of inception) to December 31, 1996 was $83,000 and $32,000, respectively. 15. SUBSEQUENT EVENT In March 1998, management of the Company announced an agreement in principle to merge the business of the Company with NATCO Group Inc. ("NATCO"). The transaction is expected to be completed in June 1998 and is contingent on NATCO's successful initial public offering anticipated to occur in June 1998. Upon completion, NATCO will own 100% of the Company's capital stock. The Company has obtained approval of the proposed transaction with the holder of outstanding borrowings. F-41 116 INDEPENDENT AUDITORS' REPORT The Board of Directors Porta-Test International Inc.: We have audited the accompanying balance sheet of Porta-Test International Inc. as of June 30, 1999, and the related statements of operations, stockholders' equity and comprehensive loss, and cash flows for the year ended June 30, 1999. These financial statements are the responsibility of Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Porta-Test International Inc. as of June 30, 1999, and the results of its operations and its cash flows for the year ended June 30, 1999 in conformity with generally accepted accounting principles. KPMG LLP September 17, 1999 Houston, Texas F-42 117 PORTA-TEST INTERNATIONAL INC. BALANCE SHEET JUNE 30, 1999 ASSETS Current assets: Cash and cash equivalents................................. $ 80,405 Trade accounts receivable................................. 613,351 Inventory................................................. 638,996 Note receivable from related party........................ 137,287 Investments and other current assets...................... 106,772 ---------- Total current assets.............................. 1,576,811 Property, plant and equipment, net.......................... 338,582 ---------- $1,915,393 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt.................... $ 93,547 Bonuses payable........................................... 757,666 Accounts payable.......................................... 357,519 Accrued expenses and other................................ 136,036 Advances from shareholders................................ 68,059 ---------- Total current liabilities......................... 1,412,827 Long-term debt, excluding current installments.............. 162,843 Deferred tax liability...................................... 28,302 ---------- Total liabilities................................. 1,603,972 Stockholders' equity: Common stock, $.72 par value. Authorized unlimited shares, issued and outstanding 100 shares...................... 72 Retained earnings......................................... 322,629 Accumulated other comprehensive loss...................... (11,280) ---------- Total stockholders' equity........................ 311,421 Commitments and contingencies ---------- $1,915,393 ==========
See accompanying notes to financial statements. F-43 118 PORTA-TEST INTERNATIONAL INC. STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 1999 Revenues.................................................... $7,255,961 Cost of goods sold.......................................... 4,483,103 ---------- Gross profit.............................................. 2,772,858 Selling, general and administrative expenses................ 2,797,026 Depreciation and amortization expense....................... 66,491 ---------- Loss from operations...................................... (90,659) Interest expense, net....................................... 16,464 Loss on disposal of investments and other assets, net....... 109,263 ---------- Loss before income taxes.................................. (216,386) Income tax benefit.......................................... 26,946 ---------- Net loss.................................................. $ (189,440) ==========
See accompanying notes to financial statements. F-44 119 PORTA-TEST INTERNATIONAL INC. STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS YEAR ENDED JUNE 30, 1999
ACCUMULATED OTHER TOTAL COMMON RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK EARNINGS LOSS EQUITY Balances at June 30, 1998...................... $72 $ 512,069 $(26,376) $ 485,765 Comprehensive loss: Net loss..................................... -- (189,440) -- (189,440) Unrealized gains on investments.............. -- -- 21,628 21,628 Foreign currency translation adjustment...... -- -- (6,532) (6,532) --------- Total comprehensive loss............. -- -- -- (174,344) --- --------- -------- --------- Balances at June 30, 1999...................... $72 $ 322,629 $(11,280) $ 311,421 === ========= ======== =========
See accompanying notes to financial statements. F-45 120 PORTA-TEST INTERNATIONAL INC. STATEMENT OF CASH FLOWS YEAR ENDED JUNE 30, 1999 Cash flows from operating activities: Net loss.................................................. $ (189,440) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense.................. 66,491 Loss on disposal of investments and other assets, net................................................... 109,263 Deferred income taxes.................................. (1,989) Changes in operating assets and liabilities: Decrease in trade accounts receivable................ 318,797 Decrease in inventories.............................. 27,669 Increase in bonus payable............................ 757,666 Increase in accounts payable......................... 33,883 Decrease in accrued expenses and other............... (41,068) ---------- Net cash provided by operating activities......... 1,081,272 ---------- Cash flows from investing activities: Capital expenditures for property, plant and equipment.... (58,901) Purchase of investments, net.............................. (24,612) Note receivable advances to related party................. (246,550) ---------- Net cash used in investing activities............. (330,063) ---------- Cash flows from financing activities: Decrease is bank overdraft................................ (710,620) Proceeds from long-term debt.............................. 186,352 Repayments of advances from shareholders.................. (16,870) Repayments of advances from related party................. (129,666) ---------- Net cash provided by financing activities......... (670,804) ---------- Net increase in cash and cash equivalents................... 791,025 Cash and cash equivalents at beginning of period............ -- ---------- Cash and cash equivalents at end of period.................. $ 80,405 ========== Cash payments for: Interest.................................................. $ 16,464 Income taxes.............................................. 13,753
See accompanying notes to financial statements. F-46 121 PORTA-TEST INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (1) THE COMPANY Porta-Test International Inc. (the Company), incorporated in Alberta, Canada, is a manufacturer of equipment for separating gases, liquids and suspended solids. The Company's manufacturing facility is located in Edmonton, Alberta and sales are primarily to customers located in Canada, Mexico and the United States. The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all highly-liquid investment instruments with original maturities of three months or less to be cash equivalents. CONCENTRATION OF CREDIT RISK The Company had revenues from one single customer that represented 54% of revenues for the year ended June 30, 1999. INVENTORIES Finished goods and work-in-process are valued at the lower of cost and net realizable value. Raw materials and supplies are valued at the lower of cost and net replacement cost. Cost is determined principally on a first-in, first-out basis. Cost includes materials, labor and manufacturing overhead. INVESTMENTS Investments at June 30, 1999 consist of equity securities which the Company classifies as available-for-sale. Investments are recorded at fair value, and unrealized holding gains and losses are excluded from earnings and are reported as a separate component of other comprehensive income(loss) until realized. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less an allowance for depreciation. Depreciation on plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Maintenance and repair costs are expensed as incurred; renewals and betterments are capitalized. Upon the sale or retirement of properties, the accounts are relieved of the cost and the related accumulated depreciation, with any resulting profit or loss included in income. The carrying values of property, plant and equipment by location are reviewed at least annually or whenever there are indications that these assets may be impaired. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at discrete points in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. The Company believes that the carrying amounts of its current assets and current liabilities approximate the fair value of such items due to their short-term nature. The carrying amounts of long-term debt approximate fair value as the interest rates thereon approximate market. F-47 122 PORTA-TEST INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION Revenues from fixed-price and modified fixed-price construction contracts are recognized on the percentage-of-completion method for each contract. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repair costs. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are included in revenues when their realization is reasonably assured. Claims are included in revenues when realization is probable and can be reliably estimated. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. TRANSLATION OF FOREIGN CURRENCIES Financial statement amounts have been translated into their United States dollar equivalents at exchange rates as follows: (1) balance sheet accounts at year-end exchange rates, and (2) statement of operations accounts at a weighted average exchange rate for the period. The gains or losses resulting from such translations are included in the determination of comprehensive income (loss). Gains or losses from foreign currency transactions are reflected in the statement of operations. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the amounts of revenues and expenses recognized during the period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. (3) INVENTORIES Inventories consist of the following at June 30, 1999: Raw materials and supplies............................. $134,297 Work-in-process........................................ 433,428 Finished goods......................................... 71,271 -------- $638,996 ========
(4) INVESTMENTS AND OTHER CURRENT ASSETS Investments and other current assets consist of the following at June 30, 1999: Short-term investments................................. $ 84,215 Other.................................................. 22,557 -------- $106,772 ========
F-48 123 PORTA-TEST INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following at June 30, 1999:
ESTIMATED USEFUL LIFE Buildings and improvements.......................... $ 30,177 5 years Machinery and equipment............................. 373,264 3 - 15 years Computer and office equipment....................... 116,068 2 - 5 years --------- 519,509 Less accumulated depreciation..................... (180,927) --------- $ 338,582 =========
(6) LONG-TERM DEBT Long-term debt consists of the following at June 30, 1999: Bank term loan, with monthly repayments of $8,334 (CAN$) plus interest at prime plus 1.25% (7.50% at June 30, 1999), secured by a general security agreement and a postponement of shareholder advances...................... $226,446 Bank term loan, with monthly repayments of $4,167 (CAN$) plus interest at prime plus 3/4% (7.00% at June 30, 1999), secured by a general security agreement and a postponement of shareholder advances................................... 19,802 Bank term loan, with monthly repayments of $712 (CAN$) plus interest at prime plus 2% (8.25%) at June 30, 1999), secured by an assignment of book debts and a postponement of shareholder advances................................... 10,142 -------- Total long-term debt.............................. 256,390 Less current installments................................... 93,547 -------- Long-term debt, less current installments......... $162,843 ========
At June 30, 1999, aggregate annual future maturities of long-term debt are as follows: 2000........................................................ $ 93,547 2001........................................................ 72,279 2002........................................................ 67,940 2003........................................................ 22,624 -------- $256,390 ========
(7) ADVANCES FROM SHAREHOLDERS Advances from shareholders are due on demand, bear no interest and have no fixed terms of repayment. As such, these advances have been classified as current on the accompanying balance sheet. (8) INCOME TAXES Income tax benefit consists of the following for the year ended June 30, 1999: Current-Foreign............................................. $24,957 Deferred-Foreign............................................ 1,989 ------- Total............................................. $26,946 =======
F-49 124 PORTA-TEST INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities at June 30, 1999, are as follows: Property, plant and equipment............................. $28,302 ------- Total deferred tax liabilities.................... $28,302 =======
Income tax benefit for the year ended June 30, 1999 differs from the amount computed by applying the U.S. federal income tax rate of 34% to loss before income taxes as a result of the following: Income tax benefit computed at U.S. statutory rate.......... $ 73,571 Differences between U.S. and foreign tax rate............... (32,458) Other....................................................... (14,167) -------- $ 26,946 ========
(9) RELATED PARTY TRANSACTIONS The Company is related to 554257 Alberta Ltd. and Quantum Mechanical Ltd. by virtue of common control exercised by members of the shareholders' family. 554257 Alberta Ltd. leases the building occupied by the Company as outlined in note 10. Rent expense is paid to 554257 Alberta Ltd. at commercial rates. The Company has written off advances to Quantum Mechanical Ltd. in the amount of $140,806 during the year ended June 30, 1999. At June 30, 1999, the Company had a note receivable from Westana Financial Corporation (Westana) in the amount of $137,287. Westana is a related party in that an officer at Westana serves as a director of the Company. The note receivable is due on demand, accrues interest at 18% and is unsecured. (10) OPERATING LEASES The Company operates in premises leased from a related party under a long-term lease from February 1996 to January 2000. The lease provides for annual lease payments of $228,000 (CAN$), plus a five-year renewal option to extend this lease at annual rates to be negotiated. In addition, the Company leases various facilities and equipment under noncancelable operating lease agreements. These leases expire on various dates through 2003. Future minimum lease payments required under these operating leases are summarized as follows:
YEAR ENDING JUNE 30, AMOUNT 2000........................................................ $173,527 2001........................................................ 106,263 2002........................................................ 11,577 -------- Total minimum lease payments...................... $291,367 ========
Total expense for operating leases for the year ended June 30, 1999, was $199,095. F-50 125 PORTA-TEST INTERNATIONAL INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (11) COMPREHENSIVE INCOME (LOSS) The accumulated balances for each classification of comprehensive income (loss) are as follows at June 30, 1999:
ACCUMULATED FOREIGN UNREALIZED OTHER CURRENCY GAINS ON COMPREHENSIVE TRANSLATION INVESTMENTS INCOME (LOSS) ----------- ----------- ------------- Beginning balance.............................. $(26,376) $ -- $(26,376) Current period change.......................... (6,532) 21,628 15,096 -------- ------- -------- Ending balance................................. $(32,908) $21,628 $(11,280) ======== ======= ========
(12) GEOGRAPHIC INFORMATION For the year ended June 30, 1999, the Company had revenues from external customers in the following countries: Mexico...................................................... $4,231,037 United States............................................... 1,845,315 Canada...................................................... 1,179,609 ---------- $7,255,961 ==========
(13) SALE OF COMPANY The shareholders of the Company have signed a letter of intent to sell all of the issued and outstanding common stock of the Company to NATCO Group, Inc. (NATCO) in exchange for cash and notes. F-51 126 INDEPENDENT AUDITORS' REPORT The Stockholders Engineering Specialties, Inc. and Engineering Specialties FSC, Inc.: We have audited the accompanying combined balance sheet of Engineering Specialties, Inc. and Engineering Specialties FSC, Inc. (ESI) as of December 31, 1998, and the related combined statements of operations, stockholders' equity and comprehensive income, and cash flows for the year then ended. These combined financial statements are the responsibility of ESI's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of ESI as of December 31, 1998 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG LLP New Orleans, Louisiana September 24, 1999 F-52 127 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. COMBINED BALANCE SHEETS
DECEMBER 31, JUNE 30, 1998 1999 ASSETS ------------ ----------- (UNAUDITED) Current assets: Cash...................................................... $1,043,248 148,857 Investments............................................... 1,700,205 2,600,068 Receivables: Trade.................................................. 741,475 254,203 Costs and estimated earnings in excess of billings on uncompleted contracts................................ 139,588 401,138 ---------- --------- Total receivables................................. 881,063 655,341 Inventories............................................... 190,890 331,353 Prepaid expenses.......................................... 36,561 24,700 ---------- --------- Total current assets.............................. 3,851,967 3,760,319 ---------- --------- Property and equipment, net................................. 239,569 220,385 Other assets................................................ 8,934 8,777 ---------- --------- $4,100,470 3,989,481 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Billings in excess of costs and estimated earnings on uncompleted contracts.................................. $ -- 43,185 Accounts payable.......................................... 93,068 22,020 Accrued expenses.......................................... 122,326 153,147 ---------- --------- Total current liabilities......................... 215,394 218,352 ---------- --------- Stockholders' equity: Common stock.............................................. 2,000 2,000 Additional paid-in capital................................ 4,096 4,096 Retained earnings......................................... 4,653,456 4,546,900 Accumulated other comprehensive income.................... 215,524 208,133 Treasury stock............................................ (990,000) (990,000) ---------- --------- Total stockholders' equity........................ 3,885,076 3,771,129 Commitments ---------- --------- $4,100,470 3,989,481 ========== =========
See accompanying notes to combined financial statements F-53 128 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, --------------------- 1998 1998 1999 ------------ --------- --------- (UNAUDITED) Revenues.................................................. $3,905,553 1,592,655 1,380,032 Cost of goods sold........................................ 1,881,915 895,686 839,951 ---------- --------- --------- Gross profit.................................... 2,023,638 696,969 540,081 ---------- --------- --------- Operating expenses: Production expenses..................................... 327,143 121,677 164,901 Selling expenses........................................ 275,866 146,781 151,024 General and administrative expenses..................... 693,340 330,278 343,275 ---------- --------- --------- 1,296,349 598,736 659,200 ---------- --------- --------- Operating profit (loss)............................ 727,289 98,233 (119,119) Other income (expense): Dividend income......................................... 85,150 48,129 23,825 Gain (loss) on sale of investments...................... (18,111) 33 83,427 Other, net.............................................. 1,524 -- -- ---------- --------- --------- 68,563 48,162 107,252 ---------- --------- --------- Earnings before income taxes......................... 795,852 146,395 (11,867) Income taxes.............................................. 4,986 987 -- ---------- --------- --------- Net earnings (loss)............................. $ 790,866 145,408 (11,867) ========== ========= =========
See accompanying notes to combined financial statements. F-54 129 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' STOCK CAPITAL EARNINGS INCOME STOCK EQUITY ------ ---------- ---------- ------------- -------- ------------- Balances at December 31, 1997... $2,000 4,096 4,947,908 122,245 (990,000) 4,086,249 Comprehensive income Net income.................... -- -- 790,866 -- -- 790,866 Net unrealized changes in investments................ -- -- -- 93,279 -- 93,279 ------ ----- ---------- ------- -------- ---------- Total comprehensive income.............. -- -- 790,866 93,279 -- 884,145 Shareholder distributions....... -- -- (1,085,318) -- -- (1,085,318) ------ ----- ---------- ------- -------- ---------- Balances at December 31, 1998... 2,000 4,096 4,653,456 215,524 (990,000) 3,885,076 Comprehensive income Net loss (unaudited).......... -- -- (11,867) -- -- (11,867) Net unrealized changes in investments (unaudited).... -- -- -- (7,391) -- (7,391) ------ ----- ---------- ------- -------- ---------- Total comprehensive income (unaudited)......... -- -- (11,867) (7,391) -- (19,258) Shareholder distributions (unaudited)................... -- -- (94,689) -- -- (94,689) ------ ----- ---------- ------- -------- ---------- Balances at June 30, 1999 (unaudited)................... $2,000 4,096 4,546,900 208,133 (990,000) 3,771,129 ====== ===== ========== ======= ======== ==========
See accompanying notes to combined financial statements. F-55 130 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, --------------------- 1998 1998 1999 ------------ -------- ---------- (UNAUDITED) Cash flows from operating activities: Net earnings (loss).................................... $ 790,866 145,408 (11,867) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation...................................... 65,335 16,560 26,864 Loss (gain) on sale of investments................ 18,111 (33) (83,427) Change in operating assets and liabilities: Receivables.................................... 207,501 (154,910) 225,722 Inventories.................................... 14,714 (52,799) (140,463) Prepaid expenses............................... (22,784) 2,695 11,861 Other assets................................... (1,177) (1,146) 157 Accounts payable............................... 115,981 91,263 (71,048) Accrued expenses............................... (14,881) 24,355 (62,943) Billings in excess of cost..................... -- -- 43,185 ----------- -------- ---------- Net cash provided by (used in) operating activities................................... 1,173,666 71,393 (61,959) ----------- -------- ---------- Cash flows from investing activities: Proceeds from sale of investments...................... 1,200,101 50,050 879,016 Purchases of investments............................... (835,150) (48,129) (1,702,843) Capital expenditures................................... (39,296) (21,946) (7,680) ----------- -------- ---------- Net cash provided by (used in) investing activities................................... 325,655 (20,025) (831,507) Cash flows from financing activities -- distributions to stockholder............................................ (1,085,318) (680,613) (925) ----------- -------- ---------- Net increase (decrease) in cash................ 414,003 (629,245) (894,391) Cash at beginning of period.............................. 629,245 629,245 1,043,248 ----------- -------- ---------- Cash at end of period.................................... $ 1,043,248 -- 148,857 =========== ======== ========== Supplemental disclosures of non-cash transactions: Change in unrealized gain on investments............... $ 93,279 112,969 (7,391) =========== ======== ========== Accrued distributions to stockholder................... $ -- 136,393 93,764 =========== ======== ==========
See accompanying notes to combined financial statements. F-56 131 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1998 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) ORGANIZATION The combined financial statements include the accounts of Engineering Specialties, Inc. and Engineering Specialties FSC, Inc. (the Company), which are affiliated through common ownership. Significant intercompany accounts and transactions have been eliminated in combination. Engineering Specialties, Inc. (ESI) was organized under the laws of the State of Louisiana in 1964, and is located in Covington, Louisiana. ESI designs, engineers, manufactures and markets wastewater treating equipment for use by the industrial and oilfield wastewater markets. The Company serves clients worldwide, providing services and equipment in 24 countries. Engineering Specialties FSC, Inc. is a foreign sales corporation organized in 1995. (B) CONCENTRATION OF CREDIT RISK Trade receivables from four customers collectively represented 77% and individually represented 30%, 21%, 15% and 11% of total trade receivables at December 31, 1998. The Company had revenues from two customers that collectively represented 31% and individually represented 20% and 11% of revenues for the year ended December 31, 1998. Export sales to Norway and Saudi Arabia represented 12% and 19% of revenues, respectively, for the year ended December 31, 1998. (C) INVESTMENTS Investments consist of shares in mutual funds. The Company classifies these investments as available-for-sale, and thus records them at their fair value. Unrealized holding gains and losses are excluded from earnings and are reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of the investments are determined on a specific identification basis. A decline in the market value of an investment below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the investment is established. Dividend and interest income are recognized when earned. (D) INVENTORIES Inventories are valued at the lower of cost, determined by the first-in, first-out method, or market. (E) PROPERTY AND EQUIPMENT Property and equipment are carried at cost, less an allowance for depreciation. Depreciation is computed by accelerated methods over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. The carrying values of property and equipment are reviewed at least annually or whenever there are indications that these assets may be impaired. F-57 132 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) (F) REVENUE RECOGNITION Revenues from significant contracts are recognized on the percentage-of-completion method of accounting. Earned revenue is based on the percentage that incurred costs to date bear to total estimated costs after giving effect to the most recent estimates of total cost. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the year in which these changes become known. Earned revenue reflects the original contract price, adjusted for agreed upon change order revenue, if any. Losses expected to be incurred on jobs in progress, after consideration of estimated minimum recoveries from change orders, are charged to income as soon as such losses are known. Progress billings are included in accounts receivable and are considered currently due. (G) INCOME TAXES Engineering Specialties, Inc. elected under the applicable provision of the Internal Revenue Code not to be taxed as a corporation, but to have their income taxed to the individual stockholder. Accordingly, no provision for Federal and state income taxes with respect to income from Engineering Specialties, Inc. has been made in the accompanying combined financial statements. Engineering Specialties FSC, Inc., however, is taxed as a C-corporation. Gross profits earned on the export sales of Engineering Specialties, Inc., net of operating expense allocations, are recorded as commission income at Engineering Specialties FSC, Inc. and as commission expense by Engineering Specialties, Inc. The commission expense is fully deductible by Engineering Specialties, Inc. but a portion of the commission income is excludable by Engineering Specialties FSC, Inc. under the Internal Revenue Code. Income taxes for Engineering Specialties FSC, Inc. are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. For all periods presented, there were no differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. (H) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (I) COMPREHENSIVE INCOME On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income F-58 133 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on investments and is presented in the statements of stockholders' equity and comprehensive income. The Statement requires only additional disclosures in the financial statements; it does not affect the Company's financial position or results of operations. (J) UNAUDITED INTERIM COMBINED FINANCIAL INFORMATION In the opinion of management, the accompanying unaudited combined financial information of the Company contains all adjustments, consisting only of those of a recurring nature, necessary to present fairly the Company's combined financial position as of June 30, 1999 and the results of its operations and cash flows for the six-months periods ended June 30, 1999 and 1998, and the changes in stockholders' equity for the six months ended June 30, 1999. These results are not necessarily indicative of the results to be expected for the full fiscal year. (2) INVESTMENTS The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of available-for-sale investments in mutual funds as of December 31, 1998 and June 30, 1999 were as follows:
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- December 31, 1998....................... $1,484,681 215,524 -- 1,700,205 June 30, 1999........................... $2,391,935 208,133 -- 2,600,068
Proceeds from the sale of investments were $1,200,101, $50,050 and $879,016 for the year ended December 31, 1998, and for the six months ended June 30, 1998 and 1999, respectively. Gross realized gains included in income for the same periods were $14,340, $33 and $94,458, respectively. Gross unrealized losses included in income for the same periods were $32,451, $0 and $11,031, respectively. F-59 134 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) (3) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Contract costs are summarized as follows:
DECEMBER 31, JUNE 30, 1998 1999 ------------ -------- Cumulative expenditures on uncompleted contracts........... $524,772 412,598 Estimated earnings thereon................................. 285,135 217,447 -------- -------- 809,907 630,045 Less billings to date...................................... (670,319) (272,092) -------- -------- $139,588 357,953 ======== ======== Included in the combined balance sheets under the following captions: Costs and estimated earnings in excess of.................. $ billings on uncompleted contracts.......................... 139,588 401,138 Billings in excess of costs and estimated earnings on uncompleted contracts.................................... -- (43,185) -------- -------- $139,588 357,953 ======== ========
(4) INVENTORIES Inventories consist of the following amounts:
DECEMBER 31, JUNE 30, 1998 1999 ------------ -------- Finished goods.............................................. $ 26,424 92,017 Work-in-progress............................................ 164,466 239,336 -------- ------- $190,890 331,353 ======== =======
(5) PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, JUNE 30, ESTIMATED 1998 1999 USEFUL LIVES ------------ ---------- ------------- Leasehold improvements...................... $ 406,181 406,181 15 - 25 years Buildings................................... 280,614 280,614 31 - 39 years Automobiles and equipment................... 413,816 415,622 5 years Furniture and fixtures...................... 184,205 190,079 5 - 7 years ----------- ---------- 1,284,816 1,292,496 Less accumulated depreciation............... (1,045,247) (1,072,111) ----------- ---------- $ 239,569 220,385 =========== ==========
F-60 135 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) (6) STOCKHOLDERS' EQUITY A summary of ESI's authorized and issued common stock and additional paid-in capital at December 31, 1998 and June 30, 1999 follows:
ISSUED AND ADDITIONAL PAR VALUE AUTHORIZED OUTSTANDING COMMON PAID-IN PER SHARE SHARES SHARES STOCK CAPITAL --------- ---------- ----------- ------ ---------- Engineering Specialties, Inc......... $ -- 1,000 500 $1,000 $4,096 Engineering Specialties, FSC, Inc.... -- 10,000 1,000 1,000 --
(7) INCOME TAXES All income tax expense in 1998 related to the federal tax expense of Engineering Specialties FSC, Inc. Actual income tax expense differs from amounts computed by applying the U.S. federal corporate income tax rate of 34% to earnings before income taxes as a result of the following: Computed "expected" tax expense............................. $270,590 Increase (reduction) in income taxes resulting from: Earnings taxed directly to shareholders..................... (233,479) Benefit of FSC.............................................. (24,219) Effect of graduated rates................................... (7,906) -------- $ 4,986 ========
Cash paid for income taxes in 1998 was approximately $5,000. (8) RELATED PARTY TRANSACTIONS The Company has a land lease with the stockholder of Engineering Specialties, Inc. that required monthly rental payments of $3,000 through December 31, 1998. The monthly rental payment increased to $5,000 effective January 1, 1999. This lease expires in 2001. Rent expense to the stockholder was $36,000 for the year ended December 31, 1998. Revenues from contracts between the stockholder of Engineering Specialties, Inc. and the Company totaled $23,886 for the year ended December 31, 1998. These revenues were recorded as distributions to the stockholder. The Company paid $30,000 in professional services to a related party during 1998. (9) COMMITMENTS The Company has various outstanding letters of credit totaling approximately $140,000 and $155,000, at December 31, 1998 and June 30, 1999, respectively. These letters of credit are maintained for certain customers in accordance with the terms of their contract. The outstanding letters of credit have expiration dates ranging from January 1999 through October 2000. F-61 136 ENGINEERING SPECIALTIES, INC. AND ENGINEERING SPECIALTIES FSC, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) (10) SUBSEQUENT EVENT In August 1999, the stockholder of Engineering Specialties, Inc. purchased certain fixed assets from the Company for $50,000. The net book value of the assets purchased was $14,000 at December 31, 1998. In September 1999, the stockholder of the Company signed a non-binding letter of intent to sell all of the issued and outstanding common stock of the Company to NATCO Group, Inc. (NATCO) in exchange for cash. F-62 137 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses of the offering are estimated to be as follows: Securities and Exchange Commission registration fee......... $ 24,249 NASD filing fee............................................. 8,720 NYSE listing fee............................................ 84,600 Legal fees and expenses..................................... 250,000 Accounting fees and expenses................................ 285,000 Blue Sky fees and expenses (including legal fees)........... 10,000 Printing expenses........................................... 100,000 Transfer Agent fees......................................... 15,000 Miscellaneous............................................... 22,431 --------- TOTAL............................................. $ 800,000 =========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 145 of the Delaware General Corporation Law, a Delaware corporation has the power, under specified circumstances, to indemnify its directors, officers, employees and agents in connection with threatened, pending or completed actions, suits or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in right of the corporation), brought against them by reason of the fact that they were or are such directors, officers, employees or agents, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in any such action, suit or proceeding. Article Eleventh of the Restated Certificate of Incorporation of NATCO Group Inc. (the "Company") provides that the Company may indemnify any director, officer, employee or agent of the Company to the fullest extent permitted by the Delaware General Corporation Law as the same exists or may be hereafter amended. Article VI of the Company's Bylaws provides that the Company shall indemnify each person who is or was made a party to any actual or threatened civil, criminal, administrative or investigative action, suit or proceeding because such person is or was an officer or director of the Company or is a person who is or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service relating to employee benefit plans, to the fullest extent permitted by the Delaware General Corporation Law as it existed at the time the indemnification provisions of the Company's Bylaws were adopted or as may be thereafter amended. Article VI of the Company's Bylaws also provides that the Company may maintain insurance, at its own expense, to protect itself and any director, officer, employee or agent of the Company or of another entity against any expense, liability, or loss, regardless of whether the Company would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. Section 102(b)(7) of the Delaware General Corporation Law provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for its or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law (relating to liability for unauthorized acquisitions or redemptions of, or dividends on, capital stock) or (iv) for any transaction from which the director derived an improper personal benefit. Article Tenth of the Company's Certificate of Incorporation contains such a provision. II-1 138 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On March 5, 1998, the Company effected a four for three split of its common stock, par value $.01 per share (the "Common Stock"). All references to shares of Common Stock herein are on a post-split basis. On June 30, 1997, the Company issued $2,359,864 in principal amount of its 13% Subordinated Promissory Notes due 2000 and 2,113,334 shares of Common Stock to Capricorn Investors II, L.P. in consideration of the payment to the Company of $13,000,000. In so doing, the Company relied on the provisions of Section 4(2) of the Securities Act in claiming exemption for the offering, sale and delivery of such securities from the registration provisions of the Securities Act. As of June 30, 1998, Capricorn Investors, L.P. and Capricorn Investors II, L.P. delivered to the Company $5,084,501 and $2,359,864, respectively, in principal amount of the Company's 13% Subordinated Notes due 2000 in exchange for the issuance by the Company to such limited partnerships out of authorized but unissued Common Stock 1,010,333 shares and 468,925 shares, respectively. In so doing, the Company relied on the provisions of Section 3(a)(9) of the Securities Act in claiming exemption from the registration provisions of the Securities Act. On November 18, 1998, in connection with the merger of The Cynara Company ("Cynara") with and into the Company, the Company issued 500,000 shares of Common Stock to the former stockholders of Cynara in partial consideration of the receipt of all of the outstanding shares of the common stock, par value $.01 per share, of Cynara. In so doing, the Company relied on the provisions of Section 4(2) of the Securities Act in claiming exemption for the offering, sale and delivery of such securities from the registration provisions of the Securities Act. On November 18, 1998, the Company issued $5,300,000 in principal amount of its Convertible Promissory Note due 1999 to Capricorn Investors II, L.P. in consideration of the payment to the Company of $5,300,000. In so doing, the Company relied on the provisions of Section 4(2) of the Securities Act in claiming exemption for the offering, sale and delivery of such securities from the registration provisions of the Securities Act. On December 17, 1998, Capricorn Investors II, L.P. delivered to the Company $5,300,000 in principal amount of the Company's Convertible Promissory Note due 1999 in exchange for the issuance by the Company to such limited partnership out of authorized but unissued Common Stock 504,762 shares. In so doing, the Company relied on the provisions of Section 3(a)(9) of the Securities Act in claiming exemption from the registration provisions of the Securities Act. As of July 12, 1999, the Company issued 136,832 shares of Common Stock to Nathaniel A. Gregory in consideration of the payment to the Company of $1,205,489.92. In so doing, the Company relied on the provisions of Section 4(2) of the Securities Act in claiming exemption for the offering, sale and delivery of such securities from the registration provisions of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION 1.1*** -- Form of Underwriting Agreement. 2.1** -- Amended and Restated Agreement and Plan of Merger dated November 17, 1998 but effective March 26, 1998 among the Company, NATCO Acquisition Company, National Tank Company and The Cynara Company. 2.2* -- Stock Purchase Agreement dated as of May 7, 1997 among Enterra Petroleum Equipment Group, Inc., National Tank Company and Weatherford Enterra, Inc. 3.1** -- Restated Certificate of Incorporation of the Company, as amended by Certificate of Amendment dated November 18, 1998.
II-2 139
EXHIBIT NUMBER DESCRIPTION 3.2* -- Certificate of Designations of Series A Junior Participating Preferred Stock. 3.3* -- Amended and Restated Bylaws of the Company. 4.1* -- Specimen Common Stock certificate. 4.2* -- Rights Agreement dated as of May 15, 1998 by and among the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. 4.3** -- Registration Rights Agreement dated as of November 18, 1998 among the Company and Capricorn Investors, L.P. and Capricorn Investors II, L.P. 4.4** -- Registration Rights Agreement dated as of November 18, 1998 among the Company and the former stockholders of The Cynara Company. 4.5*** -- Form of lock-up letter to the Underwriters from certain directors and officers of the Company. 5.1** -- Opinion of Vinson & Elkins L.L.P. 10.1* -- Directors Compensation Plan. 10.2* -- Form of Nonemployee Director's Option Agreement. 10.3* -- Employee Stock Incentive Plan. 10.4* -- International Revolving Loan Agreement dated as of June 30, 1997 between National Tank Company and Chase Bank of Texas, N.A. 10.5* -- Commitment Letter dated November 24, 1994 from The Bank of Nova Scotia to NATCO Canada, Ltd. 10.6* -- Service and Reimbursement Agreement dated as of July 1, 1997 between the Company and Capricorn Management, G.P. 10.7* -- Term Loan Facility and Revolving Loan Facility dated June 30, 1997 among National Tank Company and Chase Bank of Texas, N.A. 10.8* -- Loan Agreement dated as of October 8, 1997 between The Cynara Company and Bank One Texas, N.A. 10.9* -- Form of Indemnification Agreement between the Company and its officers and directors. 10.10* -- Securities Exchange Agreement dated as of March 5, 1998 by and among the Company, Capricorn Investors, L.P. and Capricorn Investors II, L.P. 10.11* -- Stockholders' Agreement by and among the Company, Capricorn Investors, L.P. and Capricorn Investors II, L.P. 10.12** -- Employment Agreement dated as of July 31, 1997 between the Company and Nathaniel A. Gregory, as amended as of July 12, 1999. 10.13** -- Stock Option Agreement dated as of July 31, 1997 between the Company and Nathaniel A. Gregory, as amended as of July 12, 1999. 10.14* -- Stock Option Agreement dated as of July 31, 1997 between the Company and Patrick M. McCarthy. 10.15* -- Stock Option Agreement dated as of July 31, 1997 between the Company and William B. Wiener III. 10.16* -- Stock Option Agreement dated as of July 31, 1997 between the Company and Frank Smith. 10.17* -- Stock Option Agreement dated as of July 31, 1997 between the Company and Frank Smith. 10.18* -- Stock Option Agreement dated as of July 31, 1997 between the Company and David Volz.
II-3 140
EXHIBIT NUMBER DESCRIPTION 10.19** -- Stockholder's Agreement dated as of November 18, 1998 among the Company, Capricorn Investors, L.P., Capricorn Investors II, L.P. and the former stockholders of The Cynara Company. 10.20** -- Change of Control Policy dated as of September 28, 1999. 10.21** -- Severance Pay Summary Plan Description. 10.22** -- Loan Agreement ($22,000,000 U.S. Revolving Loan Facility, $10,000,000 Canadian Revolving Loan Facility and $32,500,000 Term Loan Facility) dated as of November 20, 1998 among National Tank Company, NATCO Canada, Ltd., Chase Bank of Texas, National Association, The Bank of Nova Scotia and the other lenders parties thereto and joined in by NATCO Group Inc., as amended. 10.23** -- International Revolving Loan Agreement dated as of June 30, 1997 between National Tank Company and Texas Commerce Bank, National Association, as amended. 10.24** -- Form of Nonstatutory Stock Option Agreement. 21.1** -- List of subsidiaries of the Company. 23.1** -- Consent of KPMG LLP regarding NATCO Group Inc. 23.2** -- Consent of KPMG LLP regarding Engineering Specialties, Inc. and Engineering Specialties FSC, Inc. 23.3** -- Consent of KPMG LLP regarding Porta-Test International Inc. 23.4** -- Consent of Ernst &Young LLP regarding The Cynara Company. 23.5** -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit 5.1 hereto). 24.1** -- Powers of Attorney (included on the signature page hereto). 27.1** -- Financial Data Schedule. 99.1* -- Consent of George K. Hickox, Jr. to serve as director.
- ------------------------------ * Previously filed. ** Filed herewith. *** To be filed by amendment. (b)[CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, YEARS ENDED MARCH 31, 1996, 1997 AND 1998 AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999 (UNAUDITED)] All other schedules are omitted because the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company 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 Company of expenses incurred or paid by a director, officer or controlling person of the Company 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 Company 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. II-4 141 The undersigned Company 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. The undersigned Company 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 Company 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 purposes 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-5 142 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 Houston, State of Texas, on the 30th day of September, 1999. NATCO GROUP INC. By: /s/ NATHANIEL A. GREGORY ---------------------------------- Nathaniel A. Gregory Chief Executive Officer and Chairman of the Board of Directors POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Nathaniel A. Gregory and Daniel R. Carter, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution, 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 any subsequent registration statements filed by the Registrant pursuant to Rule 462(b) of the Securities Act of 1933, which relates 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 attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and ratifying and confirming all that said attorney-in-fact and agent 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 below by the following persons in the capacities indicated on the day of , 1999.
SIGNATURE TITLE /s/ NATHANIEL A. GREGORY Chairman of the Board and Chief Executive - --------------------------------------------- Officer (Principal Executive Officer) Nathaniel A. Gregory /s/ J. MICHAEL MAYER Senior Vice President and Chief Financial - --------------------------------------------- Officer (Principal Financial Officer) J. Michael Mayer /s/ STEPHEN J. GOODLAND Vice President -- Finance and Accounting - --------------------------------------------- (Principal Accounting Officer) Stephen J. Goodland /s/ HERBERT S. WINOKUR, JR. Director - --------------------------------------------- Herbert S. Winokur, Jr. /s/ E. HALE STALEY Director - --------------------------------------------- E. Hale Staley /s/ PATRICK M. MCCARTHY Director - --------------------------------------------- Patrick M. McCarthy
II-6 143
SIGNATURE TITLE /s/ HOWARD I. BULL Director - --------------------------------------------- Howard I. Bull /s/ KEITH K. ALLAN Director - --------------------------------------------- Keith K. Allan /s/ GEORGE K. HICKOX, JR. Director - --------------------------------------------- George K. Hickox, Jr.
II-7 144 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION 1.1*** -- Form of Underwriting Agreement. 2.1** -- Amended and Restated Agreement and Plan of Merger dated November 17, 1998 but effective March 26, 1998 among the Company, NATCO Acquisition Company, National Tank Company and The Cynara Company. 2.2* -- Stock Purchase Agreement dated as of May 7, 1997 among Enterra Petroleum Equipment Group, Inc., National Tank Company and Weatherford Enterra, Inc. 3.1** -- Restated Certificate of Incorporation of the Company, as amended by Certificate of Amendment dated November 18, 1998. 3.2* -- Certificate of Designations of Series A Junior Participating Preferred Stock. 3.3* -- Amended and Restated Bylaws of the Company. 4.1* -- Specimen Common Stock certificate. 4.2* -- Rights Agreement dated as of May 15, 1998 by and among the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. 4.3** -- Registration Rights Agreement dated as of November 18, 1998 among the Company and Capricorn Investors, L.P. and Capricorn Investors II, L.P. 4.4** -- Registration Rights Agreement dated as of November 18, 1998 among the Company and the former stockholders of The Cynara Company. 4.5*** -- Form of lock-up letter to the Underwriters from certain directors and officers of the Company. 5.1** -- Opinion of Vinson & Elkins L.L.P. 10.1* -- Directors Compensation Plan. 10.2* -- Form of Nonemployee Director's Option Agreement. 10.3* -- Employee Stock Incentive Plan. 10.4* -- International Revolving Loan Agreement dated as of June 30, 1997 between National Tank Company and Chase Bank of Texas, N.A. 10.5* -- Commitment Letter dated November 24, 1994 from The Bank of Nova Scotia to NATCO Canada, Ltd. 10.6* -- Service and Reimbursement Agreement dated as of July 1, 1997 between the Company and Capricorn Management, G.P. 10.7* -- Term Loan Facility and Revolving Loan Facility dated June 30, 1997 among National Tank Company and Chase Bank of Texas, N.A. 10.8* -- Loan Agreement dated as of October 8, 1997 between The Cynara Company and Bank One Texas, N.A. 10.9* -- Form of Indemnification Agreement between the Company and its officers and directors. 10.10* -- Securities Exchange Agreement dated as of March 5, 1998 by and among the Company, Capricorn Investors, L.P. and Capricorn Investors II, L.P. 10.11* -- Stockholders' Agreement by and among the Company, Capricorn Investors, L.P. and Capricorn Investors II, L.P. 10.12** -- Employment Agreement dated as of July 31, 1997 between the Company and Nathaniel A. Gregory, as amended as of July 12, 1999. 10.13** -- Stock Option Agreement dated as of July 31, 1997 between the Company and Nathaniel A. Gregory, as amended as of July 12, 1999.
145
EXHIBIT NUMBER DESCRIPTION 10.14* -- Stock Option Agreement dated as of July 31, 1997 between the Company and Patrick M. McCarthy. 10.15* -- Stock Option Agreement dated as of July 31, 1997 between the Company and William B. Wiener III. 10.16* -- Stock Option Agreement dated as of July 31, 1997 between the Company and Frank Smith. 10.17* -- Stock Option Agreement dated as of July 31, 1997 between the Company and Frank Smith. 10.18* -- Stock Option Agreement dated as of July 31, 1997 between the Company and David Volz. 10.19** -- Stockholder's Agreement dated as of November 18, 1998 among the Company, Capricorn Investors, L.P., Capricorn Investors II, L.P. and the former stockholders of The Cynara Company. 10.20** -- Change of Control Policy dated as of September 28, 1999. 10.21** -- Severance Pay Summary Plan Description 10.22** -- Loan Agreement ($22,000,000 U.S. Revolving Loan Facility, $10,000,000 Canadian Revolving Loan Facility and $32,500,000 Term Loan Facility) dated as of November 20, 1998 among National Tank Company, NATCO Canada, Ltd., Chase Bank of Texas, National Association, The Bank of Nova Scotia and the other lenders parties thereto and joined in by NATCO Group Inc., as amended. 10.23** -- International Revolving Loan Agreement dated as of June 30, 1997 between National Tank Company and Texas Commerce Bank, National Association, as amended. 10.24** -- Form of Nonstatutory Stock Option Agreement. 21.1** -- List of subsidiaries of the Company. 23.1** -- Consents of KPMG LLP regarding NATCO Group Inc. 23.2** -- Consent of KPMG LLP regarding Engineering Specialties, Inc. and Engineering Specialties FSC, Inc. 23.3** -- Consent of KPMG LLP regarding Porta-Test International Inc. 23.4** -- Consent of Ernst &Young LLP regarding The Cynara Company. 23.5** -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit 5.1 hereto). 24.1** -- Powers of Attorney (included on the signature page hereto). 27.1** -- Financial Data Schedule. 99.1* -- Consent of George K. Hickox, Jr. to serve as director.
- ------------------------------ * Previously filed. ** Filed herewith. *** To be filed by amendment. EX-2.1 2 AMENDED AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 2.1 AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER BY AND AMONG NATCO GROUP INC., NATCO ACQUISITION COMPANY, NATIONAL TANK COMPANY AND THE CYNARA COMPANY DATED NOVEMBER 17, 1998 BUT EFFECTIVE AS OF MARCH 26, 1998 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS SECTION 1.01 Definitions............................................................................2 SECTION 1.02 Rules of Construction..................................................................2 ARTICLE II TERMS OF MERGER SECTION 2.01 Statutory Merger.......................................................................2 SECTION 2.02 Effective Time.........................................................................2 SECTION 2.03 Effect of the Merger...................................................................2 SECTION 2.04 Certificate of Incorporation; Bylaws...................................................2 SECTION 2.05 Directors and Officers.................................................................3 ARTICLE III CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES SECTION 3.01 Merger Consideration; Conversion and Cancellation of Securities........................3 SECTION 3.02 Exchange of Certificates...............................................................7 SECTION 3.04 Stock Transfer Books...................................................................9 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY SECTION 4.01 Organization and Qualification; Subsidiaries..........................................10 SECTION 4.02 Certificate of Incorporation and Bylaws...............................................10 SECTION 4.03 Capitalization........................................................................10 SECTION 4.04 Authorization of Agreement............................................................11 SECTION 4.05 Approvals.............................................................................11 SECTION 4.06 No Violation..........................................................................11 SECTION 4.07 Financial Statements..................................................................12 SECTION 4.08 No Material Adverse Effect; Conduct...................................................12 SECTION 4.09 Title to Properties...................................................................13 SECTION 4.10 Certain Obligations...................................................................13
AGREEMENT AND PLAN OF MERGER -i- 3 SECTION 4.11 Permits; Compliance...................................................................13 SECTION 4.12 Litigation; Compliance with Laws......................................................13 SECTION 4.13 Employee Benefit Plans................................................................14 SECTION 4.14 Taxes.................................................................................17 SECTION 4.15 Environmental Matters.................................................................17 SECTION 4.16 Intellectual Property.................................................................18 SECTION 4.17 Insurance.............................................................................18 SECTION 4.18 Tax Matters...........................................................................18 SECTION 4.19 Stockholders..........................................................................19 SECTION 4.20 Certain Business Practices............................................................19 SECTION 4.21 Brokers...............................................................................19 ARTICLE V REPRESENTATIONS AND WARRANTIES OF ACQUIROR SECTION 5.01 Organization and Qualification; Subsidiaries..........................................20 SECTION 5.02 Certificate of Incorporation and Bylaws...............................................20 SECTION 5.03 Capitalization........................................................................20 SECTION 5.05 Approvals.............................................................................22 SECTION 5.06 No Violation..........................................................................22 SECTION 5.07 Financial Statements..................................................................23 SECTION 5.08 No Material Adverse Effect; Conduct...................................................23 SECTION 5.09 Title to Properties...................................................................23 SECTION 5.10 Certain Obligations...................................................................24 SECTION 5.11 Permits; Compliance...................................................................24 SECTION 5.12 Litigation; Compliance with Laws......................................................24 SECTION 5.13 Employee Benefit Plans................................................................25 SECTION 5.14 Taxes.................................................................................28 SECTION 5.15 Environmental Matters.................................................................28 SECTION 5.16 Tax Matters...........................................................................29 SECTION 5.17 Brokers...............................................................................30 SECTION 5.18 Intellectual Property.................................................................30 SECTION 5.19 Certain Business Practices............................................................30 ARTICLE VI COVENANTS SECTION 6.01 Affirmative Covenants.................................................................31 SECTION 6.02 Negative Covenants....................................................................31 SECTION 6.03 Access and Information................................................................35 SECTION 6.04 Confidentiality Agreement.............................................................35
AGREEMENT AND PLAN OF MERGER -ii- 4 SECTION 6.05 Stockholders' Letter..................................................................35 ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.01 Meeting of Stockholders...............................................................36 SECTION 7.02 Appropriate Action; Consents; Filings.................................................36 SECTION 7.03 Tax Treatment.........................................................................37 SECTION 7.04 Public Announcements..................................................................37 SECTION 7.06 Employee Benefit Plans................................................................38 SECTION 7.07 Indemnification of Directors and Officers.............................................38 SECTION 7.08 Event Notices.........................................................................39 SECTION 7.11 The Cynara Name.......................................................................40 SECTION 7.12 Natco.................................................................................40 SECTION 7.13 Avoidance of Diminution of Put........................................................41 ARTICLE VIII CLOSING CONDITIONS SECTION 8.01 Conditions to Obligations of Each Party Under This Agreement..........................41 SECTION 8.02 Additional Conditions to Obligations of the Acquiror Companies........................42 SECTION 8.03 Additional Conditions to Obligations of the Company...................................43 ARTICLE IX INDEMNIFICATION SECTION 9.02 General Indemnification...............................................................44 ARTICLE X TERMINATION, AMENDMENT AND WAIVER SECTION 10.01 Termination...........................................................................47 SECTION 10.02 Effect of Termination.................................................................48 SECTION 10.03 Amendment.............................................................................48 SECTION 10.04 Waiver................................................................................48 SECTION 10.05 Fees, Expenses and Other Payments.....................................................49
AGREEMENT AND PLAN OF MERGER -iii- 5 ARTICLE XI GENERAL PROVISIONS SECTION 11.01 Notices...............................................................................49 SECTION 11.02 Headings..............................................................................50 SECTION 11.03 Severability..........................................................................50 SECTION 11.04 Entire Agreement......................................................................51 SECTION 11.05 Assignment............................................................................51 SECTION 11.06 Parties in Interest...................................................................51 SECTION 11.07 Failure or Indulgence Not Waiver; Remedies Cumulative.................................51 SECTION 11.08 Governing Law.........................................................................51 SECTION 11.09 Arbitration...........................................................................51 SECTION 11.10 Counterparts..........................................................................52
ANNEXES Annex A Schedule of Defined Terms Annex B Form of Stockholder's Letter Annex C Form of Escrow Agreement Annex D Form of Charter Amendment Annex E-1 Form of Registration Rights Agreement - Capricorn Annex E-2 Form of Registration Rights Agreement - Cynara Annex F Form of Stockholders' Agreement Exhibit I Calculation Examples AGREEMENT AND PLAN OF MERGER -iv- 6 AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated November 17, 1998 but effective as of March 26, 1998 (this "Agreement"), is by and among NATCO Group Inc., a Delaware corporation ("Acquiror"), National Tank Company, a Delaware corporation and a direct, wholly-owned subsidiary of Acquiror ("Natco"), Natco Acquisition Company, a Delaware corporation and a wholly owned subsidiary of the Acquiror ("Newco"), and The Cynara Company, a Delaware corporation (the "Company"). The Acquiror and Natco are sometimes referred to herein as the "Acquiror Companies." RECITALS: The Acquiror, the Company and Newco executed and delivered an Agreement and Plan of Merger dated March 26, 1998 providing for the merger of Newco with and into the Company as a result of which the Company would become a wholly owned subsidiary of the Acquiror. The parties to that agreement have determined to amend the agreement to provide for the merger (the "Merger") of Cynara with and into Natco in lieu of Newco and to provide for certain other changes therein and, after effecting such amendments, to restate the agreement. The Board of Directors of the Company has determined that the business combination to be effected by means of the Merger is consistent with and in furtherance of the long-term business strategy of the Company and is in the best interests of the Company and its stockholders and has approved and adopted this Agreement and recommended approval and adoption of this Agreement by the stockholders of the Company. The Board of Directors of the Acquiror has determined that the business combination to be effected by means of the Merger is consistent with and in furtherance of the long-term business strategy of the Acquiror and is fair to, and in the best interests of, the Acquiror and its stockholders and has approved and adopted this Agreement. Upon the terms and subject to the conditions of this Agreement and in accordance with the Corporate Statute, the Company will merge with and into Natco and Natco will be the Surviving Corporation. For federal income tax purposes, it is intended that the Merger will qualify as a reorganization within the meaning of the provisions of Section 368(a) of the Code. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement, the parties hereto agree as follows: 7 ARTICLE I DEFINITIONS SECTION 1.01 Definitions. Certain capitalized and other terms used in this Agreement are defined in Annex A hereto and are used herein with the meanings ascribed to them therein. SECTION 1.02 Rules of Construction. Unless the context otherwise requires, as used in this Agreement: (a) a term has the meaning ascribed to it; (b) an accounting term not otherwise defined has the meaning ascribed to it in accordance with GAAP; (c) "including" means "including without limitation;" (d) words in the singular include the plural; (e) words in the plural include the singular; (f) words applicable to one gender shall be construed to apply to each gender; (g) the terms "hereof," "herein," "hereby," "hereto" and derivative or similar words refer to this entire Agreement; and (h) the terms "Article" or "Section" shall refer to the specified Article or Section of this Agreement. ARTICLE II TERMS OF MERGER SECTION 2.01 Statutory Merger. Subject to the terms and conditions and in reliance upon the representations, warranties, covenants and agreements contained herein, the Company shall merge with and into Natco at the Effective Time. The terms and conditions of the Merger and the mode of carrying the same into effect shall be as set forth in this Agreement. As a result of the Merger, the separate corporate existence of the Company shall cease and Natco shall continue as the Surviving Corporation. SECTION 2.02 Effective Time. At the conclusion of the Closing on the Closing Date, the parties hereto shall cause the Merger to be consummated by filing a Certificate of Merger with the Secretary of State of the State of Delaware, in such form as required by, and executed in accordance with the relevant provisions of, the Corporate Statute. SECTION 2.03 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the Corporate Statute. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, except as otherwise provided herein, all the property, rights, privileges, powers and franchises of Natco and the Company shall vest in the Surviving Corporation, and all debts, liabilities and duties of Natco and the Company shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 2.04 Certificate of Incorporation; Bylaws. At the Effective Time, the certificate of incorporation and the bylaws of Natco, as in effect immediately prior to the Effective Time, shall be the certificate of incorporation and the bylaws of the Surviving Corporation, except that the certificate of incorporation and bylaws of Natco shall contain provisions substantially similar AGREEMENT AND PLAN OF MERGER -2- 8 in form and substance to the indemnification provisions contained in Article Ten of the certificate of incorporation and Article VI of the bylaws of the Company, respectively. SECTION 2.05 Directors and Officers. The directors of Natco immediately prior to the Effective Time shall be the directors of the Surviving Corporation, each to hold office in accordance with the certificate of incorporation and bylaws of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. ARTICLE III CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES SECTION 3.01 Merger Consideration; Conversion and Cancellation of Securities. On the date on which the Effective Time occurs, by virtue of the Merger and without any action on the part of the Acquiror Companies, the Company or the holders of any of the following securities: (a) Conversion Ratio. Subject to the other provisions of this Article III and to the provisions of Section 7.10, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (excluding any Company Common Stock described in Subsection 3.01(e)) shall be converted into 18.525 shares of Acquiror Class B Common Stock, the right to receive $102.38 in cash, the right to receive the CTOC Earnout Shares, if any (which right shall in no event entitle the holder and any permitted assignees to more than 2.730 shares of Acquiror Class B Common Stock per share of Company Common Stock) and the right to receive the Initial Earnout Shares and the Supplemental Earnout Shares, if any (which right shall in no event entitle the holder and any permitted assignees to more than 15.795 shares of Acquiror Class B Common Stock per share of Company Common Stock plus such portion of the 2.730 shares of Acquiror Class B Common Stock per share of Company Common Stock as were not received as CTOC Earnout Shares). The right to receive the CTOC Earnout Shares and the right to receive the Initial Earnout Shares and the Supplemental Earnout Shares shall not be assignable except by operation of Law, by death pursuant to a will or the Laws of descent and distribution, by transfer to a member of the immediate family of the Designated Company Stockholder or a trust for the benefit of any such family member, by transfer to another Designated Company Stockholder, by transfer to a commercial bank or other lending institution in accordance with the terms of a bona fide pledge or, in the case of a Designated Company Stockholder that is a legal entity, by such entity to an affiliate or successor of such entity or to the purchaser of all or substantially all of that entities assets, all of which exceptions shall be permitted if the transferor or transferee shall give notice of such assignment, together with such information as may be reasonably necessary to evidence qualification of the transferee to be an assignee thereof, to the Acquiror and the transferee shall have executed the Stockholders' Agreement. The Acquiror shall issue any CTOC Earnout Shares on the CTOC Payout Date, any Initial Earnout Shares on the Initial Payout Date and any Supplemental Earnout Shares on the AGREEMENT AND PLAN OF MERGER -3- 9 Supplemental Payout Date. Notwithstanding the foregoing, (i) if between the date of this Agreement and the Effective Time the outstanding shares of common stock, par value $0.001 per share, of the Acquiror as constituted prior to the effectuation of the Charter Amendment or the Acquiror Class A Common Stock shall have been changed into a different number of shares or a different class by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares (a "Share Adjustment"), the Merger Consideration Per Share of Company Common Stock shall be correspondingly adjusted to reflect such Share Adjustment and (ii), if between the Effective Time and the Supplemental Payout Date the outstanding shares of Acquiror Class B Common Stock shall be subject to a Share Adjustment, the numbers of CTOC Earnout Shares, Initial Earnout Shares and Supplemental Earnout Shares payable with respect to a share of Company Common Stock outstanding immediately prior to the Effective Time shall, to the extent the record date for such Share Adjustment shall have occurred, or the Share Adjustment shall otherwise have become effective, prior to the CTOC Payout Date, the Initial Payout Date or the Supplemental Payout Date, as appropriate, be correspondingly adjusted to reflect such Share Adjustment. Upon exercise of the Warrants issued by the Company from and after the Effective Time in accordance with their terms, the Acquiror will issue the Merger Consideration Per Share of Company Common Stock for each share of Company Common Stock as to which the Warrants are exercised. (b) Earnout Determinations. With respect to determinations relating to CTOC Earnout Shares, the aggregate amount of revenues, if any, billed in the ordinary course of business by the Surviving Corporation to the CTOC Project through September 30, 1999 ("Billed Revenues") shall be determined by the Acquiror as of September 30, 1999 no later than October 31, 1999. With respect to determinations relating to Initial Earnout Shares, the Sales Revenue derived or to be derived from all Awarded Project Contracts that shall have an award date on or prior to March 31, 2000 shall be determined by the Acquiror as of March 31, 2000 no later than April 30, 2000. With respect to determinations relating to Supplemental Earnout Shares, the Sales Revenue derived or to be derived from all Awarded Project Contracts that shall have an award date after March 31, 2000 but on or prior to December 31, 2000 shall be determined by the Acquiror as of December 31, 2000 no later than January 31, 2001. (c) No Return Obligation. Notwithstanding the provisions of subsections (a) and (b) of this Section 3.01, no Designated Company Stockholder shall have any obligation to return any shares of Acquiror Class B Common Stock by reason of the fact that the calculation of the number of Initial Earnout Shares or Supplemental Earnout Shares shall result in a negative number. (d) Cancellation of Converted Shares. All shares of Company Common Stock shall at the Effective Time, upon conversion thereof into shares of Acquiror Class B Common Stock and the right to receive cash, cease to be outstanding and shall without further action be canceled and retired, and each certificate previously evidencing Company Common Stock outstanding immediately prior to the Effective Time (other than Company AGREEMENT AND PLAN OF MERGER -4- 10 Common Stock described in Subsection 3.01(e)) shall thereafter be deemed, for all purposes other than the payment of dividends or distributions, to represent that number of shares of Acquiror Class B Common Stock and the right to receive cash determined pursuant to Section 3.01(a) and, if applicable, the right to receive cash pursuant to Subsection 3.02(e). The holders of certificates previously evidencing Company Common Stock shall cease to have any rights with respect to such Company Common Stock except as otherwise provided herein or by law. (e) Treasury Stock. Notwithstanding any provision of this Agreement to the contrary, each share of Company Common Stock held in the treasury of the Company and each share of Company Common Stock, if any, owned by the Acquiror or any direct or indirect wholly owned Subsidiary of the Acquiror or of the Company immediately prior to the Effective Time shall be canceled and extinguished without conversion thereof. (f) Natco Stock. Each share of common stock, par value $1.00 per share, of Natco issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock, par value $1.00 per share, of the Surviving Corporation. (g) Review of Earnout Determinations. The Acquiror shall deliver its determinations of Billed Revenues to the first sentence of subsection (b) of this Section and of Sales Revenue pursuant to the second and third sentences of subsection (b) of this Section at least twenty (20) days prior to the CTOC Payout Date, the Initial Payout Date and the Supplemental Payout Date, respectively, to the Representative (as hereinafter defined) and shall provide the Representative with a reasonably detailed calculation of Billed Revenues or Sales Revenue together with any supporting backup reasonably requested by the Representative. If the Representative shall have any objections to the determination of such Billed Revenues or either determination of Sales Revenue, the Representative shall so notify the Acquiror and the Acquiror and the Representative shall endeavor in good faith to resolve their differences (the "Differences") prior to the related payout date. Any Differences not so resolved shall be deferred until the Supplemental Payout Date. If the parties are unable to resolve their Differences, the Representative shall have until the Supplemental Payout Date to notify the Acquiror that the Representative intends to apply for arbitration of the Differences pursuant to Section 11.09. If Differences exist as to the determination of Billed Revenues for the CTOC Earnout Shares or the Sales Revenue for the Initial Earnout Shares or the Supplemental Earnout Shares, the Acquiror shall deliver the CTOC Earnout Shares, the Initial Earnout Shares and the Supplemental Earnout Shares on the CTOC Payout Date, the Initial Payout Date and the Supplemental Payout Date, respectively, less in each case the numbers of shares of Acquiror Class B Common Stock attributable to the Differences. Any additional shares of Acquiror Class B Common Stock attributable to the Differences shall be delivered by the Acquiror upon resolution of all such Differences, whether by arbitration or otherwise. (h) Acquiror's Successor. If (i) the Acquiror shall merge with one or more other corporations or legal entities (whether or not the Acquiror shall be the corporation surviving AGREEMENT AND PLAN OF MERGER -5- 11 such merger) and the outstanding Acquiror Class B Common Stock shall be converted into another class of capital stock or into other securities of the surviving corporation or into cash or other property, (ii) the Acquiror shall consolidate with one or more other corporations or legal entities, (iii) the Acquiror shall sell all or substantially all its assets in a single transaction or a series of related transactions and distribute the proceeds thereof to its stockholders, the rights under this Section 3.01 of the former holders of Company Common Stock to receive CTOC Earnout Shares, Initial Earnout Share and Supplemental Earnout Shares shall become, at the effective time of any such transaction, rights to receive, in lieu of shares of Acquiror Class B Common Stock, the number and class of shares of capital stock or other securities or cash or other property to which such holders would have been entitled pursuant to the terms of such transaction if, immediately prior thereto, such holders had been the holders of record of the number of shares of Acquiror Class B Common Stock to which such holders would have been entitled as CTOC Earnout Shares, Initial Earnout Shares and Supplemental Earnout Shares pursuant to this Section 3.01 but for such transaction. If the consideration to be received by the former holders of Company Common Stock is converted into a right to receive shares of capital stock of any other issuer and if between the Effective Time and the Supplemental Payout Date the outstanding shares of such capital stock shall become subject to a Share Adjustment, the numbers of shares of such capital stock or other securities payable hereunder in lieu of CTOC Earnout Shares, Initial Earnout Shares and Supplemental Earnout Shares shall, to the extent the record date for such Share Adjustment shall have occurred, or the Share Adjustment shall otherwise have become effective, prior to the CTOC Payout Date, the Initial Payout Date or the Supplemental Payout Date, as appropriate, be correspondingly adjusted to reflect such Share Adjustment. The parties hereto intend, through this subsection 3.01(h) and the last sentence of subsection 3.01(a), to provide a mechanism by which the Designated Company Stockholders, to the extent that they are entitled to any CTOC Earnout Shares, Initial Earnout Shares or Supplemental Earnout Shares pursuant to the provisions of this Agreement, will receive on the applicable payout dates the correct numbers of shares of Acquiror Class B Common Stock or shares of any other capital stock of Acquiror or any other issuer of the type and amount that would have been received by a Designated Company Stockholder (or its assignee) if such stockholder (or its assignee) had been issued such CTOC Earnout Shares, Initial Earnout Shares or Supplemental Earnout Shares at the Effective Time. The Acquiror, on behalf of itself, its successors and assigns, hereby agrees to reserve for issuance all shares of capital stock in any way required to be issued to the Designated Company Stockholders pursuant to the provisions of this Agreement and agrees to adjust equitably the consideration to be received by the Designated Company Stockholders as CTOC Earnout Shares, Initial Earnout Shares and Supplemental Earnout Shares if necessary to give effect to the intent of the parties hereto expressed in the preceeding sentence. (i) Examples. Attached hereto as Exhibit I are examples prepared to demonstrate the application of this Section 3.01, Section 7.10 and the applicable definitions, to reflect the distribution of the Escrow Shares, the CTOC Earnout Shares, the Initial Earnout Shares and the Supplemental Earnout Shares to the Designated Company Stockholders. AGREEMENT AND PLAN OF MERGER -6- 12 SECTION 3.02 Exchange of Certificates. (a) Exchange Fund. At or immediately prior to the Effective Time, the Acquiror shall segregate, and hold separate and apart from its general funds, for the benefit of the former holders of Company Common Stock as of the Effective Time and for exchange in accordance with this Article III, certificates evidencing a number of shares of Acquiror Class B Common Stock and an amount of cash equal to the product of the Merger Consideration Per Share of Company Common Stock (other than the right to receive the Earnout Shares) and the number of shares of Company Common Stock outstanding immediately prior to the Effective Time (exclusive of any such shares to be canceled pursuant to Subsection 3.01(e)), together with any cash to be paid pursuant to Section 3.02(e). The Acquiror shall deliver Acquiror Class B Common Stock, together with any cash to be paid in lieu of fractional interests in shares of Acquiror Class B Common Stock pursuant to Subsection 3.02(e) and any dividends or distributions to be paid pursuant to Subsection 3.02(d), in exchange for certificates theretofore evidencing Company Common Stock surrendered to the Acquiror pursuant to Subsection 3.02(c). Except as contemplated by Subsection 3.02(e), the Exchange Fund shall not be used for any other purpose. (b) Letter of Transmittal. The Acquiror will at the request of any Designated Company Stockholder provide to the Designated Company Stockholder within 10 days of such request a letter of transmittal and other appropriate materials for use in surrendering to the Acquiror certificates that prior to the Effective Time evidenced shares of Company Common Stock. To the extent that the Designated Company Stockholders do not make any such request prior to the Effective Time, the Acquiror will send, within two Business Days after the Effective Time, to each record holder of Company Common Stock immediately prior to the Effective Time a letter of transmittal and other appropriate materials for use in surrendering to the Acquiror certificates that prior to the Effective Time evidenced shares of Company Common Stock. Such letter of transmittal shall include a Form W-9 prescribed by the Regulations under the Code. (c) Exchange Procedures. Promptly after the Effective Time, the Acquiror shall distribute to each former holder of Company Common Stock, upon surrender to the Acquiror for cancellation of one or more certificates that theretofore evidenced shares of Company Common Stock, certificates evidencing the appropriate number of shares of Acquiror Class B Common Stock and cash into which such shares of Company Common Stock were converted pursuant to the Merger, together with any cash to be paid in lieu of fractional interests in shares of Acquiror Class B Common Stock pursuant to Subsection 3.02(e) and any dividends or distributions to be paid pursuant to Subsection 3.02(d). If shares of Acquiror Class B Common Stock are to be issued to a Person other than the Person in whose name the surrendered certificate or certificates are registered, it shall be a condition of issuance of the Acquiror Class B Common Stock that (i) the surrendered certificate or certificates shall be properly endorsed, with signatures guaranteed or otherwise in proper form for transfer, and that the Person requesting such payment shall pay any transfer or other taxes required by reason of the issuance of Acquiror Class B Common Stock to a Person AGREEMENT AND PLAN OF MERGER -7- 13 other than the registered holder of the surrendered certificate or certificates or (ii) such Person shall establish to the satisfaction of the Acquiror that such tax has been paid or is not applicable. Notwithstanding the foregoing, neither the Acquiror nor any other party hereto shall be liable to any former holder of Company Common Stock for any Acquiror Class B Common Stock or cash into which such Company Common Stock shall have been converted pursuant to the Merger, cash in lieu of fractional share interests or dividends or distributions thereon required to be delivered to a public official pursuant to any applicable escheat law in accordance with an opinion of counsel to such effect. (d) Distributions with Respect to Unexchanged Shares of Company Common Stock. No dividends or other distributions declared or made with respect to Acquiror Class B Common Stock with a record date after the Effective Time shall be paid to the holder of any certificate that theretofore evidenced shares of Company Common Stock until the holder of such certificate shall surrender such certificate. Subject to the effect of any applicable escheat laws, following surrender of any such certificate, there shall be paid (i) to the holder of the certificates evidencing whole shares of Acquiror Class B Common Stock issued in exchange therefor, without interest, (A) promptly, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Acquiror Class B Common Stock and (B), at the appropriate payment date, the amount of dividends or other distributions, with a record date after the Effective Time but prior to surrender and a payment date occurring after surrender, payable with respect to such whole shares of Acquiror Class B Common Stock and (ii) to the holder of any certificate that theretofore evidenced shares of Company Common Stock, without interest, promptly the amount of any cash payable with respect to a fractional share of Acquiror Class B Common Stock to which such holder is entitled pursuant to Subsection 3.02(e). (e) No Fractional Shares. Notwithstanding anything herein to the contrary, no certificates or scrip evidencing fractional shares of Acquiror Class B Common Stock shall be issued in connection with the Merger, and any such fractional share interests to which a holder of record of Company Common Stock at the Effective Time would otherwise be entitled will not entitle such holder to vote or to any rights of a stockholder of the Acquiror. In lieu of any such fractional shares, each holder of record of Company Common Stock at the Effective Time who but for the provisions of this Subsection 3.02(e) would be entitled to receive a fractional interest of a share of Acquiror Class B Common Stock pursuant to the Merger shall be paid cash, without any interest thereon, in an amount equal to $13.00 multiplied by such fraction. The Acquiror shall promptly deposit the aggregate amount of cash so required as part of the Exchange Fund. Thereafter, the Acquiror shall, in accordance with Subsection 3.02(d), pay to the Persons who would otherwise be entitled to receive a fractional interest of a share of Acquiror Class B Common Stock an amount in cash determined as provided above. (f) Termination of Exchange Fund. Any portion of the Exchange Fund which remains unclaimed by the former holders of Company Common Stock for twelve months after the Effective Time may be returned to the general funds of the Acquiror, and any former AGREEMENT AND PLAN OF MERGER -8- 14 holders of Company Common Stock who shall not have theretofore complied with this Article III shall thereafter look only to the Acquiror for the Acquiror Class B Common Stock and any cash to which they are entitled. (g) Withholding of Tax. The Acquiror shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any former holder of Company Common Stock such amounts as the Acquiror (or any affiliate thereof) is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Acquiror, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Company Common Stock in respect of which such deduction and withholding was made by the Acquiror. To the extent that any former holder of Company Common Stock shall execute and return the Form W-9 included in the letter of transmittal, no such withholding shall be required or made. (h) Lost Certificates. If any certificate evidencing Company Common Stock shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such certificate to be lost, stolen or destroyed and, if required by Acquiror, the posting by such Person of a bond, in such reasonable amount as Acquiror may direct, as indemnity against claims that may be made against it with respect to such certificate, the Acquiror shall issue in exchange for such lost, stolen or destroyed certificate the Acquiror Class B Common Stock and cash into which such Company Common Stock shall have been converted pursuant to the Merger, any cash in lieu of fractional shares of Acquiror Class B Common Stock to which the holder thereof may be entitled pursuant to Section 3.02(e) and any dividends or other distributions to which the holder thereof may be entitled pursuant to Subsection 3.02(d). SECTION 3.03 Closing. The Closing shall take place at the offices of Vinson & Elkins L.L.P., 1001 Fannin, 3600 First City Tower, Houston, Texas 77002-6760, at 10:00 a.m. on November 18, 1998 or at such other place and time as the parties hereto may agree. SECTION 3.04 Stock Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers of shares of Company Common Stock thereafter on the records of the Company. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY If and to the extent any information required to be furnished in any Section of the Company's Disclosure Letter is contained in another Section of the Company's Disclosure Letter, such information will be deemed to be included in all Sections of the Company's Disclosure Letter if such disclosure is reasonably apparent on its face. Subject to the provisions of Section 9.01, the Company hereby represents and warrants to the Acquiror Companies that: AGREEMENT AND PLAN OF MERGER -9- 15 SECTION 4.01 Organization and Qualification; Subsidiaries. The Company is a legal entity duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation, has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by it or the ownership or leasing of its properties makes such qualification necessary, other than any matters, including the failure to be so duly qualified and in good standing, that could not reasonably be expected to have a Material Adverse Effect on the Company. The Company does not have any Subsidiaries. Except as disclosed in Section 4.01 of the Company's Disclosure Letter, the Company does not own an equity interest in any partnership, joint venture arrangement or other business entity that is Material to the Company. SECTION 4.02 Certificate of Incorporation and Bylaws. The Company has heretofore marked for identification and furnished to the Acquiror complete and correct copies of its certificate of incorporation and bylaws, in each case as amended or restated to the date hereof. The Company is not in violation of any of the provisions of its certificate of incorporation or bylaws. SECTION 4.03 Capitalization. (a) Company Common Stock. The authorized capital stock of the Company consists solely of (i) 100,000 shares of Company Common Stock consisting of 90,000 shares of Class A Common Stock and 10,000 shares of Class B Common Stock, of which as of December 31, 1997: (A) 49,999.99 shares of Class A Common Stock were issued and outstanding, (B) no shares of Class B Common Stock were issued and outstanding. All the outstanding shares of Class A Common Stock are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, the Company's certificate of incorporation or bylaws or any agreement to which the Company is a party or is bound other than the Stockholders Agreement dated July 1, 1996 by and among the Company, BOCP and the stockholders of the Company (the "Company Stockholders Agreement"). Except as set forth in Subsection 4.03(a) of the Company's Disclosure Letter, between December 31, 1997 and the date of this Agreement, no shares of Company Common Stock have been issued by the Company and the Company has not granted any options for, or other rights to purchase, shares of Company Common Stock. (b) Reserved Shares. Except as set forth in Subsection 4.03(a), no shares of Common Stock are reserved for issuance, and, except for the Warrants listed in Subsection 4.03(b) of the Company's Disclosure Letter, there are no contracts, agreements, commitments or arrangements obligating the Company (i) to offer, sell, issue or grant any Equity Securities of the Company, (ii) to redeem, purchase or acquire, or to offer to purchase or acquire, any outstanding Equity Securities of the Company or (iii) to grant any Lien on any shares of capital stock of the Company. (c) Adverse Claims. Except for the Warrants and the Company Stockholders Agreement, there are no voting trusts, proxies or other agreements, commitments or AGREEMENT AND PLAN OF MERGER -10- 16 understandings of any character to which the Company is a party or by which the Company is bound with respect to the voting of any shares of capital stock of the Company or with respect to the registration of the offering, sale or delivery of any shares of capital stock of the Company under the Securities Act. SECTION 4.04 Authorization of Agreement. The Company has all requisite corporate power and authority to execute and deliver this Agreement and each instrument required hereby to be executed and delivered by it at the Closing, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby. The execution and delivery by the Company of this Agreement and each instrument required hereby to be executed and delivered by it at the Closing and the performance of its obligations hereunder and thereunder have been duly and validly authorized by all requisite corporate action on the part of the Company (other than, with respect to this Agreement, the approval and adoption of this Agreement by the holders of a majority of the outstanding shares of Company Common Stock in accordance with the Corporate Statute). This Agreement has been duly executed and delivered by the Company and (assuming due authorization, execution and delivery hereof by the other parties hereto) constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the same may be limited by legal principles of general applicability governing the application and availability of equitable remedies. SECTION 4.05 Approvals. Except as set forth in Section 4.05 of the Company's Disclosure Letter and for the applicable requirements, if any, of (a) the Securities Act, (b) the Exchange Act, (c) state securities or blue sky laws, (b) the HSR Act, (c) the filing and recordation of appropriate merger documents as required by the Corporate Statute and (d) those Laws, Regulations and Orders noncompliance with which could not reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under this Agreement or to have a Material Adverse Effect on the Company, no filing or registration with, no waiting period imposed by and no Permit or Order of, any Governmental Authority is required under any Law, Regulation or Order applicable to the Company to permit the Company to execute, deliver or perform this Agreement or any instrument required hereby to be executed and delivered by it at the Closing. SECTION 4.06 No Violation. Assuming effectuation of all filings and registrations with, termination or expiration of any applicable waiting periods imposed by and receipt of all Permits and Orders of, Governmental Authorities indicated as required in Section 4.05 and receipt of the approval of this Agreement by the stockholders of the Company as required by the Corporate Statute and the approvals or consents required to be obtained from the other parties disclosed in Section 4.06 of the Company's Disclosure Letter, neither the execution and delivery by the Company of this Agreement or any instrument required hereby to be executed and delivered by it at the Closing nor the performance by the Company of its obligations hereunder or thereunder will (a) violate or breach the terms of or cause a default under, or result in the termination of, or accelerate the performance required by, or result in a right of termination, cancellation or acceleration of any obligation under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any of its Subsidiaries under (i) any Law, AGREEMENT AND PLAN OF MERGER -11- 17 Regulation or Order applicable to the Company, (ii) the certificate of incorporation or bylaws of the Company or (iii) any contract or agreement to which the Company or any of its Subsidiaries is a party or by which it or any of its properties or assets is bound, or (b) with the passage of time, the giving of notice or the taking of any action by a third Person, have any of the effects set forth in clause (a) of this Section, except in any such case for any matters described in this Section that could not reasonably be expected to have a material adverse effect upon the ability of the Company to perform its obligations under this Agreement or a Material Adverse Effect on the Company. SECTION 4.07 Financial Statements. (a) The Company Financial Statements (i) have been prepared in accordance with GAAP and (ii) fairly present the consolidated financial position of the Company and its Subsidiaries as of the respective dates thereof and the consolidated results of their operations and cash flows for the periods indicated. (b) Except as set forth in Subsection 4.07(b) of the Company's Disclosure Letter, there exist no liabilities or obligations of the Company that are Material to the Company, whether accrued, absolute, contingent or threatened, that would be required to be reflected, reserved for or disclosed under GAAP in financial statements of the Company (including the notes thereto) as of and for the period ended on the date of this representation and warranty, other than (i) liabilities or obligations that are adequately reflected, reserved for or disclosed in the Company's Financial Statements, (ii) liabilities or obligations incurred in the ordinary course of business of the Company since December 31, 1997, (iii) liabilities or obligations the incurrence of which is not prohibited by Subsection 6.02(a) and (iv) liabilities and obligations that are not Material to the Company. SECTION 4.08 No Material Adverse Effect; Conduct. (a) Since December 31, 1997, no event (other than any event that is of general application to all or a substantial portion of the Company's industry and other than any event that is expressly subject to any other representation or warranty contained in Article IV) has, to the Knowledge of the Company, occurred that, individually or together with other similar events, could reasonably be expected to constitute or cause a Material Adverse Effect on the Company. (b) Except as disclosed in Subsection 4.08(b) of the Company's Disclosure Letter, during the period from December 31, 1997 to the date of this Agreement, the Company has not engaged in any conduct that is proscribed during the period from the date of this Agreement to the Effective Time by subsections (i) through (xii) of Subsection 6.02(a) or agreed in writing or otherwise during such period prior to the date of this Agreement to engage in any such conduct. AGREEMENT AND PLAN OF MERGER -12- 18 SECTION 4.09 Title to Properties. The Company has indefeasible title to all of the properties reflected in the Company's Balance Sheet, other than any properties reflected in the Company's Balance Sheet that (i) have been sold or otherwise disposed of since the date of the Company's Balance Sheet in the ordinary course of business consistent with past practice or (ii) are not, individually or in the aggregate, Material to the Company, free and clear of Liens, other than (x) Liens the existence of which is reflected in the Company's Financial Statements, (y) Permitted Encumbrances and (z) Liens that, individually or in the aggregate, are not Material to the Company. The Company holds under valid lease agreements all real and personal properties reflected in the Company's Balance Sheet as being held under capitalized leases, and all real and personal property that is subject to the operating leases to which reference is made in the notes to the Company's Audited Financial Statements, and enjoy peaceful and undisturbed possession of such properties under such leases, other than (i) any properties as to which such leases have terminated in the ordinary course of business without any Material liability of any party thereto since the date of the Company's Balance Sheet and (ii) any properties that, individually or in the aggregate, are not Material to the Company. The Company has not received any written notice of any adverse claim to the title to any properties owned by it or with respect to any lease under which any properties are held by it, other than any claims that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. SECTION 4.10 Certain Obligations. Except as set forth in Section 4.10 of the Company's Disclosure Letter, the Company is not a party to or bound by any Material Contract. Except as set forth in Section 4.10 of the Company's Disclosure Letter, all Material Contracts to which the Company is a party are in full force and effect, the Company has performed its obligations thereunder to date and, to the Knowledge of the Company, each other party thereto has performed its obligations thereunder to date, other than any failure of a Material Contract to be in full force and effect or any nonperformance thereof that could not reasonably be expected to have a Material Adverse Effect on the Company. SECTION 4.11 Permits; Compliance. To the Knowledge of the Company, the Company has obtained all Permits that are necessary to carry on its business as currently conducted, except for any such Permits that its failure to possess, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. Such Permits are in full force and effect, have not been violated in any respect that could reasonably be expected to have a Material Adverse Effect on the Company and, to the Knowledge of the Company, no suspension, revocation or cancellation thereof has been threatened and there is no action, proceeding or investigation pending or threatened regarding suspension, revocation or cancellation of any of such Permits, except where the suspension, revocation or cancellation of such Permits could not reasonably be expected to have a Material Adverse Effect on the Company. SECTION 4.12 Litigation; Compliance with Laws. There are no actions, suits, investigations or proceedings (including any proceedings in arbitration) pending or, to the Knowledge of the Company, threatened against the Company, at law or in equity, in any Court or before or by any Governmental Authority, except actions, suits or proceedings that (a) are set forth in Section 4.12 or Section 4.15 of the Company's Disclosure Letter or (b), individually or, with AGREEMENT AND PLAN OF MERGER -13- 19 respect to multiple actions, suits or proceedings that allege similar theories of recovery based on similar facts, in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. There are no claims pending or, to the Knowledge of the Company, threatened by any Persons against the Company for indemnification pursuant to any statute, organizational document, contract or otherwise with respect to any action, suit, investigation or proceeding pending or previously determined in any Court or before or by any Governmental Authority. Except as set forth in Section 4.12 of the Company's Disclosure Letter, the Company is in substantial compliance with all applicable Laws and Regulations and is not in default with respect to any Order applicable to the Company, except such events of noncompliance or defaults that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. SECTION 4.13 Employee Benefit Plans. (a) Listing. Each Benefit Plan of the Company is listed in Subsection 4.13(a) of the Company's Disclosure Letter, including, with respect to Terminated Benefit Plans, the date of termination. True and correct copies of each of the following have been made available to the Acquiror: (i) the most recent annual report (Form 5500) relating to each such Current Benefit Plan filed with the IRS, (ii) the plan document for each such Current Benefit Plan, (iii) the trust agreement, if any, relating to each such Current Benefit Plan, (iv) the most recent summary plan description for each such Current Benefit Plan for which a summary plan description is required by ERISA, (v) the most recent actuarial report or valuation relating to each such Current Benefit Plan subject to Title IV of ERISA and (vi) the most recent determination letter, if any, issued by the IRS with respect to any such Current Benefit Plan intended to be qualified under Section 401 of the Code. (b) Liability Related to Plans. No event has occurred and, to the Knowledge of the Company, there exists no condition or set of circumstances in connection with which the Company could be subject to any liability under the terms of such Benefit Plans, or with respect to any such Benefit Plans, under ERISA, the Code or any other applicable Law, other than any event, condition or set of circumstances that could not reasonably be expected to have a Material Adverse Effect on the Company. (c) Qualified Status. Each Current Benefit Plan intended to be qualified under Code Section 401 (i) satisfies in form the requirements of such Section, (ii) is a standardized prototype which does not require an individual favorable determination letter from the IRS, (iii) has not, since adoption of the prototype, been amended and (iv) has not been operated in a way that would adversely affect its qualified status. (d) No Termination of Current Plans. There has been no termination or partial termination of any such Current Benefit Plan within the meaning of Section 411(d)(3) of the Code. The Company intends to terminate its Management Incentive Plan (the "MIP") as of or immediately prior to the Closing and to pay any accrued amounts to employees of the Company entitled to participate in the MIP as of the termination date. AGREEMENT AND PLAN OF MERGER -14- 20 (e) Terminated Plans. Any such Terminated Benefit Plan intended to have been qualified under Section 401 of the Code received a favorable determination letter from the IRS with respect to its termination. (f) No Claims. There are no actions, suits or claims pending (other than routine claims for benefits) or, to the Knowledge of the Company, threatened against, or with respect to, any of such Benefit Plans or their assets that could reasonably be expected to have a Material Adverse Effect on the Company. (g) Pending Matters. To the Knowledge of the Company, there is no matter pending (other than routine qualification determination filings) with respect to any of such Benefit Plans before the IRS, the Department of Labor, the PBGC or any other Governmental Authority. (h) Required Contributions. All contributions required to be made by the Company or the Company's Subsidiaries to such Benefit Plans pursuant to their terms and provisions have been made timely. (i) No ERISA Violations. As to any such Current Benefit Plan subject to Title IV of ERISA, (i) there has been no event or condition that presents a material risk of plan termination, (ii) no accumulated funding deficiency, whether or not waived, within the meaning of Section 302 of ERISA or Section 412 of the Code has been incurred within six years prior to date of this Agreement, (iii) no reportable event within the meaning of Section 4043 of ERISA (for which the disclosure requirements of Regulation section 2615.3 promulgated by the PBGC have not been waived) has occurred within six years prior to the date of this Agreement, (iv) no notice of intent to terminate such Benefit Plan has been given under Section 4041 of ERISA, (v) no proceeding has been instituted under Section 4042 of ERISA to terminate such Benefit Plan, (vi) no liability to the PBGC has been incurred (other than with respect to required premium payments) and (vii) the assets of the Benefit Plan equal or exceed the actuarial present value of the benefit liabilities, within the meaning of Section 4041 of ERISA, under the Benefit Plan, based upon reasonable actuarial assumptions and the asset valuation principles established by the PBGC. (j) Nondeductible Payments. Except as set forth in Subsection 4.13(j) of the Company's Disclosure Letter, in connection with the consummation of the transactions contemplated by this Agreement, no payment of money or other property, acceleration of benefits or provision of other rights has been or will be made under any such Current Benefit Plans or any of the programs, agreements, policies or other arrangements described in Subsection 4.13(l) of the Company's Disclosure Letter that would be reasonably likely to be nondeductible under Section 280G of the Code, whether or not some other subsequent action or event would be required to cause such payment, acceleration or provision to be triggered. (k) No Required Increases. Except as set forth in Subsection 4.13(k) of the Company's Disclosure Letter, the execution and delivery of this Agreement and the AGREEMENT AND PLAN OF MERGER -15- 21 consummation of the transactions contemplated hereby will not (i) require the Company to make a larger contribution to, or pay greater benefits or provide other rights under, any Current Benefit Plan or any of the programs, agreements, policies or other arrangements described in Subsection 4.13(l) of the Company's Disclosure Letter than it otherwise would, whether or not some other subsequent action or event would be required to cause such payment or provision to be triggered or (ii) create or give rise to any additional vested rights or service credits under any Current Benefit Plan or any of such programs, agreements, policies or other arrangements, whether or not some other subsequent action or event would be required to cause such creation or acceleration to be triggered. (l) Severance and Employment Agreements. Except as set forth in Subsection 4.13(l) of the Company's Disclosure Letter, the Company is not a party to nor is it bound by any severance agreement (involving $50,000 or more), program or policy. True and correct copies of all employment agreements with officers of the Company and all vacation, overtime and other compensation policies of the Company relating to its employees have been made available to the Acquiror. (m) Retiree Benefits. Except as set forth in Subsection 4.13(m) of the Company's Disclosure Letter, no Benefit Plan provides retiree medical or retiree life insurance benefits to any Person and the Company is not contractually or otherwise obligated (whether or not in writing) to provide any Person with life insurance or medical benefits upon retirement or termination of employment, other than as required by the provisions of Sections 601 through 608 of ERISA and Section 4980B of the Code. Each Benefit Plan or other arrangement described in Subsection 4.13(m) of the Company's Disclosure Letter may be unilaterally amended or terminated in its entirety without liability except as to benefits accrued thereunder prior to such amendment or termination. (n) Multiemployer Plans. The Company does not contribute or have any obligation to contribute, and has not within six years prior to the date of this Agreement contributed or had an obligation to contribute, to a multiemployer plan within the meaning of Section 3(37) of ERISA. (o) Vacation Policies. Except as set forth in Subsection 4.13(o) of the Company's Disclosure Letter, the vacation policies of the Company do not provide for carryover vacation from one calendar year to the next. (p) Collective Bargaining Agreements. No collective bargaining agreement to which the Company is a party is currently in effect or is being negotiated by the Company. There is no pending or, to the Knowledge of the Company, threatened labor dispute, strike or work stoppage against the Company that could reasonably be expected to have a Material Adverse Effect on the Company. To the Knowledge of the Company, neither the Company nor any representative or employee of the Company has in the United States committed any unfair labor practices in connection with the operation of the business of the Company, and there is no pending or, to the Knowledge of the Company, threatened charge or complaint AGREEMENT AND PLAN OF MERGER -16- 22 against the Company by the National Labor Relations Board or any comparable agency of any state of the United States. SECTION 4.14 Taxes. (a) Tax Returns and Taxes. Except for such matters as could not reasonably be expected to have a Material Adverse Effect on the Company, (i) all Tax Returns that are required to be filed by or with respect to the Company on or before the Effective Time have been or will be timely filed, (ii) all Taxes payable by the Company with respect to the income, operations, business or capital of the Company on or before the Effective Time have been or will be timely paid in full, (iii) all withholding Tax requirements imposed on or with respect to the Company have been or will be satisfied in full in all respects and (iv) no penalty, interest or other charge is or will become due with respect to the late filing of any such Tax Return or late payment of any such Tax. (b) Audits. Except as set forth in Subsection 4.14(b) of the Company's Disclosure Letter, all Tax Returns have been audited by the applicable Governmental Authority or the applicable statute of limitations has expired for the period covered by such Tax Returns. (c) Extensions of Times. Except as set forth in Subsection 4.14(c) of the Company's Disclosure Letter, there is not in force any extension of time with respect to the due date for the filing of any Tax Return or any waiver or agreement for any extension of time for the assessment or payment of any Tax due with respect to the period covered by any Tax Return. (d) Claims. There is no claim against or with respect to the income, operations, business or capital of the Company for any Taxes, and no assessment, deficiency or adjustment has been asserted or proposed with respect to any Tax Return, that, in either case, could reasonably be expected to have a Material Adverse Effect on the Company. (e) Affiliated Group. Except as set forth in Subsection 4.14(e) of the Company's Disclosure Letter, the Company has not, during the last ten years, been a member of an affiliated group filing a consolidated federal income Tax Return. SECTION 4.15 Environmental Matters. Except for matters disclosed in Section 4.15 of the Company's Disclosure Letter and except for matters that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company, (a) the properties, operations and activities of the Company are in compliance with all applicable Environmental Laws; (b) the Company and the properties and operations of the Company are not subject to any existing, pending or, to the Knowledge of the Company, threatened action, suit, investigation, inquiry or proceeding by or before any Court or Governmental Authority under any Environmental Law; (c) all Permits, if any, required to be obtained or filed by the Company under any Environmental Law in connection with the business of the Company have been obtained or filed AGREEMENT AND PLAN OF MERGER -17- 23 and are valid and currently in full force and effect; (d) there has been no release of any hazardous substance, pollutant or contaminant into the environment by the Company or in connection with its properties or operations; (e) there has been no exposure (attributable to the action of the Company) of any Person or property to any hazardous substance, pollutant or contaminant in connection with the properties, operations and activities of the Company; and (f) the Company has made available to the Acquiror all internal and external environmental audits and studies and all correspondence on substantial environmental matters (in each case relevant to the Company) in the possession of the Company. SECTION 4.16 Intellectual Property. Other than as disclosed in Section 4.16 of the Company's Disclosure Letter, the Company owns or holds licenses under or otherwise has the right to use or sublicense, all foreign and domestic patents, trademarks (common law and registered), trademark registration applications, service marks (common law and registered), service mark registration applications, trade names and copyrights, copyright applications, trade secrets, know-how and other proprietary information as are necessary for the conduct of the business of the Company as currently conducted except for any such intellectual property as to which the failure to own or hold licenses could not reasonably be expected to have a Material Adverse Effect on the Company. Other than as disclosed in Section 4.16 of the Company's Disclosure Letter, the Company is not currently in receipt of any notice of infringement or notice of conflict with the asserted rights of others in any patents, trademarks, service marks, trade names, trade secrets and copyrights owned or held by other Persons, except, in each case, for matters that could not reasonably be expected to have a Material Adverse Effect on the Company. Neither the execution and delivery of this Agreement nor consummation of the transactions contemplated hereby will violate or breach the terms or cause any cancellation of any Material license held by the Company under any patent, trademark, service mark, trade name, trade secret or copyright. SECTION 4.17 Insurance. Section 4.17 of the Company's Disclosure Letter sets forth a list, including the name of the underwriter, the risks insured, coverage and related limits and deductibles, expiration dates and significant riders, of the principal insurance policies currently maintained by the Company. To the Knowledge of the Company, all such policies are in full force and effect and all premiums due thereon have been paid. SECTION 4.18 Tax Matters. The Company has not taken or agreed to take any action that would prevent the Merger from constituting a reorganization within the meaning of section 368(a) of the Code. Specifically: (a) Preservation of Proprietary Interest. Prior to and in connection with the Merger, (x) none of the Company Common Stock will be redeemed, (y) no extraordinary distribution will be made with respect to the Company Common Stock and (z) none of the Company Common Stock will be acquired by any Person related (as the term "related" is defined in Treas. Reg. Section 1.368-1(e)(3) without regard to Section 1.368-1(e)(3)(i)(A)) to the Company. AGREEMENT AND PLAN OF MERGER -18- 24 (b) Expenses. The Company and the stockholders of the Company will each pay their respective expenses, if any, incurred in connection with the Merger. (c) Intercorporate Indebtedness. There is no intercorporate indebtedness existing between the Company and the Acquiror or between the Company and Natco that was issued, acquired, or will be settled at a discount. (d) Investment Company. The Company is not an investment company as defined in section 368(a)(2)(F)(iii) and (iv) of the Code. (e) Bankruptcy. The Company is not under the jurisdiction of a court in a title 11 or similar case within the meaning of section 368(a)(3)(A) of the Code. SECTION 4.19 Stockholders. Section 4.19 of the Company's Disclosure Letter contains a true and complete list of all Persons who as of the date hereof own shares of Company Common Stock of record or, to the Knowledge of the Company, beneficially. SECTION 4.20 Certain Business Practices. To the Company's Knowledge, as of the date of this Agreement, neither the Company nor any director, officer, employee or agent of the Company has (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful payments relating to political activity, (ii) made any unlawful payment to any foreign or domestic government official or employee or to any foreign or domestic political party or campaign or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, (iii) consummated any transaction, made any payment, entered into any agreement or arrangement or taken any other action in violation of Section 1128B(b) of the Social Security Act, as amended, or (iv) made any other unlawful payment, except for any such matters that could not reasonably be expected to have a Material Adverse Effect on the Company. SECTION 4.21 Brokers. Except as set forth in Section 4.21 of the Company's Disclosure Letter, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. ARTICLE V REPRESENTATIONS AND WARRANTIES OF ACQUIROR If and to the extent any information required to be furnished in any Section of the Acquiror's Disclosure Letter is contained in another Section of the Acquiror's Disclosure Letter, such information will be deemed to be included in all Sections of the Acquiror's Disclosure Letter if such disclosure is reasonably apparent on its face. Subject to the provisions of Section 9.01, the Acquiror Companies hereby represent and warrant to the Company that: AGREEMENT AND PLAN OF MERGER -19- 25 SECTION 5.01 Organization and Qualification; Subsidiaries. The Acquiror, Natco and each other Subsidiary of the Acquiror are legal entities duly organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation or organization, have all requisite power and authority to own, lease and operate their respective properties and to carry on their business as it is now being conducted and are duly qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by them or the ownership or leasing of their respective properties makes such qualification necessary, other than any matters, including the failure to be so duly qualified and in good standing, that could not reasonably be expected to have a Material Adverse Effect on the Acquiror. Section 5.01 of the Acquiror's Disclosure Letter sets forth, as of the date of this Agreement, a true and complete list of all Significant Subsidiaries of the Acquiror, together with the jurisdiction of incorporation of each such Subsidiary and the percentage of each such Subsidiary's outstanding capital stock or other equity interests owned by the Acquiror or another Subsidiary of the Acquiror. Except for investments in Subsidiaries, neither the Acquiror, Natco nor any of the Acquiror's other Subsidiaries owns an equity interest in any partnership or joint venture arrangement or other business entity that is Material to the Acquiror. SECTION 5.02 Certificate of Incorporation and Bylaws. The Acquiror has heretofore marked for identification and furnished to the Company complete and correct copies of the certificate of incorporation and the bylaws or the equivalent organizational documents, in each case as amended or restated to the date hereof, of the Acquiror and each of its Significant Subsidiaries. None of the Acquiror, Natco or any of the Acquiror's Significant Subsidiaries is in violation of any of the provisions of its certificate of incorporation or bylaws (or equivalent organizational documents). SECTION 5.03 Capitalization. (a) As of the date of this Agreement, the authorized capital stock of the Acquiror consists of 50,000,000 shares of Common Stock, of which 8,145,925 shares are, as of such date, issued and outstanding and owned beneficially and of record by the Stockholders, free and clear of all Liens, and 5,000,000 shares of Preferred Stock, without par value, of which 200,000 shares have been designated as the Series A Junior Participating Preferred Stock and of which none is issued or outstanding. As of the date hereof, no other shares of capital stock of the Acquiror are issued or outstanding. Section 5.03(a) of the Acquiror's Disclosure Letter sets forth the Persons who own the Acquiror Common Stock of record and beneficially as of the date hereof, including the number of shares owned by each, and the pro forma ownership of the Acquiror Common Stock after giving effect to the consummation of the Investment Agreement and the Merger. The Acquiror has heretofore delivered to the Company a true and correct copy of the Investment Agreement. (b) Each outstanding share of Common Stock has been duly authorized, validly issued and is fully paid and nonassessable. No shares of Common Stock were issued in violation of any preemptive rights created by statute, the Acquiror's certificate of incorporation or bylaws or any agreement as to which the Acquiror is a party or bound. Except for 504,762 shares of Class A Common Stock to be issued pursuant to the Investment AGREEMENT AND PLAN OF MERGER -20- 26 Agreement, the shares of Class B Common Stock to be issued pursuant to this Agreement and the shares of Common Stock to be issued (as Class A Common Stock) pursuant to the Acquiror Stock Options listed in Subsection 5.03(b) of the Acquiror's Disclosure Letter and except as otherwise set forth in Subsection 5.03(b) of the Disclosure Letter, no shares of Common Stock or other capital stock of the Acquiror were reserved for issuance and, except for the Investment Agreement, this Agreement, and the Acquiror Stock Options listed in Subsection 5.03(b) of the Acquiror's Disclosure Letter and the other agreements listed in Subsection 5.03(b) of the Acquiror's Disclosure Letter, there are no contracts, agreements, commitments or arrangements obligating the Acquiror (i) to offer, sell, issue or grant any Equity Securities of the Acquiror, (ii) to redeem, purchase or acquire, or offer to purchase or acquire, any outstanding Equity Securities of the Acquiror or (iii) to grant any Lien on any shares of capital stock of the Acquiror. (c) The authorized capital stock of each Significant Subsidiary of the Acquiror is as set forth in Subsection 5.03(c) of the Acquiror's Disclosure Letter. Except as set forth in Subsection 5.03(c) of the Acquiror's Disclosure Letter, (i) all the issued and outstanding shares of capital stock of, or other equity interests in, each Significant Subsidiary of the Acquiror are owned by the Acquiror or one of its Subsidiaries, have been duly authorized and are validly issued, and, with respect to capital stock, are fully paid and nonassessable, and were not issued in violation of any preemptive or similar rights of any Person; (ii) all such issued and outstanding shares, or other equity interests, that are owned by the Acquiror or one of its Subsidiaries are owned free and clear of all Liens; (iii) no shares of capital stock of, or other equity interests in, any Significant Subsidiary of the Acquiror are reserved for issuance, and there are no contracts, agreements, commitments or arrangements obligating the Acquiror or any of its Subsidiaries (A) to offer, sell, issue, grant, pledge, dispose of or encumber any Equity Securities of any of the Significant Subsidiaries of the Acquiror or (B) to redeem, purchase or acquire, or offer to purchase or acquire, any outstanding Equity Securities of any of the Significant Subsidiaries of the Acquiror or (C) to grant any Lien on any outstanding Equity Securities of any of the Significant Subsidiaries of the Acquiror; and (iv) all the outstanding shares of capital stock of Natco are owned directly by the Acquiror; except for any matter under clause (i), (ii) or (iii) of this Subsection 5.03(c) that could not reasonably be expected to have a Material Adverse Effect on the Acquiror. (d) Except as set forth in Section 5.03(d) of the Acquiror's Disclosure Letter, there are no voting trusts, proxies or other agreements, commitments or understandings of any character to which the Acquiror or any of its Subsidiaries is a party or by which the Acquiror or any of its Subsidiaries is bound with respect to the voting of any shares of capital stock of the Acquiror or any of its Subsidiaries or with respect to the registration of the offering, sale or delivery of any shares of capital stock of the Acquiror or any of its Subsidiaries, except in the case of any Subsidiaries of the Acquiror that are not Significant Subsidiaries for any matters that could not reasonably be expected to have a Material Adverse Effect on the Acquiror. AGREEMENT AND PLAN OF MERGER -21- 27 SECTION 5.04 Authorization of Agreement. Each of the Acquiror and Natco has all requisite corporate power and authority to execute and deliver this Agreement and each instrument required hereby to be executed and delivered by it at the Closing, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby. The execution and delivery by the Acquiror and Natco of this Agreement and each instrument required hereby to be executed and delivered by the Acquiror or Natco at the Closing and the performance of their respective obligations hereunder and thereunder have been duly and validly authorized by all requisite corporate action (including stockholder action) on the part of the Acquiror and Natco, respectively. This Agreement has been duly executed and delivered by the Acquiror and Natco and (assuming due authorization, execution and delivery hereof by the other party hereto) constitutes a legal, valid and binding obligation of the Acquiror and Natco, enforceable against the Acquiror and Natco in accordance with its terms, except as the same may be limited by legal principles of general applicability governing the application and availability of equitable remedies. SECTION 5.05 Approvals. Except for the applicable requirements, if any, of (a) the Securities Act, (b) the Exchange Act, (c) state securities or blue sky laws, (d) the HSR Act, (e) the filing and recordation of appropriate merger documents as required by the Corporate Statute and (f) those Laws, Regulations and Orders noncompliance with which could not reasonably be expected to have a material adverse effect on the ability of the Acquiror or Natco to perform its obligations under this Agreement or to have a Material Adverse Effect on the Acquiror, no filing or registration with, no waiting period imposed by and no Permit or Order of, any Governmental Authority is required under any Law, Regulation or Order applicable to the Acquiror or Natco to permit the Acquiror or Natco to execute, deliver or perform this Agreement or any instrument required hereby to be executed and delivered by it at the Closing. SECTION 5.06 No Violation. Assuming effectuation of all filings and registrations with, termination or expiration of any applicable waiting periods imposed by and receipt of all Permits and Orders of, Governmental Authorities indicated as required in Section 5.05, neither the execution and delivery by the Acquiror or Natco of this Agreement or any instrument required hereby to be executed and delivered by the Acquiror or Natco at the Closing nor the performance by the Acquiror or Natco of its respective obligations hereunder or thereunder will (a) violate or breach the terms of or cause a default under or result in the termination, cancellation or acceleration of any obligation under, or result in the creation of any Lien upon any of the properties or assets of the Acquiror or any of its Subsidiaries under (i) any Law, Regulation or Order applicable to the Acquiror or Natco, (ii) the certificate of incorporation or bylaws of the Acquiror or Natco or (iii) any contract or agreement to which the Acquiror or any of its Subsidiaries is a party or by which it or any of its properties or assets is bound, or (b) with the passage of time, the giving of notice or the taking of any action by a third Person, have any of the effects set forth in clause (a) of this Section, except in any such case for any matters described in this Section that could not reasonably be expected to have a material adverse effect upon the ability of the Acquiror or Natco to perform its obligations under this Agreement or a Material Adverse Effect on the Acquiror. AGREEMENT AND PLAN OF MERGER -22- 28 SECTION 5.07 Financial Statements. (a) The Acquiror's Consolidated Financial Statements (i) have been prepared in accordance with GAAP and (ii) fairly present the consolidated financial position of the Acquiror and its Subsidiaries as of the respective dates thereof and the consolidated results of their operations and cash flows for the periods indicated (including, in the case of any unaudited interim financial statements, reasonable estimates of normal and recurring year-end adjustments). (b) Except as set forth in Subsection 5.07(b) of the Acquiror's Disclosure Letter, there exist no liabilities or obligations of the Acquiror and its Subsidiaries that are Material to the Acquiror, whether accrued, absolute, contingent or threatened, that would be required to be reflected, reserved for or disclosed under GAAP in consolidated financial statements of the Acquiror as of and for the period ended on the date of this representation and warranty, other than (i) liabilities or obligations that are adequately reflected, reserved for or disclosed in the Acquiror's Consolidated Financial Statements, (ii) liabilities or obligations incurred in the ordinary course of business of the Acquiror and its Subsidiaries since December 31, 1997, (iii) liabilities or obligations the incurrence of which is not prohibited by Subsection 6.02(b) and (iv) liabilities or obligations that are not Material to the Acquiror. SECTION 5.08 No Material Adverse Effect; Conduct. (a) Since December 31, 1997, no event (other than any event that is of general application to all or a substantial portion of the Acquiror's industry and other than any event that is expressly subject to any other representation or warranty contained in Article V) has, to the Knowledge of the Acquiror, occurred that, individually or together with other similar events, could reasonably be expected to constitute or cause a Material Adverse Effect on the Acquiror. (b) Except as disclosed in the Acquiror's Disclosure Letter, during the period from September 30, 1997 to the date of this Agreement, neither the Acquiror nor any of its Subsidiaries has engaged in any conduct that is proscribed during the period from the date of this Agreement to the Effective Time by clauses (i) through (viii) of Subsection 6.02(b) or agreed in writing or otherwise during such period prior to the date of this Agreement to engage in any such conduct. SECTION 5.09 Title to Properties. The Acquiror or its Subsidiaries, individually or together, have indefeasible title to all of the properties reflected in the Acquiror's Consolidated Balance Sheet, other than any properties reflected in the Acquiror's Consolidated Balance Sheet that (a) have been sold or otherwise disposed of since the date of the Acquiror's Consolidated Balance Sheet in the ordinary course of business consistent with past practice or (b) are not, individually or in the aggregate, Material to the Acquiror, free and clear of Liens, other than (i) Liens the existence of which is reflected in the Acquiror's Consolidated Financial Statements, (ii) Permitted Encumbrances and (iii) Liens that, individually or in the aggregate, are not Material to the Acquiror. AGREEMENT AND PLAN OF MERGER -23- 29 The Acquiror or its Subsidiaries, individually or together, hold under valid lease agreements all real and personal properties reflected in the Acquiror's Consolidated Balance Sheet as being held under capitalized leases, and all real and personal property that is subject to the operating leases to which reference is made in the notes to the Acquiror's Audited Consolidated Financial Statements, and enjoy peaceful and undisturbed possession of such properties under such leases, other than (x) any properties as to which such leases have terminated in the ordinary course of business without any Material liability of any party thereto since the date of the Acquiror's Consolidated Balance Sheet and (y) any properties that, individually or in the aggregate, are not Material to the Acquiror. Neither the Acquiror nor any of its Subsidiaries has received any written notice of any adverse claim to the title to any properties owned by them or with respect to any lease under which any properties are held by them, other than any claims that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Acquiror. SECTION 5.10 Certain Obligations. Except as set forth in Section 5.10 of the Acquiror's Disclosure Letter, neither the Acquiror nor any of its Subsidiaries is a party to or bound by any Material Contract. Except as set forth in Section 5.10 of the Acquiror's Disclosure Letter, all Material Contracts to which the Acquiror or any of its Subsidiaries is a party are in full force and effect, the Acquiror or the Subsidiary of the Acquiror that is a party to or bound by each such Material Contract has performed its obligations thereunder to date and, to the Knowledge of the Acquiror, each other party thereto has performed its obligations thereunder to date, other than any failure of any such Material Contract to be in full force and effect or any nonperformance thereof that could not reasonably be expected to have a Material Adverse Effect on the Acquiror. SECTION 5.11 Permits; Compliance. To the Knowledge of the Acquiror, the Acquiror and its Subsidiaries have obtained all Permits that are necessary to carry on their businesses as currently conducted, except for any such Permits that the failure to possess, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Acquiror. Such Permits are in full force and effect, have not been violated in any respect that could reasonably be expected to have a Material Adverse Effect on the Acquiror and, to the Knowledge of the Acquiror, no suspension, revocation or cancellation thereof has been threatened and there is no action, proceeding or investigation pending or threatened regarding suspension, revocation or cancellation of any of such Permits, except where the suspension, revocation or cancellation of such Permits could not reasonably be expected to have a Material Adverse Effect on the Acquiror. SECTION 5.12 Litigation; Compliance with Laws. There are no actions, suits, investigations or proceedings (including any proceedings in arbitration) pending or, to the Knowledge of the Acquiror, threatened against the Acquiror or any of its Subsidiaries, at law or in equity, in any Court or before or by any Governmental Authority, except actions, suits or proceedings that (a) are set forth in Section 5.12 or Section 5.15 of the Acquiror's Disclosure Letter or (b), individually or, with respect to multiple actions, suits or proceedings that allege similar theories of recovery based on similar facts, in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Acquiror. There are no claims pending or, to the Knowledge of the Acquiror, threatened by any Persons against the Acquiror or any of its Subsidiaries for indemnification pursuant to any statute, organizational document, contract or otherwise with respect to any action, AGREEMENT AND PLAN OF MERGER -24- 30 suit, investigation or proceeding pending or previously determined in any Court or before or by any Governmental Authority. The Acquiror and its Subsidiaries are in substantial compliance with all applicable Laws and Regulations and are not in default with respect to any Order applicable to the Acquiror or any of its Subsidiaries, except such events of noncompliance or defaults that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Acquiror. SECTION 5.13 Employee Benefit Plans. (a) Listing. Each Benefit Plan of the Acquiror and its Subsidiaries is listed in Subsection 5.13(a) of the Acquiror's Disclosure Letter, including, with respect to Terminated Benefit Plans, the date of termination. True and correct copies of each of the following have been made available to the Company: (i) the most recent annual report (Form 5500) relating to each such Current Benefit Plan filed with the IRS, (ii) the plan document for each such Current Benefit Plan, (iii) the trust agreement, if any, relating to each such Current Benefit Plan, (iv) the most recent summary plan description for each such Current Benefit Plan for which a summary plan description is required by ERISA, (v) the most recent actuarial report or valuation relating to each such Current Benefit Plan subject to Title IV of ERISA and (vi) the most recent determination letter, if any, issued by the IRS with respect to any such Current Benefit Plan intended to be qualified under Section 401 of the Code. (b) Liability Related to Plans. No event has occurred and, to the Knowledge of the Acquiror, there exists no condition or set of circumstances in connection with which the Acquiror or any of its Subsidiaries could be subject to any liability under the terms of any Benefit Plans of the Acquiror or any of its Subsidiaries or, with respect to any such Benefit Plan, under ERISA, the Code or any other applicable Law, other than any condition or set of circumstances that could not reasonably be expected to have a Material Adverse Effect on the Acquiror. (c) Qualified Status. Each Current Benefit Plan intended to be qualified under Code Section 401 (i) satisfies in form the requirements of such Section, (ii) has received a favorable determination letter from the IRS regarding such qualified status, (iii) except as set forth in Section 5.13(c)(iii) of the Acquiror's Disclosure Letter, has not, since receipt of the most recent favorable determination letter, been amended and (iv) has not been operated in a way that would adversely affect its qualified status. (d) No Termination of Current Plans. There has been no termination or partial termination of any such Current Benefit Plan within the meaning of Section 411(d)(3) of the Code. (e) Terminated Plans. Any such Terminated Benefit Plan intended to have been qualified under Section 401 of the Code received a favorable determination letter from the IRS with respect to its termination. AGREEMENT AND PLAN OF MERGER -25- 31 (f) No Claims. There are no actions, suits or claims pending (other than routine claims for benefits) or, to the Knowledge of the Acquiror, threatened against, or with respect to, any of such Benefit Plans or their assets that could reasonably be expected to have a Material Adverse Effect on the Acquiror. (g) Pending Matters. To the Knowledge of the Acquiror, there is no matter pending (other than routine qualification determination filings) with respect to any of such Benefit Plans before the IRS, the Department of Labor, the PBGC or any other Governmental Authority. (h) Required Contributions. All contributions required to be made by the Acquiror or the Acquiror's Subsidiaries to such Benefit Plans pursuant to their terms and provisions have been made timely. (i) No ERISA Violations. As to any such Current Benefit Plan subject to Title IV of ERISA, (i) there has been no event or condition that presents the material risk of plan termination, (ii) no accumulated funding deficiency, whether or not waived, within the meaning of Section 302 of ERISA or Section 412 of the Code has been incurred, (iii), except as set forth in Subsection 5.13(i)(iii) of the Acquiror's Disclosure Letter, no reportable event within the meaning of Section 4043 of ERISA (for which the disclosure requirements of Regulation section 2615.3 promulgated by the PBGC have not been waived) has occurred within six years prior to the date of this Agreement, (iv) no notice of intent to terminate such Benefit Plan has been given under Section 4041 of ERISA, (v) no proceeding has been instituted under Section 4042 of ERISA to terminate such Benefit Plan, (vi) no liability to the Pension Benefit Guaranty Corporation has been incurred (other than with respect to required premium payments) and (vii) the assets of the Benefit Plan equal or exceed the actuarial present value of the benefit liabilities, within the meaning of Section 4041 of ERISA, under the Benefit Plan, based upon reasonable actuarial assumptions and the asset valuation principles established by the PBGC. (j) Nondeductible Payments. Except as set forth in Subsection 5.13(j) of the Acquiror's Disclosure Letter, in connection with the consummation of the transactions contemplated by this Agreement, no payment of money or other property, acceleration of benefits or provision of other rights has been or will be made under any such Current Benefit Plans or any of the programs, agreements, policies or other arrangements described in Subsection 5.13(l) of the Acquiror's Disclosure Letter that would be reasonably likely to be nondeductible under Section 280G of the Code, whether or not some other subsequent action or event would be required to cause such payment, acceleration or provision to be triggered. (k) No Required Increases. Except as set forth in Subsection 5.13(k) of the Acquiror's Disclosure Letter, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not (i) require the Acquiror or any of its Subsidiaries to make a larger contribution to, or pay greater benefits or provide other rights under, any Current Benefit Plan or any of the programs, agreements, policies or AGREEMENT AND PLAN OF MERGER -26- 32 other arrangements described in Subsection 5.13(l) of the Acquiror's Disclosure Letter than it otherwise would, whether or not some other subsequent action or event would be required to cause such payment or provision to be triggered or (ii) create or give rise to any additional vested rights or service credits under any Current Benefit Plan or any of such programs, agreements, policies or other arrangements, whether or not some other subsequent action or event would be required to cause such creation or acceleration to be triggered. (l) Severance and Employment Agreements. Except as set forth in Subsection 5.13(l) of the Acquiror's Disclosure Letter, neither the Acquiror nor any of its Subsidiaries is a party to or is bound by any severance agreement (involving $50,000 or more), program or policy. True and correct copies of all employment agreements with officers of the Acquiror and its Subsidiaries, and all vacation, overtime and other compensation policies of the Acquiror and its Subsidiaries relating to their employees have been made available to the Acquiror. (m) Retiree Benefits. Except as set forth in Subsection 5.13(m) of the Acquiror's Disclosure Letter, no Benefit Plan provides retiree medical or retiree life insurance benefits to any Person and neither the Acquiror nor any of its Subsidiaries is contractually or otherwise obligated (whether or not in writing) to provide any Person with life insurance or medical benefits upon retirement or termination of employment, other than as required by the provisions of Sections 601 through 608 of ERISA and Section 4980B of the Code. Each Benefit Plan or other arrangement described in Subsection 5.13(m) of the Acquiror's Disclosure Letter may, except as described therein, be unilaterally amended or terminated in its entirety without liability except as to benefits accrued thereunder prior to such amendment or termination. (n) Multiemployer Plans. Neither the Acquiror nor any of its Subsidiaries contributes or has an obligation to contribute, and has not within six years prior to the date of this Agreement contributed or had an obligation to contribute, to a multiemployer plan within the meaning of Section 3(37) of ERISA. (o) Vacation Policies. Except as set forth in Subsection 5.13(o) of the Acquiror's Disclosure Letter, the vacation policies of the Acquiror and its Subsidiaries do not provide for carryover vacation from one calendar year to the next. (p) Collective Bargaining Agreements. Except as set forth in Section 5.13(p) of the Acquiror's Disclosure Letter, no collective bargaining agreement to which the Acquiror or any of its Subsidiaries is a party is currently in effect or is being negotiated by the Acquiror or any of its Subsidiaries. There is no pending or, to the Knowledge of the Acquiror, threatened labor dispute, strike or work stoppage against the Acquiror or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect on the Acquiror. To the Knowledge of the Acquiror, neither the Acquiror or any of its Subsidiaries nor any representative or employee of the Acquiror or any of its Subsidiaries has in the United States committed any unfair labor practices in connection with the operation of the AGREEMENT AND PLAN OF MERGER -27- 33 business of the Acquiror and its Subsidiaries, and there is no pending or, to the Knowledge of the Acquiror, threatened charge or complaint against the Acquiror or any of its Subsidiaries by the National Labor Relations Board or any comparable agency of any state of the United States. SECTION 5.14 Taxes. (a) Tax Returns and Taxes. Except for such matters as could not reasonably be expected to have a Material Adverse Effect on the Acquiror, (i) all Tax Returns that are required to be filed by or with respect to the Acquiror or any of its Subsidiaries on or before the Effective Time have been or will be timely filed, (ii) all Taxes that are due on or before the Effective Time have been or will be timely paid in full, (iii) all withholding Tax requirements imposed on or with respect to the Acquiror or any of its Subsidiaries have been or will be satisfied in full in all respects and (iv) no penalty, interest or other charge is or will become due with respect to the late filing of any such Tax Return or late payment of any such Tax. (b) Audits. Except as set forth in Subsection 5.14(b) of the Acquiror's Disclosure Letter, all Tax Returns have been audited by the applicable Governmental Authority or the applicable statute of limitations has expired for the period covered by such Tax Returns. (c) Extensions of Times. Except as set forth in Subsection 5.14(c) of the Acquiror's Disclosure Letter, there is not in force any extension of time with respect to the due date for the filing of any Tax Return or any waiver or agreement for any extension of time for the assessment or payment of any Tax due with respect to the period covered by any Tax Return. (d) Claims. There is no claim against or with respect to the income, operations, business or capital of the Acquiror or any of its Subsidiaries for any Taxes, and no assessment, deficiency or adjustment has been asserted or proposed with respect to any Tax Return, that, in either case, could reasonably be expected to have a Material Adverse Effect on the Acquiror. (e) Consolidated Tax Returns. Except as set forth in Subsection 5.14(e) of the Acquiror's Disclosure Letter, none of the Acquiror and its Subsidiaries has, during the last ten years, been a member of an affiliated group filing a consolidated federal income Tax Return. (f) Final Company Return. The Acquiror represents that it will cause the timely filing of any required Tax Return relating to the federal income Taxes of the Company for the one day period ended at the Effective Time. SECTION 5.15 Environmental Matters. Except for matters disclosed in Section 5.15 of the Acquiror's Disclosure Letter and except for matters that, individually or in the aggregate, AGREEMENT AND PLAN OF MERGER -28- 34 could not reasonably be expected to have a Material Adverse Effect on the Acquiror, (a) the properties, operations and activities of the Acquiror and its Subsidiaries are in compliance with all applicable Environmental Laws; (b) the Acquiror and its Subsidiaries and the properties and operations of the Acquiror and its Subsidiaries are not subject to any existing, pending or, to the Knowledge of the Acquiror, threatened action, suit, investigation, inquiry or proceeding by or before any Court or Governmental Authority under any Environmental Law; (c) all Permits, if any, required to be obtained or filed by the Acquiror or any of its Subsidiaries under any Environmental Law in connection with the business of the Acquiror and its Subsidiaries have been obtained or filed and are valid and currently in full force and effect; (d) there has been no release of any hazardous substance, pollutant or contaminant into the environment by the Acquiror or its Subsidiaries or in connection with their properties or operations; and (e) there has been no exposure of any Person or property to any hazardous substance, pollutant or contaminant in connection with the properties, operations and activities of the Acquiror and its Subsidiaries; and (f) the Acquiror has made available to the Company all internal and external audits and studies and all correspondence in the possession of the Acquiror or any of its Subsidiaries relating to any environmental matter involving to the Acquiror or any of its Subsidiaries that is Material to the Acquiror. SECTION 5.16 Tax Matters. To the Knowledge of the Acquiror, neither the Acquiror nor any of its Affiliates has taken or agreed to take any action that would prevent the Merger from constituting a reorganization within the meaning of section 368(a) of the Code. Specifically: (a) Preservation of Proprietary Interest. In connection with the Merger, none of the Company Common Stock will be acquired by the Acquiror or a Person related (as defined in Treas. Reg. Section 1.368-1(e)(3)) to the Acquiror for consideration other than Acquiror Class B Common Stock except for the cash received pursuant to Section 3.01(a) and any cash paid in lieu of fractional share interests in Acquiror Class B Common Stock pursuant to Section 3.02(e). (b) Assets. The Surviving Corporation will acquire at least 90 percent of the fair market value of the Company's net assets and at least 70 percent of the fair market value of the Company's gross assets held by the Company immediately prior to the Merger, taking into account amounts used to pay Merger expenses, any dissenting holders of Company Common Stock and any distributions other than regular dividends. (c) Acquiror's Plans. The Acquiror has no plan or intention to (i) liquidate the Surviving Corporation, (ii) merge the Surviving Corporation with or into another corporation, (iii) sell or otherwise dispose of the stock of the Surviving Corporation, (iv) cause the Surviving Corporation to issue additional shares of its capital stock that would result in the Acquiror's losing control (within the meaning of section 368(c) of the Code) of the Surviving Corporation, (v) cause or permit the Surviving Corporation to sell or otherwise dispose of any of the assets acquired from the Company except for dispositions made in the ordinary course of business or successive transfers of assets to one or more corporations controlled in each transfer by the transferor corporation or (vi) reacquire or cause any of its AGREEMENT AND PLAN OF MERGER -29- 35 Subsidiaries to acquire any of the Acquiror Class B Common Stock issued to the holders of Company Common Stock in the Merger. (d) No Natco Liabilities. The liabilities of the Company that will be assumed by the Surviving Corporation in the Merger and the liabilities to which the Company's assets are subject were incurred by the Company in the ordinary course of its business. (e) Business Continuity. Following the Merger, the Surviving Corporation will continue the historic business of the Company or use a significant portion of its historic business assets in a business (within the meaning of Treas. Reg. Section 1.368-1(d)). (f) Intercorporate Indebtedness. There is no intercorporate indebtedness existing between the Company and the Acquiror or between the Company and Natco that was issued, acquired, or will be settled at a discount. SECTION 5.17 Brokers. Except as set forth in Section 5.17 of the Acquiror's Disclosure Letter, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Acquiror. SECTION 5.18 Intellectual Property. Other than as disclosed in Section 5.19 of the Acquiror's Disclosure Letter, the Acquiror and its Subsidiaries own or hold licenses under or otherwise have the right to use or sublicense, all foreign and domestic patents, trademarks (common law and registered), trademark registration applications, service marks (common law and registered), service mark registration applications, trade names and copyrights, copyright applications, trade secrets, know-how and other proprietary information as are necessary for the conduct of the businesses of the Acquiror and its Subsidiaries as currently conducted except for any such intellectual property as to which the failure to own or hold licenses could not reasonably be expected to have a Material Adverse Effect on the Acquiror. Other than as disclosed in Section 5.19 of the Acquiror's Disclosure Letter, neither the Acquiror nor any of its Subsidiaries is currently in receipt of any notice of infringement or notice of conflict with the asserted rights of others in any patents, trademarks, service marks, trade names, trade secrets and copyrights owned or held by other Persons, except, in each case, for matters that could not reasonably be expected to have a Material Adverse Effect on the Acquiror. Neither the execution and delivery of this Agreement nor consummation of the transactions contemplated hereby will violate or breach the terms or cause any cancellation of any Material license held by the Acquiror or any of its Subsidiaries under any patent, trademark, service mark, trade name, trade secret or copyright. SECTION 5.19 Certain Business Practices. To the Acquiror's Knowledge, as of the date of this Agreement, neither the Acquiror or any of its Subsidiaries nor any director, officer, employee or agent of the Acquiror or any of its Subsidiaries has (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful payments relating to political activity, (ii) made any unlawful payment to any foreign or domestic government official or employee or to any foreign or domestic political party or campaign or violated any provision of the Foreign Corrupt Practices AGREEMENT AND PLAN OF MERGER -30- 36 Act of 1977, as amended, (iii) consummated any transaction, made any payment, entered into any agreement or arrangement or taken any other action in violation of Section 1128B(b) of the Social Security Act, as amended, or (iv) made any other unlawful payment, except for any such matters that could not reasonably be expected to have a Material Adverse Effect on the Acquiror. ARTICLE VI COVENANTS SECTION 6.01 Affirmative Covenants. Each of the Company and the Acquiror hereby covenants and agrees that, prior to the Effective Time, unless otherwise expressly contemplated by this Agreement or consented to in writing by the other, it will and will cause its Subsidiaries: (a) Ordinary Course. To operate its business in the usual and ordinary course consistent with past practices; (b) Maintenance of Organization. to use all reasonable efforts to preserve substantially intact its business organization, maintain its rights and franchises, retain the services of its respective key employees and maintain its relationships with its respective customers and suppliers; (c) Maintenance of Assets. to maintain and keep its properties and assets in as good repair and condition as at present, ordinary wear and tear excepted, and maintain supplies and inventories in quantities consistent with its customary business practice; and (d) Maintenance of Insurance. to use all reasonable efforts to keep in full force and effect insurance and bonds comparable in amount and scope of coverage to that currently maintained; except for any matters that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on such party. SECTION 6.02 Negative Covenants. (a) Except as set forth in Subsection 6.02(a) of the Company's Disclosure Letter, the Company covenants and agrees that, except as expressly contemplated by this Agreement or otherwise consented to in writing by the Acquiror, from the date of this Agreement until the Effective Time, it will not do, and will not permit any of its Subsidiaries to do, any of the following: (i) Issuance of Securities. Offer, sell, issue or grant, or authorize the offering, sale, issuance or grant, of any Equity Securities of the Company, other than issuances of Company Common Stock upon the exercise of Warrants outstanding at the date of this Agreement in accordance with the terms thereof (as in effect on the date of this Agreement). AGREEMENT AND PLAN OF MERGER -31- 37 (ii) Redemptions and Purchases of Securities. (A) Redeem, purchase or acquire, or offer to purchase or acquire, any outstanding Equity Securities of the Company, (B) effect any reorganization or recapitalization; or (C) split, combine or reclassify any of the outstanding Equity Securities of the Company or issue or authorize or propose the issuance of any other Equity Securities in respect of, in lieu of or in substitution for, outstanding Equity Securities of the Company. (iii) Dividends. Declare or pay any dividend on, or make any other distribution in respect of, outstanding shares of capital stock, except for cash dividends payable at the end of each calendar quarter and for any period ending on or before the Effective Time that, in the aggregate, approximate the estimated liability of the holders of Company Common Stock for federal and state income taxes relating to operations of the Company for such calendar quarter or other period immediately prior to the Effective Time and except that the Company may pay a cash dividend on the Company Common Stock in the aggregate amount of $37,000 on or before the Closing Date. (iv) Business Combinations. Acquire, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or in any other manner acquiring, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire any assets of any other Person (other than (x) the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with past practice and (y) other acquisitions of equity interests, assets and businesses in an amount not to exceed $250,000 in the aggregate). (v) Sale of Material Assets. Sell, lease, exchange or otherwise dispose of, or to grant any Lien (other than a Permitted Encumbrance) with respect to, any of the assets of the Company or any of its Subsidiaries that are Material to the Company, except for (x) dispositions of assets and inventories in the ordinary course of business and consistent with past practice and (y) dispositions of assets and purchase money Liens incurred in connection with the original acquisition of assets and secured by the assets acquired in an amount not to exceed $250,000 in the aggregate. (vi) Debt Incurrence. Incur any obligations for borrowed money or purchase money indebtedness that are Material to the Company, whether or not evidenced by a note, bond, debenture or similar instrument, except (A) drawings under credit lines existing at the date of this Agreement, (B) purchase money indebtedness as to which Liens may be granted as permitted by Subsection 6.02(a)(v), and (C) other indebtedness incurred in the ordinary course of business consistent with past practice and in no event (including purchase money indebtedness incurred pursuant to clause (B)) in excess of $250,000. AGREEMENT AND PLAN OF MERGER -32- 38 (vii) Material Contracts. Enter into any Material Contract with any third Person (other than customers and vendors in the ordinary course of business) which provides for an exclusive arrangement with that third Person or is substantially more restrictive on the Company or substantially less advantageous to the Company than Material Contracts existing on the date hereof. (viii) Charter Amendments. Adopt any amendments to its charter or bylaws or other organizational documents that would alter the terms of its capital stock or other equity interests or would have a material adverse effect on the ability of the Company to perform its obligations under this Agreement. (ix) Compensation Increases. (A) increase the compensation payable to or to become payable to any director, executive officer or employee, (B) grant any severance or termination pay; (C) amend or otherwise modify the terms of any outstanding options, warrants or rights the effect of which shall be to make such terms more favorable to the holders thereof; (D) take any action to accelerate the vesting of any outstanding Company Stock Options; (E) amend or take any other actions to increase the amount or accelerate the payment or vesting of any benefit under any Benefit Plan (including the acceleration of vesting, waiving of performance criteria or the adjustment of awards or any other actions permitted upon a change in control of such party); except (i) pursuant to any contract, agreement or other legal obligation of the Company existing at the date of this Agreement, (ii) increases in salary payable or to become payable upon promotion to an office having greater operational responsibilities, (iii), in the case of severance or termination payments, grants made pursuant to the severance policy of the Company existing at the date of this Agreement and (iv) in the case of options, warrants, rights or Benefit Plans, amendments required by ERISA or other applicable law. (x) Employment and Other Agreements. (A) enter into any employment or severance agreement with, any director, officer or employee, either individually or as part of a class of similarly situated persons or (B) establish, adopt or enter into any new Benefit Plan; except employment and severance agreements and Benefit Plans for the benefit of any newly employed or promoted officers or employees, in which case, the terms of such agreements and Benefit Plans shall be reasonably consistent with those existing at the date of this Agreement. (xi) Tax and Accounting Changes. (A) Change any of its methods of accounting in effect at December 31, 1997, except as may be required to comply with GAAP, (B) make or rescind any election relating to Taxes (other than any election which must be made periodically which is made consistent with past practice), (C) settle or compromise any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes (except where the cost to the Company and its Subsidiaries of such settlements or compromises, individually or AGREEMENT AND PLAN OF MERGER -33- 39 in the aggregate, does not exceed $250,000) or (D) change any of its methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of the federal income tax returns for the taxable year ending December 31, 1996, except, in each case, as may be required by Law and for matters that could not reasonably be expected to have a Material Adverse Effect on the Company. (xii) Agreements. Agree in writing or otherwise to do any of the foregoing. (b) The Acquiror covenants and agrees that, except as expressly contemplated by this Agreement or otherwise consented to in writing by the Company, from the date of this Agreement until the Effective Time, it will not do, and will not permit any of its Subsidiaries to do, any of the following: (i) Issuance of Securities. Offer, sell, issue or grant, or authorize the offering, sale, issuance or grant, of any Equity Securities of the Acquiror or any of its Subsidiaries, other than issuances of (A) Acquiror Common Stock or Acquiror Class A Common Stock upon the exercise of Acquiror Stock Options outstanding at the date of this Agreement in accordance with the terms thereof (as in effect on the date of this Agreement), (B) Acquiror Class A Common Stock pursuant to the Investment Agreement, (C) upon the expiration of any restrictions upon issuance of any grant existing at the date of this Agreement of restricted stock or stock bonus pursuant to the terms (as in effect on the date of this Agreement) of any Benefit Plans of the Acquiror or any of its Subsidiaries or (D), periodically, pursuant to the terms (as in effect on the date of this Agreement) of any Benefit Plan of the Acquiror or any of its Subsidiaries. (ii) Redemptions of Securities. Redeem, purchase or acquire, or offer to purchase or acquire, any outstanding Equity Securities of the Acquiror or any of its Subsidiaries (other than (1) any such acquisition by the Acquiror or any of its wholly-owned Subsidiaries directly from any wholly-owned Subsidiary of the Acquiror in exchange for capital contributions or loans to such Subsidiary, (2) any repurchase, forfeiture or retirement of shares of Acquiror Common Stock (or Acquiror Class A Common Stock) or Acquiror Stock Options occurring pursuant to the terms (as in effect on the date of this Agreement) of any existing Benefit Plan of the Acquiror or any of its Subsidiaries, (3) any periodic purchase of Acquiror Common Stock (or Acquiror Class A Common Stock) for allocation to employee's accounts occurring pursuant to the terms (as in effect on the date of this Agreement) of any existing Benefit Plan of the Acquiror or any of its Subsidiaries and (4) any redemption, purchase or acquisition by a Subsidiary that could not reasonably be expected to have a Material Adverse Effect on the Acquiror). (iii) Dividends. Declare or to pay any dividend on, or to make any other distribution in respect of, outstanding shares of capital stock, except for dividends by AGREEMENT AND PLAN OF MERGER -34- 40 a wholly-owned Subsidiary of the Acquiror to the Acquiror or another wholly-owned Subsidiary of the Acquiror. (iv) Charter Amendments. Adopt any amendments to its charter or bylaws or other organizational documents that would alter the terms of the Acquiror's Common Stock other than the Charter Amendment or could reasonably be expected to have a material adverse effect on the ability of the Acquiror to perform its obligations under this Agreement. (v) Agreements. Agree in writing or otherwise to do any of the foregoing. SECTION 6.03 Access and Information. (a) Each of the parties shall, and shall cause its Subsidiaries to, (i) afford to the other party and its officers, directors, employees, accountants, consultants, legal counsel, agents and other representatives (collectively, the "Representatives" of such party) reasonable access at reasonable times upon reasonable prior notice to the officers, employees, agents, properties, offices and other facilities of such party and its Subsidiaries and to their books and records and (ii) furnish promptly to the other party and its Representatives such information concerning the business, properties, contracts, records and personnel of such party and its Subsidiaries (including financial, operating and other data and information) as may be reasonably requested, from time to time, by or on behalf of the other party. (b) If this Agreement is terminated for any reason pursuant to Article IX hereof, a party that has received information in accordance with Section 6.03(a), within ten days after request therefor from the other party, shall return or destroy (and provide the other party within such ten-day time period with a certificate of an executive officer certifying such destruction) all of the information furnished to it and its Representatives pursuant to the provisions of Section 6.03(a) and all internal memoranda, analyses, evaluations and other similar material containing or reflecting any such information, in each case other than information available to the general public without restriction. SECTION 6.04 Confidentiality Agreement. The parties shall comply with, and shall cause their respective Representatives to comply with, all of their respective obligations under the Confidentiality Agreement. SECTION 6.05 Stockholders' Letter. The Company agrees to use all reasonable efforts to obtain from each owner of shares of Company Common Stock of record or, to the Knowledge of the Company, beneficially as of the date of the Company Stockholders' Meeting a Stockholder's Letter dated the date of the Company Stockholders' Meeting and from any Person who shall thereafter but prior to the Closing Date become an owner of Company Common Stock of record or, to the Knowledge of the Company, beneficially a Stockholder's Letter dated the Closing Date. AGREEMENT AND PLAN OF MERGER -35- 41 ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.01 Meeting of Stockholders. The Company shall, promptly after the date of this Agreement, take all actions necessary in accordance with the Corporate Statute and its certificate of incorporation and bylaws to convene a special meeting of the Company's stockholders to consider approval and adoption of this Agreement (the "Company Stockholders' Meeting"), and the Company shall consult with the Acquiror in connection therewith. The Company shall use all reasonable efforts to secure the vote or consent of stockholders required by the Corporate Statute and its certificate of incorporation and bylaws to approve and adopt this Agreement. SECTION 7.02 Appropriate Action; Consents; Filings. (a) The Company and the Acquiror shall each use all reasonable efforts (i) to take, or to cause to be taken, all appropriate action, and to do, or to cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement, (ii) to obtain from any Governmental Entities any Permits or Orders required to be obtained or made by the Acquiror or the Company or any of their Subsidiaries in connection with the authorization, execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, including the Merger, (iii) to make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Merger required under (A) the Securities Act (in the case of Acquiror) and the Exchange Act and the Regulations thereunder, and any other applicable federal or state securities Laws, (B) the HSR Act and (C) any other applicable Law. The Acquiror and the Company shall cooperate with each other in connection with the making of all such filings, including providing copies of all such documents to the nonfiling party and its advisors prior to filings and, if requested, shall accept all reasonable additions, deletions or changes suggested in connection therewith. The Company and the Acquiror shall furnish all information required for any application or other filing to be made pursuant to any applicable Law or any applicable Regulations of any Governmental Authority in connection with the transactions contemplated by this Agreement. (b) Each of the Company and the Acquiror shall give prompt notice to the other of (i) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the Merger, (ii) any notice or other communication from any Governmental Authority in connection with the Merger, (iii) any actions, suits, claims, investigations or proceedings commenced or threatened in writing against, relating to or involving or otherwise affecting the Company, the Acquiror or their Subsidiaries that relate to the consummation of the Merger, (iv) the occurrence of a default or event that, with notice or lapse of time or both, will become a default under any Material Contract of the Acquiror or of the Company, and (v) any change that is reasonably likely to have a Material Adverse Effect on the Company or the Acquiror or is likely to delay or impede the ability of either the Acquiror or the Company to consummate the transactions contemplated by this Agreement or to fulfill their respective obligations set forth herein. AGREEMENT AND PLAN OF MERGER -36- 42 (c) The Acquiror and the Company agree to cooperate and use all reasonable efforts vigorously to contest and resist any action, including legislative, administrative or judicial action, and to have vacated, lifted, reversed or overturned any Order (whether temporary, preliminary or permanent) of any Court or Governmental Authority that is in effect and that restricts, prevents or prohibits the consummation of the Merger or any other transactions contemplated by this Agreement, including the vigorous pursuit of all available avenues of administrative and judicial appeal and all available legislative action. The Acquiror and the Company also agree to take any and all actions, including the disposition of assets or the withdrawal from doing business in particular jurisdictions, required by any Court or Governmental Authority as a condition to the granting of any Permit or Order necessary for the consummation of the Merger or as may be required to avoid, lift, vacate or reverse any administrative or judicial action that would otherwise cause any condition to Closing not to be satisfied; provided, however, that in no event shall either party take, or be required to take, any action that could reasonably be expected to have an Material Adverse Effect on the Acquiror or the Company. (d) (i) Each of the Company and Acquiror shall give (or shall cause their respective Subsidiaries to give) any notices to third Persons, and use, and cause their respective Subsidiaries to use, all reasonable efforts to obtain any consents from third Persons (A) necessary, proper or advisable to consummate the transactions contemplated by this Agreement, (B) otherwise required under any contracts, licenses, leases or other agreements in connection with the consummation of the transactions contemplated hereby or (C) required to prevent a Material Adverse Effect on the Company from occurring prior to or after the Effective Time or a Material Adverse Effect on the Acquiror from occurring after the Effective Time. (ii) If any party shall fail to obtain any consent from a third Person described in Subsection (d)(i) above, such party shall use all reasonable efforts, and shall take any such actions reasonably requested by the other parties, to limit the adverse effect upon the Company and Acquiror, their respective Subsidiaries, and their respective businesses resulting, or that could reasonably be expected to result after the Effective Time, from the failure to obtain such consent. SECTION 7.03 Tax Treatment. Each party hereto shall use all reasonable efforts to cause the Merger to qualify, and shall not take, and shall use all reasonable efforts to prevent any Affiliate of such party from taking, any actions which could prevent the Merger from qualifying as a reorganization under the provisions of Section 368(a) of the Code. SECTION 7.04 Public Announcements. The Acquiror and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Merger and shall not issue any such press release or make any such public statement prior to such consultation. AGREEMENT AND PLAN OF MERGER -37- 43 SECTION 7.05 Exercise or Assumption of Warrants. BOCP joins in this Agreement for the limited purpose of agreeing to exercise the Warrants immediately after the Closing by providing, in the case of the Warrants issued by the Company, to the Acquiror and, in the case of the Warrants granted by stockholders of the Company, to such stockholders the exercise consideration, and by executing and delivering all such documents and instruments, required by the terms of the Warrants to be provided upon the exercise thereof. In connection therewith, the Acquiror agrees to issue the Merger Consideration Per Share of Company Common Stock for each share of Company Common Stock as to which the Warrants issued by the Company are exercised in accordance with the terms and provisions thereof, and agrees to make available at the Closing certificates evidencing the Acquiror Class B Common Stock issuable upon exercise of all the Warrants, such certificates to be registered in the name of BOCP in such denominations as shall be requested by BOCP at least two Business Days prior to the Closing. All such shares of Acquiror Class B Common Stock shall be deemed, for purposes of subsection B of Section II of Article Fourth of the Certificate of Incorporation of the Acquiror, as amended by the Charter Amendment, to have been "received pursuant to the Merger Agreement" by BOCP. SECTION 7.06 Employee Benefit Plans. Until the first anniversary of the Effective Time, the Acquiror shall and shall cause the Surviving Corporation to provide each employee of the Company at the Effective Time ("Company Participants") with employee benefits after the Effective Time that are substantially comparable to similarly situated employees of the Acquiror; provided, however, that for a period of time beginning at the Effective Time and ending no later than December 31, 1998, the Acquiror may satisfy the requirements of the preceding clause by continuing to maintain the Benefit Plans of the Company existing at the Effective Time without change, except for changes required by applicable law and changes not adverse to the Company Participants. The Benefit Plans of the Acquiror and the Surviving Corporation in which Company Participants are eligible to participate shall provide Company Participants with credit for service prior to the Effective Time with the Company and its predecessors, including The Dow Chemical Company. SECTION 7.07 Indemnification of Directors and Officers. (a) Until six years from the Effective Time, the certificate of incorporation and bylaws of the Surviving Corporation as in effect immediately after the Effective Time shall not be amended to reduce or limit the rights of indemnity afforded to the present and former directors and officers of the Company thereunder or as to the ability of the Company to indemnify such persons or to hinder, delay or make more difficult the exercise of such rights of indemnity or the ability to indemnify. The Surviving Corporation will at all times exercise the powers granted to it by its certificate of incorporation, its bylaws and applicable law to indemnify to the fullest extent possible the present and former directors, officers, employees and agents of the Company against claims made against them arising from their service in such capacities prior to the Effective Time. (b) If any claim or claims shall, subsequent to the Effective Time and within six years thereafter, be made against any present or former director, officer, employee or agent of the Company based on or arising out of the services of such Person prior to the Effective AGREEMENT AND PLAN OF MERGER -38- 44 Time in the capacity of such Person as a director, officer, employee or agent of the Company, the provisions of subsection (a) of this Section respecting the certificate of incorporation and bylaws of the Surviving Corporation shall continue in effect until the final disposition of all such claims. (c) The Acquiror hereby agrees after the Effective Time to guarantee the payment of the Surviving Corporation's indemnification obligations described in Subsection 7.07(a) up to an amount determined as of the Effective Time equal to (i) the fair market value of any assets of the Surviving Corporation or any of its Subsidiaries distributed to the Acquiror or any of its Subsidiaries (other than the Surviving Corporation and its Subsidiaries), minus (ii) any liabilities of the Surviving Corporation or any of its Subsidiaries assumed by the Acquiror or any of its Subsidiaries (other than the Surviving Corporation and its Subsidiaries), minus (iii) the fair market value of any assets of the Acquiror or any of its Subsidiaries (other than the Surviving Corporation and its Subsidiaries) contributed to the Surviving Corporation or any of its Subsidiaries and (iv) plus any liabilities of the Acquiror or any of its Subsidiaries (other than the Surviving Corporation and its Subsidiaries) assumed by the Surviving Corporation or any of its Subsidiaries. If any other entity is merged with or into the Surviving Corporation or the Surviving Corporation acquires any other Material business or Material portion of the assets of another entity, the Acquiror shall assume all obligations to indemnify the former directors and officers of the Company hereunder. (d) Notwithstanding Subsection (a), (b) or (c) of this Section 7.07, the Acquiror and the Surviving Corporation shall be released from the obligations imposed by such subsection if the Acquiror shall assume the obligations of the Surviving Corporation thereunder by operation of Law or otherwise. Notwithstanding anything to the contrary in this Section 7.07, neither the Acquiror nor the Surviving Corporation shall be liable for any settlement effected without its written consent, which shall not be unreasonably withheld. (e) The provisions of this Section 7.07 are intended to be for the benefit of, and shall be enforceable by, each Person entitled to indemnification hereunder and the heirs and representatives of such Person. SECTION 7.08 Event Notices. From and after the date of this Agreement until the Effective Time, each party hereto shall promptly notify the other party hereto of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any condition to the obligations of such party to effect the Merger and the other transactions contemplated by this Agreement not to be satisfied and (ii) the failure of such party to comply with any covenant or agreement to be complied with by it pursuant to this Agreement which would be likely to result in any condition to the obligations of such party to effect the Merger and the other transactions contemplated by this Agreement not to be satisfied. No delivery of any notice pursuant to this Section 7.08 shall cure any breach of any representation or warranty or any failure to comply with any covenant or agreement of such party contained in this Agreement or otherwise limit or affect the remedies available hereunder to the party receiving such notice. AGREEMENT AND PLAN OF MERGER -39- 45 SECTION 7.09 Company Tax Audit. The Designated Company Stockholders shall have the right to defend, at their sole cost, any audit of the Company for any taxable year ending on or prior to the Closing Date and shall have the right to defend all tax issues arising in any such year. The Designated Company Stockholders shall be entitled to make all decisions relating to any such audit, including the right to settle any issue. The Acquiror and Natco agree to cooperate in any manner reasonably requested by the Designated Company Stockholders, including providing all requested information in Acquiror's or Natco's possession and signing any documents or forms, relating to any such audit. To the extent necessary to implement the foregoing, the Acquiror and Natco agree to execute, at the Closing, a power of attorney in favor of Douglas P. Heller to conduct all and any of the foregoing activities on behalf of the Company, and the Acquiror agrees that it will not revoke such power of attorney during the pendency of any audit contemplated by this Section 7.09. SECTION 7.10 Escrow Arrangement. At the Closing, the certificates evidencing 450,000 shares of Class B Common Stock (the "Escrow Shares") issuable to the Designated Company Stockholders but for the provisions of this Section 7.10 shall be deposited in escrow pursuant to an escrow agreement with Chase Bank of Texas, N.A., as escrow agent (the "Escrow Agent"), in form and substance substantially similar to the form thereof attached hereto as Annex C (the "Escrow Agreement"). The Escrow Shares shall be withheld from the shares of Class B Common Stock otherwise to be issued to the Designated Company Stockholders pursuant to Section 3.01 promptly after the Effective Time pro rata in accordance with the number of shares of Class B Common Stock to be issued to each (except that no fractional shares shall be allocated to any stockholder). On September 30, 1999 or as soon thereafter as reasonably practicable, the Acquiror and the Representative (the "Escrow Parties") shall give written instructions to the Esrow Agent with respect to the disposition of the Escrow Shares in accordance with the provisions of this Section 7.10 and the Escrow Agreement. The Escrow Parties shall instruct the Escrow Agent to release from escrow and deliver to the Designated Company Stockholders that number of Escrow Shares that shall equal the number obtained by: (i) dividing (A) the aggregate amount of revenues, if any, billed in the ordinary course of business by the Surviving Corporation to the CTOC Project through September 30, 1999 by (B) $1,000; and (ii) multiplying the quotient by 22. The Escrow Parties shall concurrently instruct the Escrow Agent to release from escrow and deliver to the Designated Company Stockholders any other capital stock or securities, cash or other property theretofore delivered to the Escrow Agent and held in escrow to the extent that such capital stock, securities, cash or other property has been distributed or paid with respect to the Escrow Shares then being released from escrow. The Escrow Shares released from escrow (and such capital stock, securities, cash or other property) shall be delivered to the Designated Company Stockholders pro rata in accordance with the number of shares of Class B Common Stock issued to each pursuant to Section 3.01 promptly after the Effective Time (except that no fractional shares shall be allocated to any stockholder). Any remaining Escrow Shares shall be delivered to the Acquiror for cancellation and restoration to the status of authorized but unissued Class B Common Stock. SECTION 7.11 The Cynara Name. The Acquiror and the Company shall take all reasonable actions necessary or desirable in order to preserve the availability of the name "The AGREEMENT AND PLAN OF MERGER -40- 46 Cynara Company" and all variations thereof under the Corporate Statute and under applicable tradename Laws. SECTION 7.12 Natco. The Acquiror shall take all action necessary to cause Natco to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. SECTION 7.13 Avoidance of Diminution of Put. The Acquiror hereby agrees, for the benefit of the Designated Company Stockholders, that it will use all reasonable efforts, in amending the Bank Credit Agreement after the Effective Time or in negotiating any other credit agreement in lieu of or in addition to the Bank Credit Agreement, to avoid undertaking covenants that limit or restrict the ability of the Acquiror to perform its obligations with respect to any Put (as defined therein) exercised pursuant to the terms of Section II (B) of the Certificate of Incorporation, as amended, of the Acquiror. ARTICLE VIII CLOSING CONDITIONS SECTION 8.01 Conditions to Obligations of Each Party Under This Agreement. The respective obligations of each party to effect the Merger and the other transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived by the parties hereto, in whole or in part, to the extent permitted by applicable Law: (a) Stockholder Approval. This Agreement shall have been approved and adopted by the requisite vote of the stockholders of the Company as required by the Corporate Statute. (b) No Order. No Governmental Authority or Court shall have enacted, issued, promulgated, enforced or entered any Law, Regulation or Order (whether temporary, preliminary or permanent) that is in effect and that has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger. (c) HSR Act. The applicable waiting period under the HSR Act shall have expired or been terminated. (d) Foreign Governmental Authorities. The applicable waiting period under any competition Laws, Regulations and Orders of foreign Governmental Authorities, as set forth in the Acquiror's Disclosure Letter and the Company's Disclosure Letter, shall have expired or been terminated and any Permits or Orders required thereunder in order to consummate the Merger shall have been received by the parties hereto. AGREEMENT AND PLAN OF MERGER -41- 47 (e) Dissenting Stockholders. No holders of Company Common Stock shall have dissented from the Merger under conditions such that the aggregate amount of the Merger Consideration otherwise payable with respect to shares of Company Common Stock held by such holders, together with the Merger Expenses payable by the Company, shall equal or exceed nine percent (9%) of the total Merger Consideration payable with respect to all shares of Company Common Stock assuming no such holders dissented from the Merger. (f) Registration Rights Agreement. The Registration Rights Agreement among the Acquiror and the Designated Company Stockholders shall have been executed and delivered by such parties. (g) Charter Amendment. The Charter Amendment shall have been approved by the Stockholders, shall have been filed with the Secretary of State of the State of Delaware and shall have become effective in accordance with the Charter Amendment. SECTION 8.02 Additional Conditions to Obligations of the Acquiror Companies. The obligations of the Acquiror Companies to effect the Merger and the other transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived by the Acquiror Companies, in whole or in part, to the extent permitted by applicable Law: (a) Representations and Warranties. Each of the representations and warranties of the Company contained in this Agreement that is qualified as to materiality shall be true and correct in all respects and each of such representations and warranties that is not so qualified shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made again on and as of the Closing Date. The Acquiror Companies shall have received a certificate of the President and the Chief Financial Officer of the Company, dated the Closing Date, to such effect. (b) Agreements and Covenants. The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date. The Acquiror Companies shall have received a certificate of the President and the Chief Financial Officer of the Company, dated the date of the Closing Date, to such effect. (c) Tax Opinion. The Acquiror shall have received the opinion dated on or prior to the Closing Date of Vinson & Elkins LLP to the effect that (i) the Merger will constitute a reorganization under section 368(a) of the Code, (ii) the Acquiror, the Company and Natco will each be a party to that reorganization, and (iii) no gain or loss will be recognized by the Acquiror, the Company or Natco by reason of the Merger. (d) Stockholders' Letters. The Acquiror shall have received from each owner of shares of Company Common Stock of record or, to the Knowledge of the Company, beneficially as of the date of the Company Stockholders' Meeting a Stockholder's Letter AGREEMENT AND PLAN OF MERGER -42- 48 dated the date of the Company Stockholders' Meeting and from any Person who shall thereafter but prior to the Closing Date become an owner of Company Common Stock of record or, to the Knowledge of the Company, beneficially a Stockholder's Letter dated the Closing Date. (e) Financing. The lenders under the Bank Credit Agreement shall have made available funds to National Tank Company for the purpose of funding, and in an amount sufficient to fund, the cash portion of the Merger Consideration. SECTION 8.03 Additional Conditions to Obligations of the Company. The obligations of the Company to effect the Merger and the other transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived by the Company, in whole or in part, to the extent permitted by applicable Law: (a) Representations and Warranties. Each of the representations and warranties of the Acquiror Companies contained in this Agreement that is qualified as to materiality shall be true and correct in all respects and each of such representations and warranties that is not so qualified shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made again on and as of the Closing Date. The Company shall have received a certificate of the President and the Chief Financial Officer of each of the Acquiror Companies, dated the Closing Date, to such effect. (b) Agreements and Covenants. The Acquiror Companies shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Closing Date. The Company shall have received a certificate of the President and the Chief Financial Officer of each of the Acquiror Companies, dated the Closing Date, to such effect. (c) Tax Opinion. The Company shall have received the opinion dated on or prior to the Closing Date of Reed Smith Shaw & McClay, LLP to the effect that (i) the Merger will constitute a reorganization under section 368(a) of the Code, (ii) the Acquiror, the Company and Natco will each be a party to that reorganization, and (iii) no gain or loss will be recognized by the stockholders of the Company upon the receipt of shares of Acquiror Class B Common Stock in exchange for shares of Company Common Stock pursuant to the Merger except with respect to the cash portion of the Merger Consideration Per Share of Company Common Stock, any cash received in lieu fractional share interests, and any of the Conditional Earned Shares, the Accelerated Earned Shares and Earned Shares treated as imputed interest. (d) Bank Debt. The Acquiror Companies shall have either paid in full the outstanding indebtedness under the Company's credit facility at Banc One, Texas, N.A. or agreed with such bank to cause the Surviving Corporation to assume the indebtedness under such credit facility. AGREEMENT AND PLAN OF MERGER -43- 49 (e) Stockholders' Agreement. The Stockholders' Agreement shall have been executed and delivered by Cap I, Cap II and the Designated Company Stockholders. (f) Investment Agreement. The transactions contemplated by the Investment Agreement shall have been consummated. ARTICLE IX INDEMNIFICATION SECTION 9.01 Survival of Representations, Warranties, Covenants and Agreements. The representations and warranties of the parties contained in Articles IV and V (other than those contained in Sections 4.14 and 5.14) shall survive both the Closing and any investigation by the parties with respect thereto but shall terminate and be of no further force or effect on the first anniversary of the Closing Date. The representations and warranties contained in Section 4.14 and 5.14 shall survive the Closing and any investigation by the parties with respect thereto but shall terminate and be of no further force or effect on the earlier of the fourth anniversary of the Closing Date or, in the case of Section 4.14 or Section 5.14, respectively, the date that is thirty (30) days after the results of an audit by the Internal Revenue Service of the federal income tax returns of the Company or the Acquiror through the Closing have been reported to the Company or the Representative, respectively. Notwithstanding the foregoing, any such representation or warranty as to which a bona fide claim relating thereto is asserted in writing in accordance with Section 9.02 during such survival period shall, with respect only to such claim, survive such survival period pending resolution thereof. The covenants and agreements in this Article IX shall survive the Closing and shall remain in full force and effect for such period as is necessary to resolve any bona fide claim made with respect to any representation or warranty contained in this Agreement during the survival period thereof. The remaining covenants and agreements of the parties hereto contained in this Agreement shall survive the Closing without any contractual limitation on the period of survival. SECTION 9.02 General Indemnification. (a) If the transactions contemplated hereby to occur at the Closing are effected, the Acquiror, on the one hand, hereby agrees, and the Designated Company Stockholders, on the other, hereby severally agree (the Acquiror and such holders together each being an "Indemnifying Party"), from and after the Closing, to indemnify and hold harmless all those persons who hold Company Common Stock immediately prior to the Effective Time, on the one hand, and the Acquiror, on the other (each such group or person being the "Indemnified Party") against any losses, claims, damages or liabilities ("Losses") that such Indemnified Party shall actually incur, to the extent that such Losses (or actions, suits or proceedings in respect thereof and any appeals therefrom ("Proceedings")): AGREEMENT AND PLAN OF MERGER -44- 50 (i) arise out of or are based upon any allegation that any representation or warranty made herein in Article IV or V for the benefit of the Acquiror or the Company, respectively, is untrue or has been breached in any respect; or (ii) arise out of or are based upon any allegation that any covenant or agreement made herein for the benefit of the Indemnified Party by the Indemnifying Party has not been performed in accordance with its terms; and will reimburse the Indemnified Party for any legal or other expenses reasonably incurred by it in connection with investigating or defending against any such Losses or Proceedings. Notwithstanding the foregoing, the Indemnifying Party shall be severally liable to the Indemnified Party under this Section only for the amount of individual Losses incurred by the Indemnified Party that exceed $250,000 in the aggregate; provided, however, that the amount of such Losses that are subject to indemnification hereunder shall not exceed $2,500,000 in the aggregate for all Designated Company Stockholders on the one hand and the Acquiror on the other; and provided, further, that the Losses incurred by an Indemnified Party shall, for purposes of determining the threshold level thereof in accordance with this sentence and otherwise, be offset by (i) the proceeds of any insurance received by the Indemnified Party with respect thereto and (ii) the amount of any federal income tax benefit actually realized by the Indemnified Party with respect thereto. No Designated Company Stockholder shall be liable hereunder for more than his pro rata share of Losses (based on the number of shares of Company Common Stock owned immediately prior to the Effective Time, including for this purpose the shares of Company Common Stock issuable upon exercise of all the Warrants) and may elect, in his sole discretion, to pay such Losses in cash or in Acquiror Class B Common Stock or both. If the Designated Company Stockholder shall elect to pay all or any portion of such Losses in Acquiror Class B Common Stock, the value of such Acquiror Class B Common Stock shall be deemed to be $13.00 per share, subject to adjustment pursuant to the last sentence of Section 3.01(a) or Section 3.01(h), or both, as the case may be. (b) Promptly after receipt by the Indemnified Party under subsection (a) of this Section of notice of a Loss or the commencement of any Proceeding against which it believes it is indemnified under this Section, the Indemnified Party shall, if a claim in respect thereto is to be made against the Indemnifying Party under this Section, notify the Indemnifying Party in writing of the commencement thereof; provided, however, that the omission so to notify the Indemnifying Party shall not relieve it from any liability which it may have to the Indemnified Party to the extent that the Indemnifying Party is not prejudiced by such omission. (c) The Indemnifying Party shall, within thirty (30) days after receipt of a notice of Loss or Proceeding given pursuant to subsection (b) of this Section, either (i) acknowledge liability, as between the Indemnifying Party and the Indemnified Party, for such Loss or the amount in controversy in such Proceeding and pay the Indemnified Party the amount of such Loss or the amount in controversy in such Proceeding in cash in immediately available funds AGREEMENT AND PLAN OF MERGER -45- 51 (or establish by agreement with the Indemnified Party an alternative payment schedule), (ii) acknowledge liability, as between the Indemnifying Party and the Indemnified Party, for such Loss or the amount in controversy in such Proceeding, disavow the validity of the Loss or Proceeding or the amount thereof and, in the case of a proceeding to the extent that it shall so desire in accordance with subsection (d) of this Section, assume the legal defense thereof, or (iii) object (or reserve the right to object until additional information is obtained) to the claim for indemnification or the amount thereof, setting forth the grounds therefor in reasonable detail. If the Indemnifying Party does not respond to the Indemnified Party as provided in this subsection within such 30-day period, the Indemnifying Party shall be deemed to have acknowledged its liability for such indemnification claim in accordance with clause (i) of this subsection and the Indemnified Party may exercise any and all of its rights under applicable law to collect such amount. (d) In the case of a Loss as to which the Indemnifying Party shall have responded pursuant to clause (ii) or (iii) of subsection (c) above, the parties shall attempt in good faith to resolve their differences for a period of 60 days following receipt by the Indemnified Party or Parties of the response of the Indemnifying Party pursuant to subsection (c) above and, if the parties are unable to resolve their differences within such period, the Indemnified Party or Parties may submit the matter to arbitration in accordance with the provisions of Section 11.09. (e) If a Proceeding shall be brought against an Indemnified Party and it shall notify the Indemnifying Party thereof in accordance with subsection (b) of this Section, the Indemnifying Party shall, if it shall have responded to such notice in accordance with clause (ii) of subsection (c) of this Section, be entitled to assume the legal defense thereof with counsel reasonably satisfactory to the Indemnified Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such claim or such action, the Indemnifying Party shall not be liable to the Indemnified Party under this Section for any attorney's fees or other expenses (except reasonable costs of investigation) subsequently incurred by the Indemnified Party in connection with the defense thereof. If the Indemnifying Party does not assume the defense of a Proceeding as to which it has acknowledged liability, as between itself and the Indemnified Party, pursuant to clause (ii) of subsection (c) of this Section, the Indemnified Party may require the Indemnifying Party to reimburse it on a current basis for its reasonable expenses of investigation, reasonable attorney's fees and expenses and reasonable out-of-pocket expenses incurred in the defense thereof and, subject to the provisions of subsection (f) of this Section, the Indemnifying Party shall be bound by the result obtained with respect thereto by the Indemnified Party. (f) An Indemnifying Party will not, without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened Proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the Indemnified AGREEMENT AND PLAN OF MERGER -46- 52 Party is an actual or potential party to such Proceeding) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Party from all liability arising out of such Proceeding. If the Indemnifying Party has responded to the Indemnified Party pursuant to clause (i) of subsection (c) of this Section, the Indemnified Party may settle or compromise or consent to the entry of any judgment with respect to the Proceeding that was the subject of notice to the Indemnifying Party pursuant to subsection (c) of this Section without the consent of the Indemnifying Party (but no such settlement, compromise or consent shall increase the indemnification obligation of the Indemnifying Party to which it has consented pursuant to clause (i) of subsection (c) of this Section). An Indemnified Party will not otherwise, without the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened Proceeding, but, if such Proceeding is settled or compromised or if there is entered any judgment with respect to any such Proceeding, in either case with the consent of the Indemnifying Party, or if there be a final judgment of the plaintiff in any such Proceeding, the Indemnifying Party agrees to indemnify and hold harmless any Indemnified Party from and against any loss or liability by reason of such settlement, compromise or judgment. (g) From and after the Closing, the provisions of this Section shall be the sole and exclusive remedy of each party hereto for (i) any breach of the other party's representations or warranties contained in this Agreement or (ii) any breach of the other party's covenants or agreements contained in this Agreement. (h) From and after the Closing, all representations, warranties, covenants and agreements herein to or for the benefit of the Company by the Acquiror shall be deemed to be representations, warranties, covenants and agreements directly to, with and for the benefit of the Designated Company Stockholders and the Designated Company Stockholders shall have the right to indemnification in accordance with Article IX from the Acquiror in connection therewith. ARTICLE X TERMINATION, AMENDMENT AND WAIVER SECTION 10.01 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of this Agreement by the stockholders of the Company: (a) by mutual consent of the Acquiror and the Company; (b) by the Acquiror, upon a breach of any covenant or agreement on the part of the Company set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Subsection 8.02(a) or Subsection 8.02(b) would not be satisfied (a "Terminating Company Breach"); provided that, if (i) such Terminating Company Breach is curable by the Company through the exercise of reasonable efforts and (ii) the Company is exercising reasonable AGREEMENT AND PLAN OF MERGER -47- 53 efforts to cure the Terminating Company Breach, the Acquiror may not, for such period not exceeding 30 days as the Company continues to exert such efforts, terminate this Agreement under this Subsection 9.01(b); (c) by the Company, upon breach of any covenant or agreement on the part of the Acquiror Companies set forth in this Agreement, or if any representation or warranty of the Acquiror Companies shall have become untrue, in either case such that the conditions set forth in Subsection 8.03(a) or Subsection 8.03(b) would not be satisfied (a "Terminating Acquiror Breach"); provided that, if (i) such Terminating Acquiror Breach is curable by the Company through the exercise of reasonable efforts and (ii) the Acquiror is exercising reasonable efforts to cure the Terminating Acquiror Breach, the Company may not terminate, for such period not exceeding 30 days as the Acquiror continues to exert such efforts, this Agreement under this Subsection 9.01(c); (d) by either Acquiror or the Company, if there shall be any Order which is final and nonappealable preventing the consummation of the Merger, unless the party relying on such Order has not complied with its obligations under Section 7.03; (e) by either Acquiror or the Company, if the Merger shall not have been consummated before November 30, 1998; or (f) by either Acquiror or the Company, if this Agreement shall fail to receive the requisite vote for approval and adoption by the stockholders of the Company at the Stockholders' Meeting. The right of any party hereto to terminate this Agreement pursuant to this Section 9.01 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any party hereto, any Person controlling any such party or any of their respective officers, directors, representatives or agents, whether prior to or after the execution of this Agreement. SECTION 10.02 Effect of Termination. Except as provided in Section 10.05 or Section 10.01 of this Agreement, in the event of the termination of this Agreement pursuant to Section 10.01, this Agreement shall forthwith become void, there shall be no liability on the part of the Acquiror Companies or the Company or any of their respective officers or directors to the other and all rights and obligations of any party hereto shall cease, except that nothing herein shall relieve any party from liability for any breach of this Agreement. SECTION 10.03 Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the stockholders of the Company, no amendment may be made which would reduce the amount or change the type of consideration into which each share of Company Common Stock shall be converted pursuant to this Agreement upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. AGREEMENT AND PLAN OF MERGER -48- 54 SECTION 10.04 Waiver. At any time prior to the Effective Time, any 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 of the other party contained herein or in any document delivered pursuant hereto and (c) waive compliance by the other party 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 or parties to be bound thereby. For purposes of this Section 10.04, the Acquiror Companies shall be deemed to be one party. SECTION 10.05 Fees, Expenses and Other Payments. All Expenses incurred by the parties hereto shall be borne solely and entirely by the party which has incurred such Expenses; provided, however, that the Acquiror may, at its option, pay any Expenses of the Company and, provided further, that the Company shall bear all expenses of Reed Smith Shaw & McClay LLP in connection with this Agreement and the transactions contemplated herein. ARTICLE XI GENERAL PROVISIONS SECTION 11.01 Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given upon receipt, if delivered personally, mailed by registered or certified mail (postage prepaid, return receipt requested) to the parties at the following addresses or sent by electronic transmission to the telecopier number specified below: (a) If to any of the Acquiror Companies, to: NATCO Group Inc. 2950 North Loop West Suite 750 Houston, Texas 77092 Attention: William B. Wiener III Senior Vice President and Chief Financial Officer Telecopier No.: 713/683-7841 with a copy to: Vinson & Elkins L.L.P. First City Tower 1001 Fannin Houston, Texas 77002-6760 Attention: William E. Joor III Telecopier No.: (713) 758-2346 AGREEMENT AND PLAN OF MERGER -49- 55 (b) If to the Company, to: The Cynara Company 2925 Briarpark Suite 1200 Houston, Texas 77042 Attention: Richard D. Peters Telecopier No.: (713) 975-9611 with copies to: George K. Hickox, Jr. Heller Hickox Dimeling Schreiber & Park 1629 Locust Street Philadelphia, Pennsylvania 19103 Telecopier No.: (215) 546-1041 and Lori L. Lasher, Esquire Reed Smith Shaw & McClay, LLP 2500 One Liberty Place 1650 Market Street Philadelphia, Pennsylvania 19103 Telecopier No.: (215) 851-1420 or to such other address or telecopier number as any party may, from time to time, designate in a written notice given in a like manner. Notice given by telecopier shall be deemed delivered on the day the sender receives telecopier confirmation that such notice was received at the telecopier number of the addressee. Notice given by mail as set out above shall be deemed delivered three days after the date the same is postmarked. SECTION 11.02 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 11.03 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 materially 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 extent possible. AGREEMENT AND PLAN OF MERGER -50- 56 SECTION 11.04 Entire Agreement. This Agreement (together with the Annexes, the Company's Disclosure Letter, the Acquiror's Disclosure Letter and the Confidentiality Agreement) constitutes the entire agreement of the parties, and supersedes all prior agreements and undertakings, both written and oral, among the parties, with respect to the subject matter hereof. SECTION 11.05 Assignment. This Agreement shall not be assigned by operation of Law or otherwise. SECTION 11.06 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and, other than pursuant to Sections 7.08 and 7.09 hereof, nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. SECTION 11.07 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive to, and not exclusive of, any rights or remedies otherwise available. SECTION 11.08 Governing Law. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of Texas, regardless of the Laws that might otherwise govern under applicable principles of conflicts of law; provided, however, that any matter involving the internal corporate affairs of any corporate party hereto shall be governed by the provisions of the Corporate Statute. SECTION 11.09 Arbitration. Any dispute referenced in subsection (g) of Section 3.01 or subsection (d) of Section 9.02 shall be resolved by binding arbitration under the Commercial Arbitration Rules (the "AAA Rules") of the American Arbitration Association (the "AAA"). This arbitration provision is expressly made pursuant to and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-14. The parties hereto agree that, pursuant to Section 9 of the Federal Arbitration Act, a judgment of a United States District Court of competent jurisdiction shall be entered upon the award made pursuant to the arbitration. Three arbitrators, who shall have the authority to allocate the costs of any arbitration initiated under this paragraph, shall be selected according to the AAA Rules or, if such AAA Rules do not so provide, then in accordance with the following sentence within ten (10) days of the submission to the AAA of the response to the statement of claim or the date on which any such response is due, whichever is earlier. The alternative selection shall be made as follows: one by a majority in interest of the Designated Company Stockholders, one by the Acquiror and one by the two so selected. The arbitrators shall conduct the arbitration in accordance with the Federal Rules of Evidence. The arbitrators shall decide the amount and extent of pre-hearing discovery which is appropriate. The arbitrators shall have the power to enter any award of monetary or injunctive relief (including the power to issue permanent injunctive relief and also the power to reconsider any prior request for immediate injunctive relief by either of the parties and any order as to immediate injunctive relief previously AGREEMENT AND PLAN OF MERGER -51- 57 granted or denied by a court in response to a request therefor by either of the parties), including the power to render an award as provided in Rule 43 of the AAA Rules; provided, however, that the arbitrators shall not have the power to award punitive damages under any circumstances (whether styled as punitive, exemplary, or treble damages, or any penalty or punitive type of damages) regardless of whether such damages may be available under applicable law, the parties hereby waiving their rights, if any, to recover any such damages, whether in arbitration or litigation. The arbitrators shall award the prevailing party its costs and reasonable attorney's fees, and the losing party shall bear the entire cost of the arbitration, including the arbitrators' fees. The arbitration award may be enforced in any court having jurisdiction over the parties and the subject matter of the arbitration. The arbitration shall be held in Houston, Texas. SECTION 11.10 Counterparts. This Agreement may be executed in multiple counterparts, and by the different parties hereto in separate 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. AGREEMENT AND PLAN OF MERGER -52- 58 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. NATCO GROUP INC. By: /s/ NATHANIEL A. GREGORY ------------------------------------ Name: Nathaniel A. Gregory Title: Chairman and Chief Executive Officer NATIONAL TANK COMPANY By: /s/ WILLIAM B. WIENER III ------------------------------------ Name: William B. Wiener III Title: Senior Vice President and Treasurer NATCO ACQUISITION COMPANY By: /s/ NATHANIEL A. GREGORY ------------------------------------ Name: Nathaniel A. Gregory Title: Chairman and Chief Executive Officer THE CYNARA COMPANY By: /s/ RICHARD D. PETERS ------------------------------------ Name: Richard D. Peters Title: President THE DESIGNATED COMPANY STOCKHOLDERS /s/ WILLIAM R. DIMELING ------------------------------------------- William R. Dimeling /s/ ROBERT J. HAMAKER ------------------------------------------- Robert J. Hamaker /s/ DOUGLAS P. HELLER ------------------------------------------- Douglas P. Heller /s/ GEORGE K. HICKOX, JR. ------------------------------------------- George K. Hickox, Jr. AGREEMENT AND PLAN OF MERGER -53- 59 /s/ RALPH M. KELLY ------------------------------------------- Ralph M. Kelly /s/ STEVEN G. PARK ------------------------------------------- Steven G. Park /s/ RICHARD R. SCHREIBER ------------------------------------------- Richard R. Schreiber /s/ JOHN C. TUTEN, JR. ------------------------------------------- John C. Tuten, Jr. THE 1998 TRUST FOR JODY SMITH HAMAKER By: /s/ JODY SMITH HAMAKER -------------------------------------- Name: Jody Smith Hamaker ------------------------------------ Title: Trustee ----------------------------------- BOCP II, L.L.C. By: /s/ EARLE J. BENSING -------------------------------------- Name: Earle J. Bensing Title: Authorized Signer AGREEMENT AND PLAN OF MERGER -54- 60 ANNEX A SCHEDULE OF DEFINED TERMS The following terms when used in the Agreement shall have the meanings set forth below unless the context shall otherwise require: "Acquiror" shall mean NATCO Group Inc., a Delaware corporation, and its successors from time to time. "Acquiror Class A Common Stock" shall mean the Class A Common Stock, par value $0.01 per share, of the Acquiror, as constituted after the filing of the Charter Amendment and having the rights, powers and preferences, and limitations and restrictions thereof attributable to the Class A Common Stock set forth in the Charter Amendment. "Acquiror Class B Common Stock" shall mean the Class B Common Stock, par value $0.01 per share, of the Acquiror, as constituted after the filing of the Charter Amendment and having the rights, powers and preferences, and limitations and restrictions thereof attributable to the Class B Common Stock set forth in the Charter Amendment. "Acquiror Common Stock" shall mean the common stock, par value $0.01 per share, of the Acquiror, as constituted as of the date of this Agreement. Upon the filing of the Charter Amendment, each share of Acquiror Common Stock outstanding or reserved for issuance will become a share of Class A Common Stock. "Acquiror Companies" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Acquiror's Audited Consolidated Financial Statements" shall mean the consolidated balance sheets of the Acquiror and its Subsidiaries as of March 31, 1996 and the related consolidated statements of operations and cash flows for the fiscal years ended March 31, 1995 and 1996, together with the notes thereto, all as audited by KPMG Peat Marwick LLP, independent accountants, under their report with respect thereto dated June 27, 1997. "Acquiror's Consolidated Balance Sheet" shall mean the consolidated balance sheet of the Acquiror as of December 31, 1997 included in the Acquiror's Unaudited Consolidated Financial Statements. "Acquiror's Consolidated Financial Statements" shall mean the Acquiror's Audited Consolidated Financial Statements and the Acquiror's Unaudited Consolidated Financial Statements. AGREEMENT AND PLAN OF MERGER ANNEX A-1 61 "Acquiror's Disclosure Letter" shall mean a letter of even date herewith amending the Acquiror's disclosure letter dated March 26, 1998 delivered by the Acquiror to the Company with the execution of the Agreement, which, among other things, shall identify exceptions to the Acquiror's representations and warranties contained in Article V by specific section and subsection references. "Acquiror's Unaudited Consolidated Financial Statements" shall mean the unaudited consolidated balance sheet of the Acquiror and its Subsidiaries as of December 31, 1997 and the related consolidated statements of operations and cash flows for the fiscal quarters ended December 31, 1996 and December 31, 1997, together with the notes thereto. "Acquiror Option Plan" shall mean the Acquiror's Non-Employee Directors Stock Option Plan and the Acquiror's Employee Stock Incentive Plan. "Acquiror Stock Options" shall mean stock options granted pursuant to the Acquiror Option Plans, as well as the individual employee issued otherwise than pursuant to a plan but that are set forth in Section 5.03(b) of the Acquiror's Disclosure Letter. "Additional Shares" shall mean that number of shares of Acquiror Class B Common Stock (not less than zero) that is equal to the Sales Revenue expressed in dollars derived or to be derived from all Awarded Project Contracts that shall have an Award Date on or prior to March 31, 2000 divided by $176.06. "Affiliate" shall, with respect to any Person, mean any other Person that controls, is controlled by or is under common control with the former. "Agreement" shall mean the Amended and Restated Agreement and Plan of Merger dated November 17, 1998 but effective as of March 26, 1998 among the Acquiror, Natco, Newco and the Company, including any amendments thereto and each Annex (including this Annex A) and Schedule thereto (including the Acquiror's Disclosure Letter and the Company's Disclosure Letter). "Award Date" shall mean the date of receipt of the purchase order or commitment that, with respect to the definition of Awarded Project Contract, constitutes an Awarded Project Contract. "Awarded Project Contract" shall mean the receipt of (i) a purchase order related to a Project Contract, (ii) a commitment related to a Project Contract, e.g., a letter of intent, and work is commenced on the project substantially in accordance with the schedule contemplated by the commitment; provided, that a purchase order is subsequently received and accepted or (iii) a commitment with respect to the design engineering phase of a Project Contract and work is commenced on the project substantially in accordance with the schedule contemplated by the commitment; provided, that, in the case of clause (iii), a purchase order on the remaining phase is received within six months thereafter. AGREEMENT AND PLAN OF MERGER ANNEX A-2 62 "Bank Credit Agreement" shall mean that certain Loan Agreement to be dated as of November 18, 1998 among, inter alia, the Corporation, as U.S. Borrower, NATCO Canada, Ltd., as Canadian Borrower, and Chase Bank of Texas, National Association, as U.S. Agent for the lenders thereunder, Bank of Nova Scotia, as Canadian Agent for the lenders thereunder, and such lenders, as amended from time to time. "Benefit Plans" shall mean, with respect to a specified Person, any employee pension benefit plan (whether or not insured), as defined in Section 3(2) of ERISA, any employee welfare benefit plan (whether or not insured) as defined in Section 3(1) of ERISA, any plans that would be employee pension benefit plans or employee welfare benefit plans if they were subject to ERISA, such as foreign plans and plans for directors, any stock bonus, stock ownership, stock option, stock purchase, stock appreciation rights, phantom stock or other stock plan (whether qualified or nonqualified), and any bonus or incentive compensation plan sponsored, maintained, or contributed to by the specified Person or any of its Subsidiaries for the benefit of any of the present or former directors, officers, employees, agents, consultants or other similar representatives providing services to or for the specified Person or any of its Subsidiaries in connection with such services or any such plans which have been so sponsored, maintained, or contributed to within six years prior to the date of this Agreement; provided, however, that such term shall not include (a) routine employment policies and procedures developed and applied in the ordinary course of business and consistent with past practice, including wage, vacation, holiday and sick or other leave policies, (b) workers compensation insurance and (c) directors and officers liability insurance. "Billed Revenues" shall have the meaning ascribed to such term in Section 3.01(b). "BOCP" shall mean Banc One Capital Partners II, LTD as the holder of the Warrants. "Business Day" means any day other than a day on which banks in the State of Texas are authorized or obligated to be closed; "Cap I" shall mean Capricorn Investors, L.P., a Delaware limited partnership. "Cap II" shall mean Capricorn Investors II, L.P., a Delaware limited partnership. "Certificate of Merger" shall have the meaning ascribed to such term in Section 2.04. "Charter Amendment" shall mean an amendment to the Certificate of Incorporation of the Acquiror substantially similar in form and substance to the form thereof attached to this Agreement as Annex D, pursuant to which each share of Acquiror Common Stock outstanding or reserved for issuance will be converted into a share of Acquiror Class A Common Stock or the right to receive such a share. "Closing" shall mean a meeting, which shall be held in accordance with Section 3.03, of all Persons interested in the transactions contemplated by the Agreement at which all documents deemed necessary by the parties to the Agreement to evidence the fulfillment or waiver of all AGREEMENT AND PLAN OF MERGER ANNEX A-3 63 conditions precedent to the consummation of the transactions contemplated by the Agreement are executed and delivered. "Closing Date" shall mean the date of the Closing as determined pursuant to Section 3.03. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and Regulations promulgated thereunder. "Commission" shall mean the Securities and Exchange Commission. "Company" shall mean The Cynara Company, a Delaware corporation, and its successors from time to time. "Company Common Stock" shall mean both the Class A common stock, par value $0.001 per share, and the Class B common stock, par value $0.001 per share, of the Company. "Company Participants" shall have the meaning ascribed to such term in Section 7.08 herein. "Company Stockholders Agreement" shall mean that certain Stockholders Agreement dated July 1, 1996 by and among the Company, BOCP and the stockholders of the Company. "Company's Audited Consolidated Financial Statements" shall mean the consolidated balance sheets of the Company and its Subsidiaries as of December 31, 1997 and the related consolidated and combined statements of operations and cash flows for the fiscal years ended December 31 1996 and December 31, 1997, together with the notes thereto, all as audited by Ernst & Young LLP, independent accountants, under their report with respect thereto dated March 11, 1998. "Company's Consolidated Balance Sheet" shall mean the consolidated balance sheet of the Company as of September 30, 1997 included in the Company's Unaudited Consolidated Financial Statements. "Company's Consolidated Financial Statements" shall mean the Company's Audited Consolidated Financial Statements and the Company's Unaudited Consolidated Financial Statements. "Company's Disclosure Letter" shall mean a letter of even date herewith amending the Company's disclosure letter dated March 26, 1998 and delivered by the Company to the Acquiror Companies concurrently with the execution of the Agreement, which, among other things, shall identify exceptions to the Company's representations and warranties contained in Article IV by specific section and subsection references. "Company's Unaudited Consolidated Financial Statements" shall mean the unaudited consolidated balance sheet of the Company and its Subsidiaries as of September 30, 1997 and the AGREEMENT AND PLAN OF MERGER ANNEX A-4 64 related consolidated statements of operations and cash flows for the three months periods ended September 30, 1996 and September 30, 1997, together with the notes thereto. "Confidentiality Agreement" shall mean that certain confidentiality agreement between the Acquiror and the Company dated December 11, 1997. "Constituent Corporations" shall mean the Company and Natco. "control" (including the terms "controlled," "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of stock or as trustee or executor, by contract or credit arrangement or otherwise. "Corporate Statute" shall mean the General Corporation Law of the State of Delaware. "Court" shall mean any court or arbitration tribunal of the United States, any foreign country or any domestic or foreign state, and any political subdivision thereof. "CTOC Earnout Shares" shall mean that number of shares of Class B Common Stock that shall equal the number obtained by: (i) dividing (A) the aggregate amount of Billed Revenues, if any, in excess of $20,454,545 by (B) $1,000; (ii) multiplying the quotient by 22; and (iii) dividing the result by the number of shares of Company Common Stock outstanding at the Effective Time (after giving effect to the exercise of the Warrants). "CTOC Payout Date" shall mean November 30, 1999. "CTOC Project" shall mean any project let to the Company by the Carigali-Triton Operating Company or any general contractor appointed by the Carigali-Triton Operating Company. "Current Benefit Plans" shall mean Benefit Plans that are sponsored, maintained, or contributed to by a specified Person or any of its Subsidiaries as of the date of this Agreement. "Designated Company Stockholders" shall mean those holders of Company Common Stock (including BOCP) who have executed and delivered this Agreement for the limited purpose of joining in the mutual covenants contained in Article IX herein and, in the case of BOCP, Section 7.05 and to enforce provisions of Article IX as contemplated therein and who shall have the right to become a party to the Registration Rights Agreement pursuant to Sections 6.05 and 8.01(f) herein. "Effective Time" shall mean the date and time of the completion of the filing of the Certificate of Merger with the Secretary of State of the State of Delaware in accordance with Section 2.02. "Environmental Law or Laws" shall mean any and all laws, statutes, ordinances, rules, regulations, or orders of any Governmental Authority pertaining to health or the environment AGREEMENT AND PLAN OF MERGER ANNEX A-5 65 currently in effect and applicable to a specified Person and its Subsidiaries, including the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Hazardous & Solid Waste Amendments Act of 1984, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, the Oil Pollution Act of 1990, as amended ("OPA"), any state or local Laws implementing the foregoing federal Laws, and all other environmental conservation or protection Laws. For purposes of the Agreement, the terms "hazardous substance" and "release" have the meanings specified in CERCLA; provided, however, that to the extent the Laws of the state or locality in which the property is located establish a meaning for "hazardous substance" or "release" that is broader than that specified in CERCLA, such broader meaning shall apply within the jurisdiction of such state or locality, and the term "hazardous substance" shall include all dehydration and treating wastes, waste (or spilled) oil, and waste (or spilled) petroleum products, and (to the extent in excess of background levels) radioactive material, even if such are specifically exempt from classification as hazardous substances pursuant to CERCLA or RCRA or the analogous statutes of any jurisdiction applicable to the specified Person or its Subsidiaries or any of their respective properties or assets. "Equity Securities" shall mean, with respect to a specified Person, any shares of capital stock of, or other equity interests in, or any securities that are convertible into or exchangeable for any shares of capital stock of, or other equity interests in, or any outstanding options, warrants or rights of any kind to acquire any shares of capital stock of, or other equity interests in, such Person. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and the Regulations promulgated thereunder. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the Regulations promulgated thereunder. "Exchange Fund" shall mean the fund of Acquiror Class B Common Stock and cash comprising the Merger Consideration Per Share of Company Common Stock in the aggregate, cash in lieu of fractional share interests and dividends and distributions, if any, with respect to such shares of Acquiror Class B Common Stock segregated by the Acquiror pursuant to Section 3.02. "Expenses" shall mean all reasonable out-of-pocket expenses (including all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement and the Registration Rights Agreement, the solicitation of stockholder approvals and all other matters related to the consummation of the transactions contemplated hereby. AGREEMENT AND PLAN OF MERGER ANNEX A-6 66 "GAAP" shall mean accounting principles generally accepted in the United States consistently applied by a specified Person. "Governmental Authority" shall mean any governmental agency or authority (other than a Court) of the United States, any foreign country, or any domestic or foreign state, and any political subdivision or agency thereof, and shall include any multinational authority having governmental or quasi-governmental powers. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the Regulations promulgated thereunder. "Initial Earnout Shares" shall mean the number of Additional Shares divided by the number of shares of Company Common Stock outstanding at the Effective Time (after giving effect to the exercise of the Warrants). "Initial Payout Date" shall mean May 31, 2000. "Initial Shares" shall mean the shares of Acquiror Class B Common Stock received by the Designated Company Stockholders pursuant to the Merger as part of the Merger Consideration payable as of the Effective Date. "Investment Agreement" shall mean that certain Investment Agreement dated as of November 17, 1998 between the Acquiror and Cap II relating to the purchase by Cap II of a non-negotiable promissory note in the principal amount of $5,300,000 convertible into 504,762 shares of Class A Common Stock upon the occurrence of the events therein described. "IRS" shall mean the Internal Revenue Service. "Knowledge" shall mean, with respect to either the Company or the Acquiror, the knowledge (obtained after reasonable inquiry) of any executive officer of such party. "Law" shall mean all laws, statutes, ordinances and Regulations of the United States, any foreign country, or any domestic or foreign state, and any political subdivision or agency thereof, including all decisions of Courts having the effect of law in each such jurisdiction. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature thereof or the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction. AGREEMENT AND PLAN OF MERGER ANNEX A-7 67 "Material" shall mean material to the condition (financial and other), results of operations or business of a specified Person and its Subsidiaries, if any, taken as a whole; provided, however, that, as used in this definition the word "material" shall have the meaning accorded thereto in Section 11 of the Securities Act. "Material Adverse Effect" shall mean any change or effect that would be material and adverse to the consolidated business, condition (financial or otherwise), operations, performance or properties (but excluding any outstanding capital stock or other securities) of a specified Person and its Subsidiaries, if any, taken as a whole; provided, however, that, as used in this definition the word "material" shall have the meaning accorded thereto in Section 11 of the Securities Act. Notwithstanding anything herein to the contrary, if the Company is not awarded any Project Contract in Southeast Asia, such circumstance shall not constitute a Material Adverse Effect on the Company. "Material Contract" shall mean each contract, lease, indenture, agreement, arrangement or understanding to which a specified Person or any of its Subsidiaries is a party or to which any of the assets or operations of such specified Person or any of its Subsidiaries is subject that is of a type that would be required to be included as an exhibit to a registration statement on Form S-1 pursuant to Paragraph (2), (4), (10) or (14) of Item 601(b) of Regulation S-K under the Securities Act if such a registration statement were to be filed by such Person under the Securities Act on the date of determination. Notwithstanding the foregoing, such term shall, in the case of the Company, include any of the following contracts, agreements or commitments, whether oral or written: (1) Any collective bargaining agreement or other agreement with any labor union; (2) any agreement, contract or commitment with any other Person, other than any agency or representation entered in the ordinary course of business, containing any covenant limiting the freedom of such specified Person or any of its Subsidiaries to engage in any line of business or to compete with any other Person; (3) any partnership, joint venture or profit sharing agreement with any Person, which partnership, joint venture or profit sharing agreement generated revenues during its most recently completed fiscal year of $100,000 or more; (4) any employment or consulting agreement, contract or commitment between the Company or any of its Subsidiaries and any employee, officer or director thereof (i) having more than one year to run from the date hereof, (ii) providing for an obligation to pay or accrue compensation of $100,000 or more per annum or (iii) providing for the payment or accrual of any additional compensation upon a change in control of such Person or any of its Subsidiaries or upon any termination of such employment or consulting relationship following a change in control of such Person or any of its Subsidiaries; and AGREEMENT AND PLAN OF MERGER ANNEX A-8 68 (5) any agency or representation agreement with any Person which is not terminable by the Company or one of its Subsidiaries without penalty upon not more than one year's notice; "Merger" shall mean the merger of the Company with and into Natco as provided in Article II of this Agreement. "Merger Consideration" shall mean the aggregate Merger Consideration Per Share of Company Common Stock payable pursuant to Section 3.01 herein with respect to a specific number of shares of Company Common Stock. "Merger Consideration Per Share of Company Common Stock" shall mean the number of shares of Acquiror Class B Common Stock, the right to receive an amount of cash, the right to receive the CTOC Earnout Shares and the right to receive the Initial Earnout Shares and the Supplemental Earnout Shares into which each share of Company Common Stock is to be converted pursuant to the Merger as provided in Section 3.01(a). "NASD" shall mean the National Association of Securities Dealers, Inc. "Natco" shall mean National Tank Company, a Delaware corporation and a wholly-owned Subsidiary of the Acquiror. "Newco" shall mean Natco Acquisition Company, a Delaware corporation and a wholly-owned Subsidiary of the Acquiror. "NYSE" shall mean the New York Stock Exchange, Inc. "Order" shall mean any judgment, order or decree of any Court or Governmental Authority, federal, foreign, state or local. "Payout Date" shall mean May 31, 2001. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Permit" shall mean any and all permits, licenses, authorizations, orders, certificates, registrations or other approvals granted by any Governmental Authority. "Permitted Encumbrances" shall mean the following: (1) liens for taxes, assessments and other governmental charges not delinquent or which are currently being contested in good faith by appropriate proceedings; provided that, in the latter case, the specified Person or one of its Subsidiaries shall have set aside on its books adequate reserves with respect thereto; AGREEMENT AND PLAN OF MERGER ANNEX A-9 69 (2) mechanics' and materialmen's liens not filed of record and similar charges not delinquent or which are filed of record but are being contested in good faith by appropriate proceedings; provided that, in the latter case, the specified Person or one of its Subsidiaries shall have set aside on its books adequate reserves with respect thereto; (3) liens in respect of judgments or awards with respect to which the specified Person or one of its Subsidiaries shall in good faith currently be prosecuting an appeal or other proceeding for review and with respect to which such Person or such Subsidiary shall have secured a stay of execution pending such appeal or such proceeding for review; provided that, such Person or such Subsidiary shall have set aside on its books adequate reserves with respect thereto; (4) easements, leases, reservations or other rights of others in, or minor defects and irregularities in title to, property or assets of a specified Person or any of its Subsidiaries; provided that, such easements, leases, reservations, rights, defects or irregularities do not materially impair the use of such property or assets for the purposes for which they are held; and (5) any lien or privilege vested in any lessor, licensor or permittor for rent or other obligations of a specified Person or any of its Subsidiaries thereunder so long as the payment of such rent or the performance of such obligations is not delinquent. (6) the Lien of Banc One, Texas, N.A. on all assets of the Company. "Person" shall mean an individual, partnership, limited liability company, corporation, joint stock company, trust, estate, joint venture, association or unincorporated organization, or any other form of business or professional entity, but shall not include a Governmental Authority. "Project Contract" shall mean a contract to supply a new membrane system, including all or part of the responsibilities for design, manufacture, delivery and startup of membranes and related equipment, where the destination of such membrane system is Southeast Asia; provided, however, that the long term service and parts contracts awarded with respect to any project contract included within this definition shall be limited to a duration of the first three years of the contract term, i.e., the revenues attributable to such a long term service and parts contract for purposes of the Agreement shall be limited to the revenues earned or to be earned during the first three years of such contract. "Registration Rights Agreement" shall mean an agreement among the Acquiror and the Designated Company Stockholders pursuant to which the Acquiror agrees to provide rights of registration of the offering, sale and delivery of shares of Acquiror Common Stock under the registration provisions of the Securities Act which shall be in form and substance substantially similar to the form thereof attached hereto as Annex E. AGREEMENT AND PLAN OF MERGER ANNEX A-10 70 "Regulation" shall mean any rule or regulation of any Governmental Authority having the effect of law. "Reports" shall mean, with respect to a specified Person, all reports, registrations, filings and other documents and instruments required to be filed by the specified Person or any of its Subsidiaries with any Governmental Authority. "Representative" shall mean, initially, Douglas P. Heller, or any successor individual designated at any time by notice to the Acquiror signed by a majority in interest of the Designated Company Stockholders (determined at the time by reference to the holdings of Company Common Stock of each of the Designated Company Stockholders immediately prior to the Effective Time after giving effect to the exercise of the Warrants). "Sales Revenue" shall mean the gross sales revenue attributable to an Awarded Project Contract in accordance with the provisions of the Project Contract, whether earned or to be earned in accordance therewith. Except as heretofore provided in this definition, Sales Revenue shall be determined in accordance with GAAP and the sales revenue for any component of the Project Contract for which the sales revenue was not expressly provided in the Project Contract shall be estimated on a reasonable basis taking into account experience regarding similar Project Contracts. "Securities Act" shall mean the Securities Act of 1933, as amended, and the Regulations promulgated thereunder. "Share Adjustment" shall have the meaning ascribed to such term in subsection (a) of Section 3.01. "Significant Subsidiary" means any Subsidiary of the Company or Acquiror, as the case may be, that would constitute a Significant Subsidiary of such party within the meaning of Rule 1-02 of Regulation S-X of the Commission. "Southeast Asia" shall mean the countries and territorial waters included in the area bounded by and including Australia to the south, the Philippines to the east, China to the north and Pakistan to the west. "Stockholders" shall mean Capricorn Investors, Ltd., a Delaware limited partnership, and Capricorn Investors II, Ltd., a Delaware limited partnership. "Stockholders' Agreement" shall mean an agreement among the Acquiror, Cap I, Cap II and the Designated Company Stockholders in form and substance substantially similar to the form thereof attached hereto as Annex F. A "Subsidiary" of a specified Person shall be any corporation, partnership, limited liability company, joint venture or other legal entity of which the specified Person (either alone or through or together with any other Subsidiary) owns, directly or indirectly, 50 percent or more of the stock AGREEMENT AND PLAN OF MERGER ANNEX A-11 71 or other equity or partnership interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. "Stockholder's Letter" shall mean a letter in form and substance substantially similar to the form thereof attached hereto as Annex B. "Stockholders' Meeting" shall have the meaning ascribed to such term in Subsection 7.01(a). "Supplemental Earnout Shares" shall mean the number of Supplemental Shares divided by the number of shares of Company Common Stock outstanding at the Effective Time (after giving effect to the exercise of the Warrants). "Supplemental Payout Date" shall mean February 28, 2001. "Supplemental Shares" shall mean that number of shares of Acquiror Class B Common Stock (not less than zero) that is equal to the Sales Revenue expressed in dollars derived or to be derived from all Awarded Project Contracts that shall have an Award Date after March 31, 2000 and on or prior to December 31, 2000 (less any unearned Sales Revenue attributed to Awarded Project Contracts included in the determination of Initial Earnout Shares but subsequently cancelled) divided by $352.11. "Surviving Corporation" shall mean Natco as the corporation surviving the Merger. "Tax Returns" shall mean all returns and reports of or with respect to any Tax which are required to be filed by or with respect to the Company or any of its Subsidiaries. "Taxes" shall mean all taxes, charges, imposts, tariffs, fees, levies or other similar assessments or liabilities, including income taxes, ad valorem taxes, excise taxes, withholding taxes, stamp taxes or other taxes of or with respect to gross receipts, premiums, real property, personal property, windfall profits, sales, use, transfers, licensing, employment, payroll and franchises imposed by or under any Law; and such terms shall include any interest, fines, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any such tax or any contest or dispute thereof. "Terminated Benefit Plans" shall mean Benefit Plans that were sponsored, maintained, or contributed to by a specified Person or any of its Subsidiaries within six years prior to the date of this Agreement but which have been terminated prior to the date of this Agreement. "Warrants" shall mean those certain warrants to purchase Company Common Stock issued by the Company and those options granted by stockholders of the Company, in each case held by BOCP as described in Section 4.03(b) of the Company's Disclosure Letter. AGREEMENT AND PLAN OF MERGER ANNEX A-12 72 ANNEX B STOCKHOLDER'S LETTER [Date] NATCO Group Inc. Brookhollow Central III 2950 North Loop West, Suite 750 Houston, Texas 77092 Ladies and Gentlemen: The undersigned is a holder of Class A Common Stock of The Cynara Company, a Delaware corporation (the "Company"). Pursuant to the terms and subject to the conditions of that certain Agreement and Plan of Merger by and among NATCO Group Inc., a Delaware corporation (the "Acquiror"), Natco Acquisition Company, a newly formed Delaware corporation and a wholly owned Subsidiary of the Acquiror ("Natco"), and the Company dated as of March __, 1998 (the "Merger Agreement"), providing for, among other things, the merger of the Company with and into Natco (the "Merger"), the undersigned will be entitled to receive shares of Acquiror Class B Common Stock in exchange for shares of Company Common Stock owned by the undersigned at the Effective Time of the Merger as determined pursuant to the Merger Agreement. Capitalized terms used but not defined herein are defined in Annex A to the Merger Agreement and are used herein with the same meanings as ascribed to them therein. The undersigned hereby represents that the undersigned is the beneficial owner of the shares of Company Common Stock of which it is the record owner on the stock record books of the Company as of the date hereof and is an "accredited investor" within the meaning of such term as defined in Rule 501 of the General Rules and Regulations under the Securities Act. The undersigned acknowledges receipt of a draft dated March ___, 1998 of a Registration Statement on Form S-1 of NATCO Group Inc. to be filed with the Commission under the Securities Act. The undersigned has been advised that the offering, sale and delivery of the shares of Acquiror Class B Common Stock to be received by the undersigned pursuant to the Merger will not have been registered with the Commission under the Securities Act and that, therefore, such shares of Acquiror Class B Common Stock may not be resold by the undersigned unless the offering, sale and delivery of such shares are so registered under the Securities Act or an exemption from such registration is available. In that regard, the undersigned represents that the undersigned is acquiring the shares of Acquiror Class B Common Stock to be received by the undersigned pursuant to the Merger without a view to the distribution thereof within the meaning of such term as used in the Securities Act and Rule 144 of the General Rules and Regulations thereunder. The undersigned understands that instructions will be given to the transfer agent for the Acquiror Class B Common Stock with respect to the Acquiror Class B Common Stock to be received by the undersigned pursuant to the Merger and that there will be placed on the certificates AGREEMENT AND PLAN OF MERGER ANNEX B-1 73 representing such shares of Acquiror Class B Common Stock, or any substitutions therefor, a legend stating in substance as follows: "These shares were issued in a transaction in which the offering, sale and delivery thereof were not registered under the Securities Act of 1933, as amended, in reliance on an exemption from such registration requirement. These shares may only be sold or otherwise transferred in a transaction in which the offering, sale and delivery thereof are registered under such Act or for which an exemption from such registration requirement is provided by such Act. It is understood and agreed that the legend set forth above shall be removed upon surrender of certificates bearing such legend by delivery of substitute certificates without such legend if the undersigned shall have delivered to the Acquiror an opinion of counsel, in form and substance reasonably satisfactory to the Acquiror, to the effect that (i) the sale or disposition of the shares represented by the surrendered certificates may be effected without registration of the offering, sale and delivery of such shares under the Securities Act and (ii) the shares to be so transferred may be publicly offered, sold and delivered by the transferee thereof without compliance with the registration provisions of the Securities Act. By its execution hereof, the Acquiror agrees that it will, from and after the Effective Time of the Merger and for so long as the undersigned owns any shares of Acquiror Class B Common Stock to be received by the undersigned pursuant to the Merger that are subject to the restrictions on sale, transfer or other disposition herein set forth, take all reasonable efforts to make timely filings with the Commission of all reports required to be filed by it pursuant to the Exchange Act and will promptly furnish upon written request of the undersigned a written statement confirming that such reports have been so timely filed. If you are in agreement with the foregoing, please so indicate by signing below and returning a copy of this letter to the undersigned, at which time this letter shall become a binding agreement between us. Very truly yours, By: ------------------------------------------ Name: Title: Date: Address: ACCEPTED this ___ day of __________, 1998 NATCO Group Inc. By: Name: Title: AGREEMENT AND PLAN OF MERGER ANNEX B-2 74 ANNEX C ESCROW AGREEMENT This Escrow Agreement, dated as of November 18, 1998, between NATCO Group, Inc., a Delaware corporation (the "Acquiror") the Designated Company Stockholders named on the signature page hereto and, Douglas P. Heller or any successor as Representative (the "Representative", sometimes referred to collectively as "Escrow Parties"), and Chase Bank of Texas, National Association, a national banking association ("Escrow Agent"); W I T N E S S E T H : WHEREAS, the Acquiror, National Tank Company, a Delaware company and a direct, wholly-owned subsidiary of the Acquiror ("Natco"), Natco Acquisition Company, a Delaware corporation and a wholly owned subsidiary of the Acquiror, and The Cynara Company, a Delaware corporation (the "Company") have entered into an Amended and Restated Agreement and Plan of Merger dated November 17, 1998 but effective as of March 26, 1998, (the "Merger Agreement"), which provides, among other things, for the merger (the "Merger") of the Company with and into Natco, with the result that the separate corporate existence of the Company shall cease and Natco shall continue as the Surviving Corporation; and WHEREAS, the parties hereto desire, pursuant to Section 7.10 of the Merger Agreement, to set aside a portion of the consideration to be paid to the Designated Company Stockholders in connection with the Merger for the purpose of establishing a reserve of Escrow Shares (as defined in Section 7.10 of the Merger Agreement) for disposition in accordance with the provisions of that Section of the Merger Agreement; WHEREAS, Escrow Agent has agreed to hold the Escrow Shares in accordance with the terms and provisions contained herein; NOW, THEREFORE, in consideration of the premises and of other good and valuable consideration, the parties hereto hereby agree as follows: 1. Definitions. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Merger Agreement. 2. Appointment of Escrow Agent. The Acquiror and the Designated Company Stockholders hereby designate and appoint Chase Bank of Texas, National Association, as Escrow Agent for the purposes set forth herein, and the Escrow Agent hereby accepts such appointment on the terms herein provided. In addition, the Acquiror and the Representative hereby deliver to the Escrow Agent a fully executed copy of the Merger Agreement. 3. Deposit of Escrow Shares. In conjunction with the Closing and promptly after the Effective Time, the Acquiror shall deliver to the Escrow Agent one or more certificates totaling 450,000 shares of Natco registered in the names of the various Designated Company Stockholders representing the Escrow Shares, together with stock powers duly executed in blank. Any and all AGREEMENT AND PLAN OF MERGER ANNEX C-1 75 dividends and distributions declared and paid or made with respect to the Escrow Shares shall be delivered to the Designated Company Stockholders. Any and all shares of capital stock, other securities, cash or other property into which the Escrow Shares may from time to time in whole or in part be converted or for which they may in whole or in part be exchanged shall be delivered to the Escrow Agent and deposited into escrow. The aggregate of all such Escrow Shares, shares of capital stock, other securities, cash and other property is herein referred to as the "Escrow Fund". The Escrow Agent will invest and reinvest any cash portion of the Escrow Fund and any interest or other amounts earned thereon, in the Fidelity Treasury Money Market Fund #77 unless otherwise instructed in writing by the Escrow Parties. Unless Escrow Agent is otherwise directed in such written instructions, Escrow Agent may use a broker-dealer of its own selection, including a broker-dealer owned by or affiliated with Escrow Agent or any of its affiliates. It is expressly agreed and understood by the parties hereto that Escrow Agent shall not in any way whatsoever be liable for losses on any investments, including, but not limited to, losses from market risks due to premature liquidation or resulting from other action taken pursuant to this Escrow Agreement. 4. Maintenance and Distribution of Escrow. The Escrow Agent shall hold the Escrow Shares in escrow and shall maintain and distribute the Escrow Shares solely in accordance with written instructions signed on behalf of the Acquiror by a duly authorized officer and on behalf of the Designated Company Stockholders by the Representative. 5. Performance and Reliance by Escrow Agent; Liability of Escrow Agent. The Escrow Agent undertakes to perform such duties as are set forth in this Escrow Agreement and shall be protected in acting upon any written notice, request, waiver, consent, certificate, receipt, authorization or other paper or document that the Escrow Agent believes to be genuine. The Escrow Agent may confer with its own corporate or outside legal counsel in the event of any dispute or question as to the construction of any of the provisions hereof, or its duties hereunder, and shall incur no liability and shall be fully protected in acting in accordance with the written opinions of such counsel. The duties of the Escrow Agent hereunder will be limited to the observance of the express provisions of this Escrow Agreement. The Escrow Agent will not be subject to, or be obliged to recognize, any other agreement between the parties hereto or directions or instructions not specifically set forth as provided for herein, except for such directions as appear in this Escrow Agreement. The Escrow Agent will not make any payment or disbursement from or out of the Escrow Fund that is not expressly authorized pursuant to this Escrow Agreement. 6. Liability of Escrow Agent. The Escrow Agent may rely upon and act upon any instrument received by it pursuant to the provisions of this Escrow Agreement that it reasonably believes to be genuine and in conformity with the requirements of this Escrow Agreement. The Escrow Agent undertakes to use the same degree of care and skill in performing its services hereunder as an ordinary prudent person would do or use under the circumstances in the conduct of his or her own affairs. The Escrow Agent will not be liable for any action taken or not taken by it under the terms hereof in the absence of breach of its obligations hereunder or gross negligence, willful misconduct or willful breach of this Escrow Agreement on its part. In no event shall Escrow Agent be liable for any lost profits, lost savings or other special, exemplary, consequential or incidental damages in excess of Escrow Agent's fee hereunder and provided, further, that Escrow Agent shall have no liability for any loss arising from any cause beyond its control, including without limitation the following: (a) acts of God, force majeure, including, without limitation, war (whether AGREEMENT AND PLAN OF MERGER ANNEX C-2 76 or not declared or existing), revolution, insurrection, riot, civil commotion, accident, fire, explosion, stoppage of labor, strikes and other differences with employees; (b) the act, failure or neglect of any other party or any agent or correspondent or any other person selected by Escrow Agent; (c) any delay, error, omission or default of any mail, courier, telegraph, cable or wireless agency or operator; or (d) the acts or edicts of any government or governmental agency or other group or entity exercising governmental powers. 7. Termination of Escrow. This Escrow Agreement shall terminate upon release of all of the Escrow Shares and Escrow Fund in accordance with the provisions of this Escrow Agreement; provided, however that in the event all fees, expenses, costs and other amounts required to be paid to Escrow Agent hereunder are not fully paid prior to termination, the Escrow Agent shall be entitled to pay and set off from the Escrow Fund prior to the release of the Escrow Shares and Escrow Fund. Upon release by the Escrow Agent of all of the Escrow Shares and Escrow Fund as provided therein, the duties of the Escrow Agent shall be completed, and the Escrow Agent shall have no further obligations under this Escrow Agreement to any other party. Section 8 shall survive termination hereof. 8. Indemnification of Escrow Agent. The Acquiror and the Designated Company Stockholders shall, jointly and severally, indemnify and hold the Escrow Agent harmless from and against any and all losses, costs, damages or expenses (including without limitation reasonable attorneys' fees) it may sustain by reason of its service as Escrow Agent hereunder, except such losses, costs, damages or expenses (including without limitation reasonable attorneys' fees) incurred by reason of such acts or omissions for which the Escrow Agent is liable or responsible under the last sentence of Section 6 hereof. As between the Acquiror and the Designated Company Stockholders, however, all such losses, costs, damages and expenses (including attorneys' fees) shall be borne by the Acquiror and the Designated Company Stockholders on the basis of 50% each. 9. Release of Representative; Successor Representative. In consideration of Douglas P. Heller (and any successor) acting as the Representative hereunder on behalf of all Designated Company Stockholders, each such Designated Company Stockholder, by accepting shares of Class B Common Stock pursuant to Section 3.01 and Section 7.10 of the Merger Agreement and by becoming a beneficiary of this Escrow Agreement, releases the Representative from liability for any action taken or not taken by the Representative under the terms hereof in the absence of the Representative's gross negligence or willful misconduct. If Douglas P. Heller ceases to act as the Representative for any reason or Douglas P. Heller or his representative shall notify the Acquiror and the Escrow Agent of the Representative's intent to resign as Representative, then a majority in interest of the Designated Company Stockholders (as determined at the time by reference to the holdings of Company Common Stock of each of the Designated Company Stockholders immediately prior to the Effective Time after giving effect to the exercise of the Warrants) may designate by notice to the Acquiror a successor Representative. If no such successor is appointed within 30 days, then Acquiror shall appoint an independent third party as successor. 10. Fees and Expenses of the Escrow Agent. All fees of the Escrow Agent for its services hereunder, together with any expenses reasonably incurred by the Escrow Agent in connection with this Escrow Agreement, shall be paid by Acquiror in accordance with the Escrow Agent's fee AGREEMENT AND PLAN OF MERGER ANNEX C-3 77 schedule in effect. The Acquiror shall promptly pay to the Designated Company Stockholders any amounts set off against the Escrow Fund pursuant to Section 7 hereof. 11. Resignation of Escrow Agent. The Escrow Agent may resign from its duties hereunder by giving each of the parties hereto not less than 60 days prior written notice of the effective date of such resignation. The parties hereto intend that a substitute Escrow Agent will be appointed by the Acquiror to fulfill the duties of the Escrow Agent hereunder for the remaining term of this Escrow Agreement in the event of the Escrow Agent's resignation. If on or before the effective date of such resignation, a substitute Escrow Agent has not been appointed, the Escrow Agent will thereupon deposit the Escrow Shares into the registry of a court of competent jurisdiction. 12. Designees for Instructions. The Escrow Parties are hereby designated as the persons who will execute notices and from whom the Escrow Agent may take instructions hereunder. Such designation may be changed from time to time upon notice to the Escrow Agent from the Acquiror in the case of the Acquiror and from the Representative in the case of the Designated Company Stockholders. The Escrow Agent will be entitled to rely conclusively on any notices or instructions from the Escrow Parties that the Escrow Agent believes to be genuine. If the Acquiror or the Representative changes its designees hereunder and notifies the Escrow Agent of such change, the Escrow Agent will be entitled to rely conclusively on any notice or instructions from any such successor designees so designated. 13. Notices. Any notices, consents, demands, requests, approvals and other communications to be given under this Escrow Agreement by any party to any other party shall be in writing and shall be either (a) personally delivered, (b) mailed by registered or certified mail, postage prepaid with return receipt requested, (c) delivered by overnight express delivery service or same-day local courier service, or (d) delivered by facsimile transmission, to the address set forth below, or to such other address as may be designated by such party from time to time in accordance with this Section. Notices delivered personally, by overnight express delivery service or by local courier service shall be deemed given as of actual receipt. Mailed notices shall be deemed given three business days after mailing. Notices delivered by facsimile transmission shall be deemed given upon receipt by the sender of the transmission confirmation. (a) If to the Acquiror: NATCO Group Inc. Brookhollow Central III, Suite 750 2950 N. Loop West Houston, Texas 77092 Attn: William B. Wiener III Telecopy No.: (713) 683-7841 with a copy to: Vinson & Elkins L.L.P. 1001 Fannin, Suite 2300 Houston, Texas 77002 Attn: William E. Joor III Telecopy No.: (713) 758-2346 AGREEMENT AND PLAN OF MERGER ANNEX C-4 78 (b) If to the Escrow Agent: Chase Bank of Texas, National Association 600 Travis Street, Suite 1150 Houston, Texas Attn: May Ng Telecopy No.: (713)216-6467 (c) If to the Representative: Douglas P. Heller Heller, Hickox, Dimeling, Schrieber 1629 Locust Street Philadelphia, Pennsylvania 19103 Telecopy No.: (215) 546-1041 with a copy to: Reed, Smith, Shaw & McClay 2500 One Liberty Place Philadelphia, Pennsylvania 19103 Attn: Lori L. Lasher Telecopy No.: (215) 851-1420 14. Binding Effect. This Escrow Agreement will be binding upon and inure to the benefit of the parties hereto and their permitted assigns. The rights of any person or entity to receive Escrow Shares hereunder shall not be transferable except by operation of law. 15. Amendment and Termination. This Escrow Agreement or any provision hereof may be amended, modified, waived or terminated only by written instrument duly signed by the parties hereto. 16. Applicable Law. This Escrow Agreement will be governed by and construed in accordance with the laws of the State of Texas, without giving effect to conflicts of law principles. 17. Counterparts. This Escrow Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which together will constitute but one and the same instrument. 18. Captions and Paragraph Headings. Captions and paragraph headings used herein are for convenience only and are not part of this Escrow Agreement and will not be used in construing it. 19. Arbitration. Any and all claims, demands, causes of action, disputes, controversies and other matters in question arising out of or relating to this Escrow Agreement, the alleged breach thereof, or in any way relating to the subject matter of this Agreement ("Disputes"), even though some or all of such Disputes allegedly are extra contractual in nature, whether such Disputes sound in contract, tort or otherwise, at law or in equity, under state or federal law, whether provided by statute or the common law, for damages or any other relief, shall be resolved and decided exclusively by binding arbitration pursuant to the Federal Arbitration Act in accordance with the Commercial Arbitration Rules then in effect with the American Arbitration Association. The arbitration proceeding shall be conducted in Houston, Texas. The arbitration shall be before a panel of three AGREEMENT AND PLAN OF MERGER ANNEX C-5 79 arbitrators. The Acquiror and the Representative shall each select one arbitrator and the two arbitrators so selected shall select the third arbitrator. The arbitrators are authorized to issue subpoenas for depositions and other discovery mechanisms, as well as trial subpoenas, in accordance with the Federal Rules of Civil Procedure. Any party may initiate a proceeding in the appropriate United States District Court to enforce this provision. This agreement to arbitrate shall be enforceable in either federal or state court. Judgment upon any award rendered in any such arbitration proceeding may be entered by any federal or state court having jurisdiction. The enforcement of this agreement to arbitrate and all procedural aspects of this agreement to arbitrate, including the construction and interpretation of this agreement to arbitrate, the scope of the arbitrable issues, allegations of waiver, delay or defenses to arbitrability, and the rules governing the conduct of the arbitration, shall be governed by and construed pursuant to the Federal Arbitration Act. The arbitrators shall have no authority to award punitive damages (including, without limitation, any exemplary damages, treble damages or any other penalty or punitive type of damages), under any circumstances regardless of whether such damages in excess of such amount may be available under applicable law or otherwise, the parties hereto hereby waiving their right, if any, to recover such damages in excess of such amount in connection with any Disputes. The costs of the arbitration shall be allocated to the Acquiror and to the Designated Company Stockholders in the amount of 50% each. All other costs and expenses incurred by a party to any arbitration proceeding hereunder shall be borne by such party. The Escrow Parties shall jointly instruct the Escrow Agent with respect to all actions to be taken as a result of any arbitration award. 20. Action by the Acquiror. As between the Acquiror and the Designated Company Stockholders, all actions to be taken by the Acquiror hereunder shall be taken by, or pursuant to authority granted by, a committee of the Board of Directors of the Acquiror comprised of one or more members who were not prior to the Effective Time affiliated with the Company or affiliates of the Company and who are not Designated Company Stockholders. 21. Tax Reporting. Unless otherwise required by Treasury Regulations issued in the future, the parties will treat the Escrow Shares for purposes of Section 468B(g) of the Internal Revenue Code of 1986, as amended, and for all other income tax and general corporate purposes as being owned by the Designated Company Stockholders during the period such shares are held in Escrow, and therefore any income earned on such shares during such period will be allocated and reported to the Designated Company Stockholders as such income is earned. The parties will make any elections or filings required to characterize such shares in a manner consistent with the preceding sentence. 23. Accounting Provisions. The Escrow Shares subject to this Escrow Agreement shall appear as issued and outstanding on the balance sheet of Acquiror and such Escrow Shares shall be legally outstanding under applicable state law. 24. Dividends. All dividends payable on the Escrow Shares during the period such shares are held in escrow shall be distributed currently to the Designated Company Stockholders. 25. Voting Rights. All voting rights of the Escrow Shares shall be exercisable by or on behalf of the Designated Company Stockholders or their authorized Agent. AGREEMENT AND PLAN OF MERGER ANNEX C-6 80 IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement to be executed by their respective officers hereunto duly authorized, as of the day and year first above written. NATCO GROUP INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- REPRESENTATIVE ----------------------------------------- Name: Douglas P. Heller THE DESIGNATED COMPANY STOCKHOLDERS --------------------------------------------- William R. Dimeling --------------------------------------------- Robert J. Hamaker --------------------------------------------- Douglas P. Heller --------------------------------------------- George K. Hickox, Jr. --------------------------------------------- Ralph M. Kelly --------------------------------------------- Steven G. Park --------------------------------------------- Richard R. Schreiber --------------------------------------------- John C. Tuten, Jr. AGREEMENT AND PLAN OF MERGER ANNEX C-7 81 THE 1998 TRUST FOR JODY SMITH HAMAKER By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- BOCP II, L.L.C. By: ------------------------------------------ Name: Earle J. Bensing Title: Authorized Signer CHASE BANK OF TEXAS, NATIONAL ASSOCIATION By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- AGREEMENT AND PLAN OF MERGER ANNEX C-8 82 ANNEX D CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF NATCO GROUP INC. THE UNDERSIGNED SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF NATCO GROUP INC., A DELAWARE CORPORATION (THE "CORPORATION"), DOES HEREBY CERTIFY: I. That the Board of Directors of the Corporation adopted at a meeting duly called and held resolutions setting forth proposed amendments of the Certificate of Incorporation of the Corporation, approving such amendments, declaring such amendments advisable and recommending such amendments to the stockholders of the Corporation for approval thereof. The resolutions setting forth the proposed amendments are as follows: RESOLVED, that the first paragraph of Article Fourth of the Certificate of Incorporation of the Corporation be amended so as to be and read in its entirety as follows: FOURTH: The aggregate number of shares of capital stock that the Corporation shall have authority to issue is 55,000,000 shares, of which 5,000,000 shall be shares of Preferred Stock, par value $.01 per share ("Preferred Stock"), and 50,000,000 shall be shares of Common Stock, par value of $.01 per share ("Common Stock"), divided into 45,000,000 shares of Class A Common Stock ("Class A Common Stock") and 5,000,000 shares of Class B Common Stock ("Class B Common Stock"). and further RESOLVED, that Section II of Article Fourth of the Certificate of Incorporation of the Corporation be amended so as to be and read in its entirety as follows: II. Common Stock The Common Stock of the Corporation shall consist of two classes: Class A Common Stock and Class B Common Stock. Each such class of Common Stock shall have the relative rights, powers, preferences, limitations and restrictions set forth in this Section II: A. Class A Common Stock and Class B Common Stock. 1. Dividends. Subject to the provisions of any Preferred Stock Series Resolution, the Board of Directors may, in its discretion, out of funds legally available for the payment of dividends and at such times and in such manner as determined by the Board of Directors, declare and pay dividends on the Class A AGREEMENT AND PLAN OF MERGER ANNEX D-1 83 Common Stock and the Class B Common Stock, equally and ratably as if such classes were but a single class. 2. Liquidation. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and payment or setting aside for payment of any preferential amount due to the holders of any other class or series of stock, the holders of the Class A Common Stock and Class B Common Stock shall be entitled to receive any or all assets remaining to be paid or distributed, equally and ratably as if such classes were but a single class; provided, however, that, if any obligation of the Corporation to purchase shares of Class B Common Stock pursuant to the exercise of a Put is then pending, then upon any voluntary or involuntary liquidation, dissolution, or winding-up of the Corporation, the holders of Class B Common Stock at the time outstanding will be entitled to receive out of the net assets of the Corporation legally available for distribution to shareholders after satisfaction of liabilities to creditors as required by the Texas Business Corporation Act, subject to the rights of the holders of any stock of the Corporation ranking senior to the Class B Common Stock in respect of distributions of assets upon liquidation, dissolution, or winding-up of the Corporation but before any distribution of assets is made with respect to any shares of Class A Common Stock, an amount equal to the aggregate of the liquidation preference specified in paragraph 6 of this subsection B. 3. Voting Rights. Except as may otherwise be required by law, this Certificate of Incorporation or the provisions of any Preferred Stock Series Resolution, the holders of Class A Common Stock and Class B Common Stock, voting together as a single class, shall have one vote for each share of such stock held by such holder on each matter voted upon by the stockholders. 4. Other Rights. Neither class of Common Stock shall be subject to mandatory redemption or to redemption at the option of the Corporation. Except as hereinafter provided, neither class of Common Stock shall have any rights of conversion or exchange. The registered owner of any shares of Class B Common Stock may at any time and from time to time convert any or all such shares into Class A Common Stock on the basis of one share of Class A Common Stock for each share of Class B Common Stock. Such conversion rate shall be subject to equitable adjustment in the event the outstanding shares of Class A Common Stock or Class B Common Stock are changed into a different number of shares or a different class by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares. In addition, any shares of Class B Common Stock outstanding on January 1, 2002 shall automatically and without any action on the part of the holder thereof be converted into shares of Class A Common Stock on the basis of one share of Class A Common Stock for each share of Class B Common Stock and thereupon the Common Stock of the Corporation shall consist of a single class consisting of 50,000,000 authorized shares, designated as Common Stock; AGREEMENT AND PLAN OF MERGER ANNEX D-2 84 provided, however, that, if any Exercise Notice (as defined below) shall have been given and be outstanding on January 1, 2002, such conversion shall be deferred until such time as the Put transaction contemplated hereby to occur as the result of the giving of such Exercise Notice has been consummated. B. Additional Rights of Class B Common Stock. 1. Definitions. The following additional terms have the respective meanings specified below: "Bank Credit Agreement" shall mean that certain Loan Agreement to be dated as of November 18, 1998 among, inter alia, the Corporation, as U.S. Borrower, NATCO Canada, Ltd., as Canadian Borrower, and Chase Bank of Texas, National Association, as U.S. Agent for the lenders thereunder, Bank of Nova Scotia, as Canadian Agent for the lenders thereunder, and such lenders, as amended from time to time. "Business Day" means any day other than a day on which banks in the State of Texas are authorized or obligated to be closed. "Corporate Statute" shall mean the General Corporation Law of the State of Delaware. "Effective Time" shall have the meaning ascribed to such term in paragraph (1) of subsection D of this Section II. "Exercise Notice" shall have the meaning ascribed to such term contained in paragraph 4 of this subsection B. "Holder" shall mean the registered owner of shares of Class B Common Stock as indicated by the stock transfer records for the Class B Common Stock of the Corporation. "Put" shall have the meaning ascribed to such term contained in paragraph 2 of this subsection B. "Put Period" shall have the meaning ascribed to such term contained in paragraph 2 of this subsection B. 2. Put. Each Holder of Class B Common Stock shall have the option (the "Put"), commencing on June 30, 2000 and ending on December 31, 2001 (the "Put Period"), of causing the Corporation to purchase from time to time any or all the shares of Class B Common Stock then held by such Holder at a cash purchase price per share of $13.00 per share. AGREEMENT AND PLAN OF MERGER ANNEX D-3 85 3. Applicable Covenant. The rights of each Holder of Class B Common Stock under this Section II are subject to the covenants of the Corporation contained in Section 8.5 of the Bank Credit Agreement. 4. Method of Exercise. Any Holder of Class B Common Stock may exercise a Put by giving, during the Put Period, written notice (an "Exercise Notice") to the Corporation specifying in such Exercise Notice the number of shares of Class B Common Stock to be sold to the Corporation, the certificate numbers of the stock certificates that evidence such shares of Class B Common Stock and the aggregate purchase price specified herein to be received by such Holder of Class B Common Stock therefor. 5. Consummation. Subject to fulfillment or waiver of the conditions thereto, the closing of such sale shall be effected on the 20th Business Day following receipt of the Exercise Notice by the Corporation. At the closing, the Holder of Class B Common Stock shall deliver to the Corporation one or more stock certificates registered in the name of such Holder and evidencing the number of shares of Class B Common Stock to be sold by the Holder thereof pursuant to the Put, and the Corporation shall deliver to or for the account of such Holder the aggregate purchase price for such shares in immediately available funds. 6. Conditions. The obligation of the Corporation to consummate a transaction pursuant to the exercise of a Put shall be subject to the fulfillment or waiver of the following conditions: (a) Compliance with Corporate Statute. The consummation of the purchase by the Corporation of the shares of Class B Common Stock tendered for purchase by a Holder thereof pursuant to the exercise of a Put shall then comply with the applicable provisions of the Corporate Statute and the Bank Credit Agreement, as amended from time to time. (b) Reporting Company Status. Neither the Corporation nor any issuer of any class or series of security or securities into which the Class B Common shall have been converted or for which the Class B Common Stock shall have been exchanged, in either case pursuant to any merger, consolidation, share exchange, sale of all or substantially all of the Corporation's assets or liquidation or dissolution of the Corporation, shall then be or have previously been subject to the reporting obligations imposed by Section 15(d) or Section 13 of the Securities Exchange Act of 1934, as amended. If a transaction pursuant to the exercise of a Put is not consummated as a result of the nonfulfillment of the condition contained in subparagraph (a) of this paragraph 6, then the obligation of the Corporation to purchase shares of Class B Common Stock pursuant to such Put shall continue in full force and effect, regardless of any expiration of the time periods provided herein for the exercise of any such Put, until AGREEMENT AND PLAN OF MERGER ANNEX D-4 86 the Corporation shall have complied with the terms of the Put so exercised; provided, however, that the price per share of Class B Common Stock of the Corporation payable pursuant to paragraph 2 of this subsection B shall increase by a factor equivalent to interest thereon at a rate per annum equal to the prime rate of interest in effect from time to time at The Chase Manhattan Bank for its most creditworthy corporate customers from the date on which such price would otherwise have been paid in accordance with the other provisions of this subsection B until the date on which actually paid; provided, however, that, commencing on the first anniversary of the related Exercise Notice, such rate shall increase to such prime rate plus 250 basis points. The aggregate amount of the Corporation's obligation to purchase shares of Class B Common Stock pursuant to such Put pending at any given time shall constitute a liquidation preference of the Class B Common Stock. At such time as the condition contained in subparagraph (b) of this paragraph 6 shall occur (regardless of whether a Put shall then have been exercised), the obligation of the Corporation to purchase shares of Class B Common Stock pursuant to any Put shall terminate. 7. Representations and Warranties. At the closing of the sale of any shares of Class B Common Stock pursuant to the exercise of a Put, the Holder of such shares of Class B Common Stock shall represent and warrant in writing to the Corporation that: (i) such Holder of Class B Common Stock has full right, power and authority to sell and deliver such shares of Class B Common Stock to the Corporation, (ii) such Holder of Class B Common Stock owns such shares of Class B Common Stock of record and beneficially, free and clear of any liens, encumbrances and adverse claims and (iii), upon delivery thereof to the Corporation pursuant to the exercise of a Put by the Holder of Class B Common Stock, the Corporation will acquire good title to such shares of Class B Common Stock free and clear of any liens, encumbrances and adverse claims (other than any that may have been created by the Corporation). 8. Nonassignability. The rights of the Holder of Class B Common Stock pursuant to this subsection B are personal to the Holder of Class B Common Stock and may not be assigned by any Holder of Class B Common Stock other than proportionally in connection with an assignment of such shares of Class B Common Stock by operation of law, by death pursuant to a will or the laws of descent and distribution, by transfer to a member of the immediate family of the Holder of Class B Common Stock or a trust for the benefit of any such family member, by transfer to a commercial bank or other lending institution in accordance with the terms of a bona fide pledge or, in the case of a Holder of Class B Common Stock that is a legal entity at the Effective Time, by such entity to an affiliate (no further assignment being permitted) or successor of such entity or to the purchaser of all or substantially all of that entity's assets, any or all of which exceptions shall be permitted if the transferor or transferee shall give notice of such assignment, together with such information as may be reasonably necessary to evidence qualification of the transferee to be an assignee thereof, to the Corporation. Any assignment or transfer AGREEMENT AND PLAN OF MERGER ANNEX D-5 87 of shares of Class B Common Stock that is not in compliance with the provisions of this paragraph 8 shall cause the relinquishment and termination of the rights contained in this subsection B as they would otherwise apply to such shares of Class B Common Stock. C. Limited Rights to Class Vote. 1. So long as any shares of Class B Common Stock are outstanding, the consent of the holders of not less than a majority of the number of shares of Class B Common Stock then outstanding, given in person or by proxy either at a regular meeting or at a special meeting called for that purpose or pursuant to written consents, at which or pursuant to which, as the case may be, the holders of Class B Common Stock shall vote separately as a class, shall be necessary (i) to approve the issuance by the Corporation of any additional shares of Class B Common Stock and (ii) for effecting, validating or authorizing any amendment, alteration or repeal of any of the provisions of this Section II of Article Fourth of this Certificate of Incorporation, or any amendment thereto, or any other certificate filed pursuant to law (excluding, however, any such amendment, alteration or repeal effected by any merger or consolidation to which the Corporation is a party to the extent provided in paragraph 2 of this subsection C) that would adversely affect any of the designations, preferences, limitations or relative rights of the shares of Class B Common Stock then outstanding; provided, however, that any amendment or amendments to the provisions of the Certificate of Incorporation, as amended, so as to authorize or create, or to increase the authorized amount of, any capital stock of the Corporation ranking pari passu with or senior or junior to the Class B Common Stock as to the payment of dividends or as to the distribution of assets upon any liquidation, dissolution or winding-up of the Corporation shall not be deemed to affect adversely the designations, preferences, limitations or relative rights of the Class B Common Stock. 2. The class vote accorded to the Class B Common Stock by paragraph 1 of this subsection B shall not apply to any amendment, alteration or repeal of any of the provisions of this Section II effected by a merger to which the Corporation is a party: (a) if the Class B Common Stock would in such merger be converted into (i) a right to receive cash; (ii) any equity security if that equity security is registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or was issued by a corporation that is then subject to the reporting obligations imposed by Section 15(d) of the Securities Exchange Act of 1934, as amended, as a result of registration of an offering of that AGREEMENT AND PLAN OF MERGER ANNEX D-6 88 equity security under the registration provisions of the Securities Act of 1933, as amended ("Equity Security"); (iii) any security immediately convertible into or exchangeable for an Equity Security; (iv) any option or warrant immediately exercisable with respect to an Equity Security; or (v) any combination of any of the foregoing; or (b) if the Class B Common Stock would in such merger be converted, in whole or in part, into any security not contemplated by subparagraph (a) of this paragraph 2 ("Other Security") if the relevant documents provide that the Put shall continue after the effective date of such merger as a right to cause the Corporation or any successor thereto, subject to the other provisions of this Section II, to purchase, at the per share price specified in paragraph 2 of subsection B less the amount of any cash consideration per share of Class B Common Stock paid in the merger, the number of shares or other units of such Other Security into which each share of Class B Common Stock was converted in the merger. 3. So long as any shares of the Class B Common Stock remain outstanding, the holders of shares of the Class B Common Stock, voting separately as a class, shall have the right to nominate and to elect, by a majority vote of such shares, one director to the Board of Directors of the Corporation and to fill such position at any regular meeting of stockholders or special meeting called for that purpose or pursuant to written consents. Any director who shall have been elected by holders of shares of Class B Common Stock may be removed at any time, either for or without cause, by, and only by, the affirmative vote of the holders of a majority of the number of shares of Class B Common Stock then outstanding, voting separately as a class, given at any regular meeting of stockholders or a special meeting of such stockholders called for that purpose or pursuant to written consents, and any vacancy thereby created may be filled only by the holders of shares of Class B Common Stock. Such director shall be a member of the Class II Directors. Any director so nominated and elected shall serve until the next annual meeting of stockholders at which members of Class II Directors are elected and until his successor shall have been duly elected or until his earlier resignation, removal or death. The first individual designated by the holders of the Class B Common Stock to serve as a director of the Corporation shall be George K. Hickox, Jr., the term of such director to commence at the effective time of the first issuance of any shares of Class B Common Stock. D. Exchange of Common Stock for Class A Common Stock. AGREEMENT AND PLAN OF MERGER ANNEX D-7 89 1. Issued Shares. Upon the filing of a Certificate of Amendment reflecting these amendments to the Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware (the "Effective Time"), each then issued share of common stock, par value $0.01 per share, of the Corporation (the "Prior Common Stock"), including any such shares held in the treasury of the Corporation, shall be converted, without any action on the part of the holder thereof, into one share of Class A Common Stock. 2. Reserved Shares. From and after the Effective Time, each unissued share of the Prior Common Stock reserved for issuance shall be converted, without any action on the part of any Person, into one share of Class A Common Stock and any obligation of the Corporation, whether contractual or otherwise, to issue any shares of the Prior Common Stock shall be deemed to be an obligation to issue an identical number of shares of Class A Common Stock upon the same terms and conditions. 3. Certificates. From and after the Effective Time, each holder of a certificate theretofore evidencing shares of the Prior Common Stock may be surrendered by the holder thereof in exchange for a certificate or certificates evidencing an equivalent number of shares of Class A Common Stock. II. That in lieu of a special meeting and vote of the stockholders, the stockholders of the Corporation, by written consent, approved, adopted and consented to such amendments in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. III. That such amendments were duly adopted in accordance with the provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. The undersigned, being the duly elected and currently acting Senior Vice President and Chief Financial Officer of NATCO Group Inc., the Corporation to which reference is made in this Certificate, does make this Certificate as of the 18th day of November, 1998, and affirms and acknowledges, under penalties of perjury, that this Certificate is the act and deed of the Corporation and that the facts stated herein are true. ------------------------------------ William B. Wiener III Senior Vice President and Chief Financial Officer NATCO Group Inc. AGREEMENT AND PLAN OF MERGER ANNEX D-8 90 ANNEX E-1 Cap I and Cap II REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of November 18, 1998 by and between NATCO Group Inc., a Delaware corporation (the "Company"), and Capricorn Investors, L.P., a Delaware limited partnership ("Cap I"), and Capricorn Investors II, L.P., a Delaware limited partnership ("Cap II"). R E C I T A L S: On November 18, 1998, the Certificate of Incorporation of the Company was amended to authorize two classes of common stock, par value $0.01 per share ("Common Stock"), to wit: 45,000,000 shares of Class A Common Stock ("Class A Common Stock") and 5,000,000 shares of Class B Common Stock ("Class B Common Stock"), and to convert each of the then outstanding shares of common stock of the Company into one share of Class A Common Stock (the "Charter Amendments"). After giving effect to the Charter Amendments, Cap I owns of record and beneficially 5,563,667 shares (68.3%) of the outstanding Class A Common Stock. After giving effect to the Charter Amendments, Cap II owns of record and beneficially 2,582,259 shares (31.7%) of the outstanding Class A Common Stock. Together, Cap I and Cap II own of record and beneficially, as of the date of this Agreement, all the outstanding Class A Common Stock, being all the outstanding Common Stock. The Company, National Tank Company, a Delaware corporation and a wholly owned subsidiary of the Company ("Natco"), Natco Acquisition Company, a Delaware corporation and a wholly owned subsidiary of the Company ("Newco") and The Cynara Company, a Delaware corporation ("Cynara"), are parties to an Amended and Restated Agreement and Plan of Merger dated November 17, 1998 but effective as of March 26, 1998 (the "Merger Agreement"), pursuant to which Cynara will be merged with and into Natco (the "Merger") and the Designated Stockholders will receive shares of Class B Common Stock through conversion of the outstanding shares of Cynara common stock. The Company and Cap II have executed and delivered an Investment Agreement dated November 17, 1998 pursuant to which the Company has agreed to issue and sell, and Cap II has agreed to purchase, a non-negotiable promissory note convertible upon the occurrence of the events therein specified into 504,762 shares of Class A Common Stock. The stockholders of Cynara have entered into a Registration Rights Agreement of even date herewith between the Company and such stockholders which contains terms and provisions substantially similar to those herein (the "Cynara Registration Rights Agreement"). AGREEMENT AND PLAN OF MERGER ANNEX E-1-1 91 NOW, THEREFORE, for and in consideration of the foregoing, the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions and Usage. A. Definitions. The terms defined in this Section, wherever used in this Agreement, shall, unless the context otherwise requires, have the respective meanings hereinafter specified. "Affected Stockholders" shall mean each Stockholder all or a portion of whose shares of Common Stock have been included in a Registration Statement filed with the Commission pursuant to the provisions of this Agreement. "Agreement" shall mean this Registration Rights Agreement. "Cap I" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Cap II" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Class A Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Class B Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Commission" shall mean the United States Securities and Exchange Commission. "Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Company" shall mean NATCO Group Inc., a Delaware corporation, and any successor corporation by merger, consolidation or otherwise and any parent corporation resulting from the merger or consolidation of the Company with or into a subsidiary of another corporation. "Cynara" shall mean The Cynara Corporation, a Delaware corporation. "Cynara Registration Rights Agreement" shall have the meaning ascribed to such term in the recitals to this Agreement. "Distribution Public Offering" shall mean a distribution (as such term is used in the Securities Act and the Securities Act Rules) of Common Stock by Cap I or Cap II to its general and AGREEMENT AND PLAN OF MERGER ANNEX E-1-2 92 limited partners pursuant to a Registration Statement filed and declared effective under the Securities Act and the Securities Act Rules. "Effective Period" shall mean such period as shall be required under the provisions of the Securities Act and the Securities Act Rules for delivery of a prospectus meeting the requirements of Section 10(a) of the Securities Act to any Person purchasing Common Stock in connection with an Underwritten Public Offering, a Distribution Public Offering or a Market Public Offering, as the case may be; provided, however, that such period shall not include any delivery requirement with respect to the distribution by an underwriter of its unsold allotment relating to an Underwritten Public Offering. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, as the same shall be in effect at the date of any determination to be made hereunder. "Exchange Act Rules" shall mean the rules and regulations promulgated by the Commission under the Exchange Act, as the same shall be in effect at the date of any determination to be made hereunder. "Initial Public Offering" shall mean a public offering of Common Stock by the Company as a result of which the Company first becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. "Market Public Offering" shall mean a public offering for cash of shares of Common Stock into an existing trading market for outstanding shares of Common Stock at other than a fixed price on or through the facilities of a national securities exchange or to or through a market maker otherwise than on an exchange, but in any case pursuant to a Registration Statement filed and declared effective under the Securities Act and the Securities Act Rules. "Merger" shall have the meaning ascribed to such term in the recitals to this Agreement. "Merger Agreement" shall have the meaning ascribed to such term in the recitals to this Agreement. "Notice of Intent to File" shall mean a written notice given by the Company pursuant to Section 2.D or Section 3.A that the Company is preparing to file a Primary Distribution Registration Statement or a Secondary Distribution Registration Statement under the Securities Act relating to an Underwritten Public Offering of Common Stock. "Notice of Registration Request" shall mean a written notice given by the Company pursuant to Section 2.A to the Stockholder that did not send the applicable Registration Request or pursuant to Section 2.B to all Stockholders (other than the Stockholder who sent the applicable Registration Request), in each case notifying such Stockholders that the applicable Registration Request has been received by the Company and briefly advising such Stockholders that they have the right to request AGREEMENT AND PLAN OF MERGER ANNEX E-1-3 93 Registration for the distribution of their holdings of Common Stock, subject to the terms and provisions of this Agreement. "Person" shall mean an individual, a corporation, a partnership, a trust, an unincorporated organization or a government or any agency or political subdivision thereof. "Primary Distribution" shall mean an Underwritten Public Offering of Common Stock offered, sold and delivered by the Company. "Primary Distribution Registration Statement" shall mean a Registration Statement filed by the Company and declared effective under the Securities Act and the Securities Act Rules relating to a Primary Distribution. "Public Offering" shall mean either a Distribution Public Offering, a Market Public Offering or an Underwritten Public Offering "Registrable Shares" shall mean shares of Common Stock owned of record by any Stockholder as to which such Stockholder has requested Registration pursuant to the provisions of Section 2.A, 2.B, 3.B or 4.A. "Registration" shall mean the registration under the registration provisions of the Securities Act of the offering, sale and delivery of shares of Common Stock. "Registration Expenses" shall mean the expenses associated with the preparation and filing of any registration statement pursuant to Section 2.C, 3.C or 4.A herein and any sale covered thereby (including the reasonable fees and expenses of legal counsel to the Affected Stockholders, fees related to blue sky qualifications and filing fees in respect of the National Association of Securities Dealers, Inc.), but excluding underwriting discounts or commissions in respect of shares of Common Stock to be sold by the Affected Stockholders. "Registration Request" shall mean a written notice from a Stockholder requesting that the Company file a Registration Statement with respect to a Distribution Public Offering pursuant to Section 2.A herein, an Underwritten Public Offering pursuant to Section 2.B herein or a Public Offering pursuant to Section 4.A herein, in which the Stockholder advises the Company as to the number of shares of Common Stock that the Stockholder wishes to include in the applicable Registration and in which the Stockholder agrees to (i) the specified method of distribution, (ii), in the case of an Underwritten Public Offering, the designated managing underwriter and (iii) agrees to provide to the Company all such information as may be required by the Company pursuant to Section 6 herein. "Registration Period" shall mean the period of time from the decision of the Company to prepare and file a Registration Statement to and including the effective date of such Registration Statement. AGREEMENT AND PLAN OF MERGER ANNEX E-1-4 94 "Registration Statement" shall mean a registration statement filed on Form S-1, S-2 or S-3 (or any successor form) under the registration provisions of the Securities Act and the Securities Act Rules. "Request Period" shall mean a period of ten business days after receipt pursuant to Section 2.A by the Stockholder that did not send the applicable Registration Request or after receipt pursuant to Section 2.B by all Stockholders (other than the Stockholder who sent the applicable Registration Request) of the Notice of Registration Request. "Secondary Distribution" shall mean an Underwritten Public Offering of Common Stock offered, sold and delivered by shareholders of the Company other than the Stockholders, but including the holders of Common Stock acquired pursuant to the Merger and subject to the Cynara Registration Rights Agreement. "Secondary Distribution Registration Statement" shall mean a Registration Statement filed by the Company and declared effective under the Securities Act and the Securities Act Rules relating to a Secondary Distribution, including a distribution requested by the shareholders subject to the Cynara Registration Rights Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, as the same shall be in effect at the date of any determination to be made hereunder. "Securities Act Rules" shall mean the rules and regulations promulgated by the Commission pursuant to the Securities Act, as the same shall be in effect at the date of any determination to be made hereunder. "Stockholders" shall mean Cap I and Cap II and, upon registration of record ownership of shares of Common Stock by them, Nathaniel A. Gregory, Winokur and the general and limited partners of Cap I and Cap II and any assignee of any of them; provided, however, that, in the case of any such record owner, the offering, sale and delivery of shares of such Common Stock are not exempt from the registration provisions of the Securities Act pursuant to Section 4(1) thereof (without regard to the exemption provided by Rule 144 under the Securities Act unless paragraph (k) of Rule 144 is applicable thereto); and provided, further, that, in the case of any assignee other than Nathaniel A. Gregory, Winokur and such general and limited partners, such assignee has agreed to be bound by the provisions of this Agreement in accordance with Section 15 herein. "Supplemental Registration Request" shall mean a written notice given by any Stockholder pursuant to the provisions of Section 2.A, 2.B or 3.B herein, in which the Stockholder advises the Company as to the number of shares of Common Stock that the Stockholder wishes to include in the applicable Registration and in which the Stockholder agrees to (i) the specified method of distribution, (ii), in the case of an Underwritten Public Offering, the designated managing underwriter and (iii) agrees to provide to the Company all such information as may be required by the Company pursuant to Section 7 herein. AGREEMENT AND PLAN OF MERGER ANNEX E-1-5 95 "Underwritten Public Offering" shall mean a firm commitment underwritten public offering for cash of shares of Common Stock pursuant to a Registration Statement filed and declared effective under the Securities Act and the Securities Act Rules. "Winokur" shall mean Herbert S. Winokur, Jr. or any legal entity (other than Cap I or Cap II) of which Mr. Winokur is the predominant beneficial owner. B. Rules of Construction. Unless the context otherwise requires, as used in this Agreement: (a) a term has the meaning ascribed to it; (b) "or" is not exclusive; (c) "including" means "including without limitation;" (d) words in the singular include the plural; (e) words in the plural include the singular; (f) words applicable to one gender shall be construed to apply to each gender; (g) the terms "hereof," "herein," "hereby," "hereto" and derivative or similar words refer to this entire Agreement; and (h) the term "Section" shall refer to the specified Section of this Agreement. Section 2. Registration Rights. A. Distribution Registration Request. If the Company shall receive a Registration Request from Cap I or Cap II requesting that the Company file a Registration Statement relating to a Distribution Public Offering of shares of Common Stock owned by such Stockholder, the Company shall, if the other Stockholder (Cap I or Cap II) has not theretofore distributed its holdings of Common Stock to its partners in complete or partial liquidation, give promptly (and in any event within ten business days) a Notice of Registration Request to the Stockholder that did not send the Registration Request of the receipt of the Registration Request, enclosing a copy of the Registration Request. During the Request Period, the other Stockholder shall be entitled to give a Supplemental Registration Request to the Company in which such Stockholder requests that the Company register pursuant to the Securities Act and the Securities Act Rules the shares of Common Stock owned by such Stockholder to be distributed in a Distribution Public Offering. B. Registration Request. If the Company shall receive a Registration Request from a Stockholder requesting that the Company file a Registration Statement relating to an Underwritten Public Offering of shares of Common Stock owned by such Stockholder, the Company shall give promptly (and in any event within ten business days) a Notice of Registration Request to each other Stockholder of the receipt of the Registration Request, enclosing a copy of the Registration Request. During the Request Period, the other Stockholders shall be entitled to give a Supplemental Registration Request to the Company in which any or all such Stockholders request that the Company register pursuant to the Securities Act and the Securities Act Rules all or any portion of the shares of Common Stock owned by such Stockholders to be distributed in an Underwritten Public Offering. C. Required Registration. At the end of the Request Period in the case of a Registration Request made pursuant to Section 2.A or 2.B herein, the Company shall, subject to the provisions of Section 2.D herein, prepare as promptly as practicable and file a Registration Statement with AGREEMENT AND PLAN OF MERGER ANNEX E-1-6 96 respect to the distribution in accordance with the applicable method of distribution of the Registrable Shares to be included therein and use its best efforts to cause the Registration Statement to become effective under the Securities Act in accordance with the Securities Act Rules,. D. Suspension of Obligations. The Company's obligations under Section 2.C and Section 4.A herein to prepare and file a Registration Statement and to seek its effectiveness shall be subject to the following provisions: i. The Company shall be required to file no more than an aggregate of five (5) Registration Statements pursuant to Section 2.A and Section 2.B and one (1) Registration Statement pursuant to Section 4.A herein. ii. The Company's obligations to prepare, file and seek effectiveness of a requested Registration Statement shall be suspended: (a) in the case of an Underwritten Public Offering, if the aggregate number of Registrable Shares to be included in such requested Registration Statement is less than 750,000 shares of the then issued and outstanding Common Stock; (b) in any case, during the period from the time that it gives a Notice of Intent to File to Stockholders that it is preparing to file a Primary Distribution Registration Statement until 90 days (or such shorter period as to which the managing underwriter of the Primary Distribution to which the Primary Distribution Registration Statement relates shall consent in writing) have lapsed following the effective date of a Primary Distribution Registration Statement under the Securities Act; provided, however, that (A) such Notice of Intent to File is given prior to the time of receipt by the Company of a Registration Request by any Stockholder and (B) that the Company shall use its best efforts to cause such Primary Distribution Registration Statement to be declared effective as promptly as practicable; and provided further that the obligation to file a Registration Statement on behalf of any Stockholder shall be reinstated if the Company does not file a Primary Distribution Registration Statement within 30 days after giving the Notice of Intent to File; (c) in any case, during the period from the time that it gives a Notice of Intent to File to Stockholders that it is preparing to file a Secondary Distribution Registration Statement until 90 days (or such shorter period as to which the managing underwriter of a Secondary Distribution effected by means of a Secondary Distribution Registration Statement shall consent in writing) have lapsed following the effective date of the Secondary Distribution Registration Statement under the Securities Act; provided, however, that (A) such Notice of Intent to File is given prior to time of receipt by the Company of a Registration Request by any Stockholder and (B) that the Company shall use its best efforts to cause such Secondary Distribution Registration Statement to be declared effective as promptly as practicable; and AGREEMENT AND PLAN OF MERGER ANNEX E-1-7 97 provided further that the obligation to file a Registration Statement on behalf of any Stockholder shall be reinstated if the Company does not file a Secondary Distribution Registration Statement within 30 days after giving the Notice of Intent to File; or (d) in any case, if at the time of receipt by the Company of a Registration Request the Company has material inside information as to which it believes it has a valid business purpose in refraining from disclosing publicly for the time being and that current public disclosure of such information would have a material adverse effect on the Company, for a period commencing with the date of receipt of the Registration Request and ending on the earlier of (a) 60 days after such receipt of the Registration Request; (b) the public announcement of such material inside information; or (c) the date on which the Company gives the Stockholder who issued the Registration Request a notice that suspension of its obligation is no longer required; provided, however, that the same material inside information shall not constitute a basis for continuation of this suspension period. iii. A Registration Statement filed pursuant to a Registration Request made under Section 2.B herein shall first include all Registrable Shares requested to be included by any and all Stockholders and, only after such inclusion, may include Common Stock being sold for the account of the Company or any other security holders. Any Common Stock to be offered on behalf of the Company or such other security holders will be included in such Registration Statement only to the extent that, in the reasonable opinion of the managing underwriter for the Underwritten Public Offering of Registrable Shares on behalf of Stockholders, such inclusion will not materially adversely affect the distribution of Registrable Shares on behalf of such Stockholders. E. Underwriter. The selection of an underwriter for an Underwritten Public Offering of Registrable Shares by Stockholders shall be subject to the approval of the Company, which shall not be unreasonably withheld. F. Withdrawn Registration Statement. For purposes of Section 2.D(i) herein, if a requested Registration Statement is filed and the Company otherwise complies with its obligations hereunder, and i. the Registration Statement is withdrawn with the consent of the Affected Stockholders as a result of a delay in the offering requested by the Company, then no requested Registration Statement shall be deemed to have been filed; or ii. the Affected Stockholders cease to prosecute the Public Offering subject thereto actively and in good faith, the Company shall have the right to withdraw the Registration Statement without the consent of the Affected Stockholders and the requested Registration Statement shall be deemed to have been filed. AGREEMENT AND PLAN OF MERGER ANNEX E-1-8 98 Section 3. Incidental/"Piggy-back" Registration. A. Notice of Intent to File. If the Company at any time proposes to file a Primary Distribution Registration Statement or a Secondary Distribution Registration Statement under the Securities Act relating to an Underwritten Public Offering of Common Stock that would permit the inclusion therein of shares of Common Stock to be distributed in accordance with the method of distribution contemplated by such Registration Statement, the Company shall give to each Stockholder a Notice of Intent to File promptly after a determination has been made by the Company to prepare and file such Registration Statement, but in any event not less than ten days before the filing with the Commission of such Registration Statement, which notice shall set forth the intended method of distribution (including the name of the managing underwriter) of the securities proposed to be registered. The Notice of Intent to File shall include an offer to include in such filing, subject to the other provisions of this Agreement, such amount of Registrable Shares as each Stockholder may request. B. Supplemental Registration Request. If any Stockholder wishes to have Registrable Shares registered pursuant to this Section 3, it shall advise the Company by giving a Supplemental Registration Request within 20 days after the date of receipt of the Notice of Intent to File (or such shorter period, but in any event not less than ten days, as the Company shall specify in its Notice of Intent to File), setting forth the amount of Registrable Shares for which Registration is requested. C. Registration Obligation. Subject to the provisions of the next sentence, the Company shall include all Registrable Shares specified in the Supplemental Registration Requests received by it in accordance with subsection B of this Section 3. If, however, the managing underwriter of the proposed Primary Distribution or Secondary Distribution shall advise the Company in writing that, in the reasonable opinion of such managing underwriter, the inclusion in the Registration Statement of the aggregate number of shares of Common Stock requested by the Stockholders to be included in the Primary Distribution or Secondary Distribution would materially adversely affect such distribution of securities, then the Company shall so advise the Affected Stockholders and the number of such shares of Common Stock included in the Registration Statement shall be reduced to the number acceptable to such managing underwriter and such reduced number of shares shall be allocated pro rata among the Affected Stockholders based on the Registrable Shares held by each. If any Stockholder does not agree to the terms of underwriting of such Primary Distribution or Secondary Distribution, the shares of Common Stock owned by such Stockholder shall be excluded therefrom by written notice from the Company or such managing underwriter. D. Underwriting Agreement. Any obligation of the Company to include shares of Common Stock of any Stockholder in a Registration Statement prepared and filed pursuant to this Section 3 shall be conditioned upon the agreement of such Stockholder to enter into an underwriting agreement with the Company, other security holders, if any, and the managing underwriter of the Primary Distribution or the Secondary Distribution of the type described in subsection (H) of Section 5. AGREEMENT AND PLAN OF MERGER ANNEX E-1-9 99 Section 4. Special Registration Right. A. Preparation and Filing. If at any time during the term hereof, (i) Winokur acquires the record and beneficial ownership of any Common Stock from Cap I or Cap II, (ii) in the opinion of counsel, reasonably satisfactory to the Company, all or part of such shares may not be sold by Winokur without registration under the Securities Act or reliance on an exemption from the registration provisions thereof (other than Section 4(1) of the Securities Act) and (iii) Winokur desires in good faith to pledge all or a portion of such shares as collateral for borrowings by Winoker from one or more lenders ("Lenders"), then, upon receipt by the Company of a Registration Request from Winokur or the Lenders, the Company shall, subject to the provisions of Section 2.D herein, prepare as promptly as practicable and file a Registration Statement with respect to the offering, sale and delivery by the Lenders of all or any part of the shares of Common Stock pledged by Winokur to the Lenders in accordance with the applicable method of distribution of the Registrable Shares to be included therein and use its best efforts to cause the Registration Statement to become effective under the Securities Act in accordance with the Securities Act Rules. If so requested by Winokur or the Lenders, the Registration Statement shall be filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules. B. Distribution. The applicable method of distribution of the Registrable Shares shall be as requested by the Lenders (or Winokur on behalf of the Lenders) and the methods of distribution may include a distribution by one or more broker-dealers named in the Registration Statement "at the market" pursuant to a Market Public Offering. The Company agrees that it will amend the Registration Statement or supplement the prospectus to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. C. Limitations. The preparation and filing of a Registration Statement pursuant to this Section 4 and the offering, sale and delivery of Registrable Shares pursuant thereto shall be subject to the following limitations: i. The Company shall be obligated to prepare, file and cause to become effective only one Registration Statement pursuant to this Section 4. ii. The only offering, sale and delivery of Registrable Shares under such Registration Statement shall be for the account of the Lenders after a foreclosure of the lien against such shares following a default in payment of the borrowings made against such collateral, and no sales of such shares shall be effected by the Lenders under such Registration Statement prior to the delivery to the Company of a certificate of the Lenders to such effect. iii. The proposed and actual filing by the Company of a Registration Statement pursuant to this Section 4 shall not entitle any Stockholder to registration rights pursuant to Section 3 herein. AGREEMENT AND PLAN OF MERGER ANNEX E-1-10 100 iv. The offering, sale and delivery of Registrable Shares pursuant to any Registration Statement filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules under this Section 4 shall be suspended if, at the time of any offering, sale and delivery pursuant to a shelf registration statement, the Company has material inside information as to which it believes it has a valid business purpose in refraining from disclosing publicly for the time being and that current public disclosure of such information would have a material adverse effect on the Company. Such suspension period shall commence upon notice by the Company to Winokur and the Lenders and shall continue until the earlier of (a) the expiration of 60 days thereafter; (b) the public announcement of such material inside information; or (c) the date on which the Company gives Winokur and the Lenders notice that such suspension is no longer required; provided, however, that the same material inside information shall not constitute a basis for continuation of this suspension period. v. The Company shall be obligated to maintain the effectiveness of a Registration Statement filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules under this Section 4 until the third anniversary of the effective date thereof and no longer. D. Benefits. Upon receipt by the Company of a Registration Request under this Section 4, the Lenders shall have the benefits and obligations of an Affected Stockholder under Sections 5, 6, 7 and 8 of this Agreement and of a Stockholder under Sections 9, 10, 11, 12, 13, 16 and 17 of this Agreement. Section 5. Registration Procedures. If the Company is required by the provisions of Section 2, 3 or 4 to effect the Registration of any of the Registrable Shares, the Company shall, as expeditiously as possible: A. Filing. Prepare and file with the Commission a Registration Statement with respect to such shares of Common Stock and use its best efforts to cause such Registration Statement to become and, subject to subsection C of this Section 5, remain effective. B. Amendments. Prepare and file with the Commission during the Registration Period such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to permit such Registration Statement to become effective in accordance with the Securities Act and the Securities Act Rules and to ensure that such Registration Statement and the prospectus used in connection therewith comply with the disclosure standards of Section 11 of the Securities Act and Section 10(b) of the Exchange Act and that such prospectus complies with Section 10 of the Securities Act, in each case during the Effective Period. C. Maintenance of Effectiveness. Subject to the provisions of Section 4.C herein, use its best efforts to maintain the effectiveness of such Registration Statement and to ensure compliance of the prospectus contained therein with Section 10(a) of the Securities Act for the Effective Period. AGREEMENT AND PLAN OF MERGER ANNEX E-1-11 101 D. Copies. Furnish to each Affected Stockholder (i) such number of copies of such Registration Statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such Registration Statement (including each preliminary prospectus, summary prospectus and prospectus supplement), in conformity with the requirements of the Securities Act, and such other documents, as such Affected Stockholder may reasonably require in order to facilitate the offering, sale and delivery or other disposition of the Registrable Shares owned by such Affected Stockholder and (ii), during the Registration Period and the Effective Period, copies of any written correspondence or memoranda relating to oral communications in each case with the Commission and copies of any request by the Commission for any amendment of or supplement to the Registration Statement or the prospectus included therein or for additional information. E. Blue Sky Laws. Use its best efforts to register or qualify the Common Stock covered by such Registration Statement under the securities or blue sky laws of such jurisdictions as the managing underwriter of such Distribution may reasonably request (excluding, however, any jurisdiction in which the filing would subject the Company to additional tax liability and any jurisdiction in which the Company would thereby be required to execute a general consent to service of process) and use all reasonable efforts to do such other acts and things as may be required to enable the Affected Stockholders to consummate the public sale or other disposition in such jurisdictions of the Registrable Shares owned by such Affected Stockholders. F. Earnings Statement. Make available to its holders of Common Stock, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, but not more than 18 months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. G. Amended Prospectuses. Notify each Affected Stockholder immediately if the Company shall become aware at any time during the Effective Period that the prospectus included in the Registration Statement, as such prospectus may be amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading in light of the circumstances then existing, and at the request of any Affected Stockholder to prepare promptly and to furnish to each Affected Stockholder such number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading in the light of the circumstances then existing. H. Underwriting Agreements. Enter into such agreements (including an underwriting agreement in customary form and containing customary provisions relating to legal opinions and accountants' letters, representations and warranties and mutual indemnification and contribution between the Company and the underwriters for the Affected Stockholders) and use all reasonable AGREEMENT AND PLAN OF MERGER ANNEX E-1-12 102 efforts to take such other actions as the Affected Stockholders may reasonably request in order to expedite or facilitate the disposition of such Registrable Shares. I. Inspection. Make available for inspection by the Affected Stockholders, by any underwriter participating in any distribution to be effected pursuant to such Registration Statement and by any attorney, accountant or other agent retained by Affected Stockholders or any such underwriter all pertinent financial and other records, pertinent corporate documents and properties of the Company and cause all of the Company's officers, directors and employees to supply all such information requested by the Affected Stockholders, such underwriter, attorney, accountant or agent, as is reasonably needed in connection with such Registration. 6. Classes of Stock. The parties hereto intend that any capital stock sold by a Stockholder pursuant to the provisions of this Agreement shall be Class A Common Stock if sold prior to January 1, 2002 or Common Stock if sold thereafter. Accordingly, any reference herein to the inclusion of Common Stock in a Registration Statement for offering, sale and delivery by a Stockholder hereunder shall, subject to the proviso to Article Fourth, II-A-4, of the Certificate of Incorporation of the Company, prior to January 1, 2002 be deemed to refer to Class A Common Stock and thereafter to Common Stock. 7. Expenses; Limitations on Registration. The Registration Expenses relating to any Registration effected by the Company pursuant to this Agreement shall be for the account of the Company; provided, however, that any and all underwriting discounts and commissions attributable to the sale of the shares of Common Stock of the Affected Stockholders shall be for the account of the Affected Stockholders. For purposes of this Section 7, the Company shall be obligated to pay the fees and expenses of only one law firm representing the Affected Stockholders. If more than one such firm shall represent the Affected Stockholders in connection with a Registration under this Agreement, the Affected Stockholders shall notify the Company as to which firm shall be deemed to represent the Affected Stockholders for purposes of this Section 7. Section 8. Stockholders' Information. The Affected Stockholders shall provide all information reasonably requested by the Company for inclusion in any Registration Statement to be filed hereunder. The actual provision of such information shall be a condition precedent to the obligation of the Company to take any action pursuant to this Agreement in respect of the Registration of Registrable Shares of any Affected Stockholder. Section 9. Indemnification. A. In connection with the Registration of any Registrable Shares under the Securities Act pursuant to this Agreement, the Company agrees to indemnify and hold harmless each Affected Stockholder, its partners, directors, officers and employees, and each other Person, if any, who controls such Affected Stockholder within the meaning of Section 15 of the Securities Act, against AGREEMENT AND PLAN OF MERGER ANNEX E-1-13 103 any losses, claims, damages or liabilities, joint or several, to which such Affected Stockholder or any such partner, director, officer, employee or controlling Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or any alleged untrue statement of a material fact contained in the Registration Statement or the prospectus included therein at the time the Registration Statement is declared effective or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) any untrue statement of a material fact or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus, the prospectus included therein or any amendment or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements concerning the Company therein, in the light of the circumstances under which they were made, not misleading and shall reimburse each Affected Stockholder and each such partner, director, officer, employee and controlling Person for any legal or other expenses reasonably incurred by such Affected Stockholder or such partner, director, officer employee or controlling Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished by or on behalf of an Affected Stockholder to the Company expressly for use therein; and provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if such untrue statement or alleged untrue statement or omission or alleged omission was corrected in the final prospectus included in the Registration Statement at the time it became effective and the Affected Stockholder, in the case of a Distribution Public Offering or a Market Public Offering, or the managing underwriter, in the case of an Underwritten Public Offering, failed to provide the final prospectus as required by the Securities Act and the Securities Act Rules. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Affected Stockholder or any such partner, director, officer, employee or controlling Person, and shall survive the transfer of such securities by any Affected Stockholder. B. Each Affected Stockholder agrees to indemnify and hold harmless the Company, its directors, officers and employees, each other Person, if any, who controls the Company and each other Affected Stockholder against any losses, claims, damages or liabilities, joint or several, to which the Company, any such director, officer or employee, any such controlling Person or such other Affected Stockholder may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or any alleged untrue statement of a material fact contained in the Registration Statement or the prospectus included therein at the time the Registration Statement is declared effective or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements therein not misleading or AGREEMENT AND PLAN OF MERGER ANNEX E-1-14 104 (ii) any untrue statement of a material fact or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus, the prospectus included therein or any amendment or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements concerning the Company therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such alleged untrue statement or alleged omission was made in such Registration Statement, preliminary prospectus, prospectus, amendment or supplement in reliance upon and in conformity with written information furnished by or on behalf of an Affected Stockholder to the Company expressly for use therein, and shall reimburse the Company or such director, officer, employee or other Person for any legal or any other expenses reasonably incurred in connection with investigating or defending any such loss, claim, damage, liability or action. C. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding involving a claim referred to in subsection (A) or (B) of this Section 9, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligation under this subsection C to the extent the indemnifying party is not materially prejudiced by such failure. In case any such action is brought against an indemnified party, the indemnified party shall permit the indemnifying party to assume the defense of such action or proceeding, provided that counsel for the indemnifying party, who shall conduct the defense of such action or proceeding, shall be approved by the indemnified party (whose approval shall not be unreasonably withheld) and the indemnified party may participate in such defense (in which case, such participation shall be at such indemnified party's expense, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified party and the indemnifying party shall exist in respect of such claim, in which event the indemnifying party shall pay the reasonable fees and expense of separate counsel for the indemnified party). No indemnifying party shall consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. The indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm for all indemnified parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent. D. Indemnification similar to that specified in the preceding subsections of this Section 9 shall be given by the Company and each Affected Stockholder (with such modifications as shall be appropriate) with respect to liability related to any required registration or other qualification of Registrable Shares under any Federal or state law or regulation of governmental authority other than the Securities Act. E. If the indemnification provided for in this Section 9 is unavailable or insufficient to hold harmless an indemnified party under subsection (A) or (B) above, then the indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, AGREEMENT AND PLAN OF MERGER ANNEX E-1-15 105 damages or liabilities referred to in subsection (A) or (B) above, in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and each Affected Stockholder, on the other, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Affected Stockholder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Affected Stockholders agree that it would not be just and equitable if contributions pursuant to this subsection (E) were to be determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the first sentence of this subsection (E). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (E) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim (which shall be limited as provided in subsection (C) above if the indemnifying party has assumed the defense of any such action in accordance with the provisions thereof) that is the subject of this subsection (E). Notwithstanding the provisions of this subsection (E), in respect of any loss, claim, damage or liability based upon any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact that relates to information other than information supplied by any Affected Stockholder, no Affected Stockholder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Shares offered by it and distributed to the public exceeds the amount of any damages that such Affected Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Promptly after receipt by an indemnified party under this subsection (E) of notice of the commencement of any action against such party in respect of which a claim for contribution may be made against an indemnifying party under this subsection (E), such indemnified party shall notify the indemnifying party in writing of the commencement thereof if the notice specified in subsection (C) above has not been given with respect to such action; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party under this subsection (E) to the extent such omission is not prejudicial. Section 10. Public Availability of Information. The Company shall comply with all applicable public information reporting requirements of the Commission, to the extent required from time to time to enable each Stockholder to sell Registrable Shares without Registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Stockholder, the Company will deliver to such Stockholder a written statement as to whether it has complied with such requirements. AGREEMENT AND PLAN OF MERGER ANNEX E-1-16 106 Section 11. Supplying Information. The Company shall cooperate with each Stockholder in supplying such information as may be necessary for such Stockholder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Registrable Shares. Section 12. Specific Performance. Each party hereto acknowledges and agrees that each other party hereto would be irreparably harmed and would have no adequate remedy of law if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, it is agreed that, in addition to any other remedies by law or in equity which may be available, the parties hereto shall be entitled to obtain preliminary and permanent injunctive relief with respect to any breach or threatened breach of, or otherwise obtain specific performance of, the covenants and other agreements contained in this Agreement. Section 13. Representations and Warranties of the Company. The Company represents and warrants to each Stockholder that, as of the date of this Agreement, (a) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) the execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or any of the transactions contemplated hereby and (c) this Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, and, assuming that this Agreement constitutes a valid and binding obligation of each of Cap I and Cap II, is enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance and similar laws affecting creditors' rights generally from time to time and to general principles of equity and except as the enforceability thereof may be limited by considerations of public policy. Section 14. Representations and Warranties of Cap I and Cap II. Each of Cap I and Cap II represents and warrants to the Company that, as of the date of this Agreement, (a) it is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and has the organizational power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) the execution and delivery of this Agreement by such Stockholder and the consummation by such Stockholder of the transactions contemplated hereby have been duly authorized by all necessary organizational action on the part of such Stockholder and no other organizational proceedings on the part of such Stockholder are necessary to authorize this Agreement or any of the transactions contemplated hereby and (c) this Agreement has been duly executed and delivered by such Stockholder and constitutes a valid and binding obligation of such Stockholder and, assuming that this Agreement constitutes a valid and binding obligation of the Company, is enforceable against such Stockholder in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance and similar laws affecting creditors' AGREEMENT AND PLAN OF MERGER ANNEX E-1-17 107 rights generally from time to time and to general principles of equity and except as the enforceability thereof may be limited by considerations of public policy. Section 15. Expiration. This Agreement and the rights, benefits, duties and obligations hereunder of the parties hereto and their successors and permitted assigns shall expire and be of no further force or effect on the 180th day after the later to occur of (i) May 31, 2004 and (ii) the first date on which each and all of Cap I, Cap II, Nathaniel A. Gregory and, to the extent that Winokur has acquired the record and beneficial ownership of shares of Common Stock from Cap I or Cap II, Winokur is able to sell shares of Common Stock subject hereto in reliance upon the exemption from the registration provisions of the Securities Act contained in Rule 144(k) or any successor Securities Act Rule. Section 16. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or transmitted by telex, telegram or facsimile transmission or mailed by registered or certified mail (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): (a) if to Cap I, to: Capricorn Investors, L.P. c/o Winokur Holdings, Inc. 30 East Elm Street Greenwich, Connecticut 06830 Attention: Herbert S. Winokur, Jr. President Telecopy No.: (203) 861-6671 with a copy to: O'Melveny & Myers LLP 153 E. 53rd Street 53rd Floor New York, New York 10022-4611 Attn.: Mr. Jeffrey J. Rosen Facsimile: (212) 326-2061 (b) if to Cap II, to: Capricorn Investors II, L.P. c/o Capricorn Holdings, LLC 30 East Elm Street Greenwich, Connecticut 06830 Attention: Manager Telecopy No.: (203) 861-6671 AGREEMENT AND PLAN OF MERGER ANNEX E-1-18 108 with a copy to: O'Melveny & Myers LLP 153 E. 53rd Street 53rd Floor New York, New York 10022-4611 Attn.: Mr. Jeffrey J. Rosen Facsimile: (212) 326-2061 (c) if to the Company, to: NATCO Group, Inc. Brookhollow Central III 2950 North Loop West Suite 750 Houston, Texas 77092 Attn.: Mr. Nathaniel A. Gregory, Chairman and Chief Executive Officer Facsimile No.: (713) 683-7814 with a copy to: Vinson & Elkins L.L.P. First City Tower 1001 Fannin Street Houston, Texas 77002-6760 Attn.: Mr. William E. Joor III Facsimile No.: (713) 615-5201 Section 17. Benefit and Assignment. (a) The terms and conditions of this Agreement shall inure to the benefit of and be binding on the parties hereto and their respective successors and permitted assigns; provided, however, that, except as otherwise provided in this Section, this Agreement shall not be assignable by any party hereto except by operation of law or with the prior express written consent of the other parties hereto. Upon registration of record ownership of shares of Common Stock by Nathaniel A. Gregory, Winokur or any general or limited partner of Cap I or Cap II, such person shall become a Stockholder and a third party beneficiary of all the rights of a Stockholder hereunder. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto, their respective successors and permitted assigns and such third party beneficiaries, any rights, remedies, obligations or liabilities under or by reason of this Agreement. (b) If Cap I or Cap II shall transfer and assign shares of Common Stock to any Person otherwise than in a Distribution Public Offering or an Underwritten Public Offering, Cap I or Cap II (or any Person who shall be a transferee or assignee pursuant to this subsection (b)), as the case may be, may assign such portion of its rights and benefits under AGREEMENT AND PLAN OF MERGER ANNEX E-1-19 109 this Agreement as is necessary to permit such Person to act as a Stockholder hereunder; provided, however, that such Person shall agree in writing to be bound by the duties and obligations of a Stockholder hereunder. Section 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to the application of doctrines of conflicts of law. Section 19. Counterparts. This Agreement may be executed simultaneously in one or more counterparts, any of which may have been transmitted and received by facsimile transmission and each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. (The remainder of this page left blank intentionally.) AGREEMENT AND PLAN OF MERGER ANNEX E-1-20 110 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their officers thereunto duly authorized. NATCO GROUP INC. BY: ------------------------------------- Nathaniel A. Gregory Chairman and Chief Executive Officer CAPRICORN INVESTORS, L.P. By: Capricorn Holdings, G.P., its general partner By: Winokur Holdings, Inc., its general partner By: ------------------------------------- Herbert S. Winokur, Jr. President. CAPRICORN INVESTORS II, L.P. By: Capricorn Holdings, LLC, its general partner By: ------------------------------------- Herbert S. Winokur, Jr. Manager AGREEMENT AND PLAN OF MERGER ANNEX E-1-21 111 ANNEX E-2 Cynara REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of November 18, 1998 by and between NATCO Group Inc., a Delaware corporation (the "Company"), and the undersigned holders of Common Stock of the Company (the "Designated Stockholders"). R E C I T A L S: On November 18, 1998, the Certificate of Incorporation of the Company was amended to authorize two classes of common stock, par value $0.01 per share ("Common Stock"), to wit: 45,000,000 shares of Class A Common Stock ("Class A Common Stock") and 5,000,000 shares of Class B Common Stock ("Class B Common Stock"), and to convert each of the then outstanding shares of common stock of the Company into one share of Class A Common Stock (the "Charter Amendments"). After giving effect to the Charter Amendments, Cap I owns of record and beneficially 5,563,667 shares (68.3%) of the outstanding Class A Common Stock. After giving effect to the Charter Amendments, Cap II owns of record and beneficially 2,582,259 shares (31.7%) of the outstanding Class A Common Stock. Together, Cap I and Cap II own of record and beneficially, as of the date of this Agreement, all the outstanding Class A Common Stock, being all the outstanding Common Stock. The Company, National Tank Company, a Delaware corporation and a wholly owned subsidiary of the Company ("Natco"), Natco Acquisition Company, a Delaware corporation and a wholly owned subsidiary of the Company ("Newco") and The Cynara Company, a Delaware corporation ("Cynara"), are parties to an Amended and Restated Agreement and Plan of Merger dated November 17 1998 but effective as of March 26, 1998 (the "Merger Agreement"), pursuant to which Cynara will be merged with and into Natco (the "Merger") and the Designated Stockholders will receive shares of Class B Common Stock through conversion of the outstanding shares of Cynara common stock. The Company and Cap II have executed and delivered an Investment Agreement dated November 17, 1998 pursuant to which the Company has agreed to issue and sell, and Cap II has agreed to purchase, a non-negotiable promissory note convertible upon occurrence of the events therein specified into 504,762 shares of Class A Common Stock. Cap I and Cap II have entered into a Registration Rights Agreement of even date herewith between the Company and such stockholders which contains terms and provisions substantially similar to those herein (the "Capricorn Registration Rights Agreement"). AGREEMENT AND PLAN OF MERGER ANNEX E-2-1 112 It is a condition to consummation of the Merger that the stockholders of Cynara who will become stockholders of the Company upon consummation of the Merger shall have entered into a registration rights agreement as contemplated by the Merger Agreement. NOW, THEREFORE, for and in consideration of the foregoing, the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions and Usage. A. Definitions. The terms defined in this Section, wherever used in this Agreement, shall, unless the context otherwise requires, have the respective meanings hereinafter specified. "Affected Stockholders" shall mean each Stockholder all or a portion of whose shares of Common Stock have been included in a Registration Statement filed with the Commission pursuant to the provisions of this Agreement. "Agreement" shall mean this Registration Rights Agreement. "Cap I" shall mean Capricorn Partners, L.P., a Delaware limited partnership. "Cap II" shall mean Capricorn Partners II, L.P., a Delaware limited partnership. "Capricorn Registration Rights Agreement" shall have the meaning ascribed to such term in the recitals to this Agreement. "Class A Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Class B Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Commission" shall mean the United States Securities and Exchange Commission. "Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Company" shall mean NATCO Group Inc., a Delaware corporation, and any successor corporation by merger, consolidation or otherwise and any parent corporation resulting from the merger or consolidation of the Company with or into a subsidiary of another corporation. "Cynara" shall mean The Cynara Corporation, a Delaware corporation. AGREEMENT AND PLAN OF MERGER ANNEX E-2-2 113 "Designated Stockholders" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Earnout Shares" shall mean the CTOC Earnout Shares, the Initial Earnout Shares and the Supplemental Earnout Shares as those terms are defined in the Merger Agreement. "Effective Period" shall mean such period as shall be required under the provisions of the Securities Act and the Securities Act Rules for delivery of a prospectus meeting the requirements of Section 10(a) of the Securities Act to any Person purchasing Common Stock in connection with an Underwritten Public Offering or a Market Public Offering; provided, however, that such period shall not include any delivery requirement with respect to the distribution by an underwriter of its unsold allotment relating to an Underwritten Public Offering. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, as the same shall be in effect at the date of any determination to be made hereunder. "Exchange Act Rules" shall mean the rules and regulations promulgated by the Commission under the Exchange Act, as the same shall be in effect at the date of any determination to be made hereunder. "Market Public Offering" shall mean a public offering for cash of shares of Common Stock into an existing trading market for outstanding shares of Common Stock at other than a fixed price on or through the facilities of a national securities exchange or to or through a market maker otherwise than on an exchange, but in any case pursuant to a Registration Statement filed and declared effective under the Securities Act and the Securities Act Rules. "Merger" shall have the meaning ascribed to such term in the recitals to this Agreement. "Merger Agreement" shall have the meaning ascribed to such term in the recitals to this Agreement. "Notice of Intent to File" shall mean a written notice given by the Company pursuant to Section 2.C or Section 3.A that the Company is preparing to file a Primary Distribution Registration Statement or a Secondary Distribution Registration Statement under the Securities Act relating to an Underwritten Public Offering of Common Stock. "Notice of Registration Request" shall mean a written notice given by the Company pursuant to Section 2.A or 4.A to each Stockholder that did not send the applicable Registration Request, notifying such Stockholders that the applicable Registration Request has been received by the Company and briefly advising such Stockholders that they have the right to request Registration for the distribution of their holdings of Common Stock, subject to the terms and provisions of this Agreement. AGREEMENT AND PLAN OF MERGER ANNEX E-2-3 114 "Person" shall mean an individual, a corporation, a partnership, a trust, an unincorporated organization or a government or any agency or political subdivision thereof. "Primary Distribution" shall mean an Underwritten Public Offering of Common Stock offered, sold and delivered by the Company. "Primary Distribution Registration Statement" shall mean a Registration Statement filed by the Company and declared effective under the Securities Act and the Securities Act Rules relating to a Primary Distribution. "Public Offering" shall mean either an Underwritten Public Offering or a Market Public Offering. "Registrable Shares" shall mean shares of Common Stock owned of record by any Stockholder as to which such Stockholder has requested Registration pursuant to the provisions of Section 2.A, 3.B or 4.A. "Registration" shall mean the registration under the registration provisions of the Securities Act of the offering, sale and delivery of shares of Common Stock. "Registration Expenses" shall mean the expenses associated with the preparation and filing of any registration statement pursuant to Section 2.B, 3.C or 4.B herein and any sale covered thereby (including the reasonable fees and expenses of legal counsel to the Affected Stockholders, fees related to blue sky qualifications and filing fees in respect of the National Association of Securities Dealers, Inc.), but excluding underwriting discounts or commissions in respect of shares of Common Stock to be sold by the Affected Stockholders. "Registration Request" shall mean a written notice from a Stockholder requesting that the Company file a Registration Statement with respect to an Underwritten Public Offering pursuant to Section 2.A herein or with respect to a Public Offering pursuant to Section 4.A herein. "Registration Period" shall mean the period of time from the decision of the Company to prepare and file a Registration Statement to and including the effective date of such Registration Statement. "Registration Statement" shall mean a registration statement filed on Form S-1, S-2 or S-3 (or any successor form) under the registration provisions of the Securities Act and the Securities Act Rules. "Request Period" shall mean a period of fifteen (15) business days after receipt of a Notice of Registration Request from the Company pursuant to Section 2.A or 4.A by each Stockholder that did not send the applicable Registration Request. AGREEMENT AND PLAN OF MERGER ANNEX E-2-4 115 "Secondary Distribution" shall mean an Underwritten Public Offering of Common Stock offered, sold and delivered by shareholders of the Company other than the Stockholders, but including the holders of Common Stock subject to the Capricorn Registration Rights Agreement. "Secondary Distribution Registration Statement" shall mean a Registration Statement filed by the Company and declared effective under the Securities Act and the Securities Act Rules relating to a Secondary Distribution, including a distribution requested by the shareholders subject to the Capricorn Registration Rights Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, as the same shall be in effect at the date of any determination to be made hereunder. "Securities Act Rules" shall mean the rules and regulations promulgated by the Commission pursuant to the Securities Act, as the same shall be in effect at the date of any determination to be made hereunder. "Stockholders" shall mean any or all of the Designated Stockholders and any assignee of shares of Common Stock theretofore held by any of them; provided, however, that, in the case of any such assignee, the offering, sale and delivery of shares of such Common Stock by such assignee are not exempt from the registration provisions of the Securities Act pursuant to Section 4(1) thereof (without regard to the exemption provided by Rule 144 under the Securities Act unless paragraph (k) of Rule 144 is applicable thereto); and provided, further, that, in the case of any assignee, such assignee has agreed to be bound by the provisions of this Agreement in accordance with Section 15 herein. "Supplemental Registration Request" shall mean a written notice given by any Stockholder pursuant to the provisions of Section 2.A, 3.B or 4.A herein, in which the Stockholder advises the Company as to the number of shares of Common Stock that the Stockholder wishes to include in the applicable Registration and in which the Stockholder agrees to (i) the specified method of distribution, (ii) if applicable, the designated managing underwriter and (iii) provide to the Company all such information as may be required by the Company pursuant to Section 7 herein. "Underwritten Public Offering" shall mean a firm commitment underwritten public offering for cash of shares of Common Stock pursuant to a Registration Statement filed and declared effective under the Securities Act and the Securities Act Rules. B. Rules of Construction. Unless the context otherwise requires, as used in this Agreement: (a) a term has the meaning ascribed to it; (b)"including" means "including without limitation;" (c) words in the singular include the plural; (d) words in the plural include the singular; (e) words applicable to one gender shall be construed to apply to each gender; (f) the terms "hereof," "herein," "hereby," "hereto" and derivative or similar words refer to this entire Agreement; and (g) the term "Section" shall refer to the specified Section of this Agreement. AGREEMENT AND PLAN OF MERGER ANNEX E-2-5 116 Section 2. Registration Rights. A. Registration Request. If the Company shall receive a Registration Request from a Stockholder requesting that the Company file a Registration Statement relating to an Underwritten Public Offering of shares of Common Stock owned by such Stockholder, the Company shall give promptly (and in any event within ten business days) a Notice of Registration Request to each other Stockholder of the receipt of the Registration Request, enclosing a copy of the Registration Request. During the Request Period, the other Stockholders shall be entitled to give a Supplemental Registration Request to the Company in which any or all such Stockholders request that the Company register pursuant to the Securities Act and the Securities Act Rules all or any portion of the shares of Common Stock owned by such Stockholders to be distributed in an Underwritten Public Offering. B. Required Registration. At the end of the Request Period, the Company shall, subject to the provisions of Section 2.C herein, prepare as promptly as practicable and file a Registration Statement with respect to the distribution in accordance with the applicable method of distribution of the Registrable Shares to be included therein and use its best efforts to cause the Registration Statement to become effective under the Securities Act in accordance with the Securities Act Rules,. C. Suspension of Obligations. The Company's obligations under Section 2.B herein to prepare and file a Registration Statement and to seek its effectiveness shall be subject to the following provisions: i. The Company shall be required to file no more than two (2) Registration Statements pursuant to Section 2.A herein and one (1) Registration Statement pursuant to Section 4.B herein. ii. The Company's obligations to prepare, file and seek effectiveness of a requested Registration Statement shall be suspended: (a) if the aggregate number of Registrable Shares to be included in such requested Registration Statement is less than 500,000 shares of the then issued and outstanding Common Stock; (b) in any case, during the period from the time that it gives a Notice of Intent to File to Stockholders that it is preparing to file a Primary Distribution Registration Statement until 90 days (or such shorter period as to which the managing underwriter of the Primary Distribution to which the Primary Distribution Registration Statement relates shall consent in writing) have lapsed following the effective date of a Primary Distribution Registration Statement under the Securities Act; provided, however, that (A) such Notice of Intent to File is given prior to the time of receipt by the Company of a Registration Request by any Stockholder and (B) that the Company shall use its best efforts to cause such Primary Distribution AGREEMENT AND PLAN OF MERGER ANNEX E-2-6 117 Registration Statement to be declared effective as promptly as practicable; and provided, further, that the obligation to file a Registration Statement on behalf of any Stockholder shall be reinstated if the Company does not file a Primary Distribution Registration Statement within 30 days after giving the Notice of Intent to File; (c) in any case, during the period from the time that it gives a Notice of Intent to File to Stockholders that it is preparing to file a Secondary Distribution Registration Statement until 90 days (or such shorter period as to which the managing underwriter of a Secondary Distribution effected by means of a Secondary Distribution Registration Statement shall consent in writing) have lapsed following the effective date of the Secondary Distribution Registration Statement under the Securities Act; provided, however, that (A) such Notice of Intent to File is given prior to time of receipt by the Company of a Registration Request by any Stockholder and (B) that the Company shall use its best efforts to cause such Secondary Distribution Registration Statement to be declared effective as promptly as practicable; and provided, further, that the obligation to file a Registration Statement on behalf of any Stockholder shall be reinstated if the Company does not file a Secondary Distribution Registration Statement within 30 days after giving the Notice of Intent to File; (d) if at the time of receipt by the Company of a Registration Request the Company has material inside information as to which it believes it has a valid business purpose in refraining from disclosing publicly for the time being and that current public disclosure of such information would have a material adverse effect on the Company, for a period commencing with the date of receipt of the Registration Request and ending on the earlier of (a) 60 days after such receipt of the Registration Request; (b) the public announcement of such material inside information; or (c) the date on which the Company gives the Stockholder who issued the Registration Request a notice that suspension of its obligation is no longer required; provided, however, that the same material inside information shall not constitute a basis for continuation of this suspension period; or (e) if at the time of receipt by the Company of a Registration Request the Company is not required to file reports with the Commission pursuant to Section 15(d) of the Securities Act or Section 13 of the Exchange Act. iii. A Registration Statement filed pursuant to a Registration Request made under Section 2.B herein shall first include all Registrable Shares requested to be included by any and all Stockholders and, only after such inclusion, may include Common Stock being sold for the account of the Company or any other security holders. Any Common Stock to be offered on behalf of the Company or such other security holders will be included in such Registration Statement only to the extent that, in the reasonable opinion of the managing underwriter for the Underwritten Public Offering of Registrable Shares on behalf of AGREEMENT AND PLAN OF MERGER ANNEX E-2-7 118 Stockholders, such inclusion will not materially adversely affect the distribution of Registrable Shares on behalf of such Stockholders. D. Underwriter. The selection of an underwriter for an Underwritten Public Offering of Registrable Shares by Stockholders shall be subject to the approval of the Company, which shall not be unreasonably withheld. E. Withdrawn Registration Statement. For purposes of Section 2.C(i) herein, if a requested Registration Statement is filed and the Company otherwise complies with its obligations hereunder, and i. the Registration Statement is withdrawn with the consent of the Affected Stockholders as a result of a delay in the offering requested by the Company, then no requested Registration Statement shall be deemed to have been filed; or ii. the Affected Stockholders cease to prosecute the Public Offering subject thereto actively and in good faith, the Company shall have the right to withdraw the Registration Statement without the consent of the Affected Stockholders and the requested Registration Statement shall be deemed to have been filed. Section 3. Incidental/"Piggy-back" Registration. A. Notice of Intent to File. If the Company at any time proposes to file a Primary Distribution Registration Statement or a Secondary Distribution Registration Statement under the Securities Act relating to an Underwritten Public Offering of Common Stock that would permit the inclusion therein of shares of Common Stock to be distributed in accordance with the method of distribution contemplated by such Registration Statement, the Company shall give to each Stockholder a Notice of Intent to File promptly after a determination has been made by the Company to prepare and file such Registration Statement, but in any event not less than ten days before the filing with the Commission of such Registration Statement, which notice shall set forth the intended method of distribution (including the name of the managing underwriter) of the securities proposed to be registered. The Notice of Intent to File shall include an offer to include in such filing, subject to the other provisions of this Agreement, such amount of Registrable Shares as each Stockholder may request. B. Supplemental Registration Request. If any Stockholder wishes to have Registrable Shares (including Earnout Shares) registered pursuant to this Section 3, it shall advise the Company by giving a Supplemental Registration Request within 20 days after the date of receipt of the Notice of Intent to File (or such shorter period, but in any event not less than ten days, as the Company shall specify in its Notice of Intent to File), setting forth the amount of Registrable Shares for which Registration is requested. AGREEMENT AND PLAN OF MERGER ANNEX E-2-8 119 C. Registration Obligation. Subject to the provisions of the next sentence, the Company shall include all Registrable Shares specified in the Supplemental Registration Requests received by it in accordance with Subsection B of this Section 3. If, however, the managing underwriter of the proposed Primary Distribution or Secondary Distribution shall advise the Company in writing that, in the reasonable opinion of such managing underwriter, the inclusion in the Registration Statement of the aggregate number of shares of Common Stock requested by the Stockholders to be included in the Primary Distribution or Secondary Distribution would materially adversely affect such distribution of securities, then the Company shall so advise the Affected Stockholders and the number of such shares of Common Stock included in the Registration Statement shall be reduced to the number acceptable to such managing underwriter and such reduced number of shares shall be allocated pro rata among the Affected Stockholders based on the Registrable Shares held by each. If any Stockholder does not agree to the terms of underwriting of such Primary Distribution or Secondary Distribution, the shares of Common Stock owned by such Stockholder shall be excluded therefrom by written notice from the Company or such managing underwriter. D. Underwriting Agreement. Any obligation of the Company to include shares of Common Stock of any Stockholder in a Registration Statement prepared and filed pursuant to this Section 3 shall be conditioned upon the agreement of such Stockholder to enter into an underwriting agreement with the Company, other security holders, if any, and the managing underwriter of the Primary Distribution or the Secondary Distribution of the type described in subsection (H) of Section 5. Section 4. Special Registration Right. Pursuant to the terms of the Merger Agreement, the Designated Stockholders may in the future receive Earnout Shares and, in order to provide liquidity to the Designated Stockholders who receive such Earnout Shares, the Company has agreed to provide a special right of Registration with respect to such Earnout Shares as in this Section 4 provided. A. Notices. If, at any time during the term hereof, (i) some or all of the Stockholders receive the record and beneficial ownership of Earnout Shares, whether from the Company upon original issue pursuant to the Merger Agreement or from one or more Designated Stockholders upon assignment not involving a Public Offering, (ii), in the opinion of counsel reasonably satisfactory to the Company, all or part of such Earnout Shares may not be sold by such Stockholders without registration under the Securities Act or reliance on an exemption from the registration provisions thereof (other than Section 4(1) of the Securities Act) and (iii) the Company shall receive a Registration Request from one or more such Stockholders requesting that the Company file a Registration Statement relating to a Public Offering of shares of Common Stock owned by such Stockholder or Stockholders, then the Company shall give promptly (and in any event within ten business days) a Notice of Registration Request to each other Stockholder who, to the knowledge of the Company, holds Earnout Shares of the receipt of the Registration Request, enclosing a copy of the Registration Request. During the Request Period, such other Stockholders shall be entitled to give a Supplemental Registration Request to the Company in which any or all such Stockholders request that the Company register pursuant to the Securities Act and the Securities Act Rules all or AGREEMENT AND PLAN OF MERGER ANNEX E-2-9 120 any portion of the shares of Common Stock constituting Earnout Shares owned by such Stockholders. B. Preparation and Filing. After the Request Period, the Company shall, subject to the provisions of Section 2.C herein, prepare as promptly as practicable and file a Registration Statement with respect to the offering, sale and delivery by the Stockholders of all or any part of the shares of Common Stock constituting Earnout Shares in accordance with the applicable method of distribution of the Registrable Shares to be included therein specified in the Registration Request and use its best efforts to cause the Registration Statement to become effective under the Securities Act in accordance with the Securities Act Rules. If so requested by such Affected Stockholders, the Registration Statement shall be filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules. C. Distribution. The applicable method of distribution of the Registrable Shares shall be as requested by the Affected Stockholders and the methods of distribution may include a distribution by one or more broker-dealers named in the Registration Statement "at the market" pursuant to a Market Public Offering. The Company agrees that it will amend the Registration Statement or supplement the prospectus to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. D. Limitations. The preparation and filing of a Registration Statement pursuant to this Section 4 and the offering, sale and delivery of Registrable Shares pursuant thereto shall be subject to the following limitations: i. The Company shall be obligated to prepare, file and cause to become effective only one Registration Statement pursuant to this Section 4. ii. Only Earnout Shares, whether received by a Designated Stockholder from the Company upon original issue pursuant to the Merger Agreement or received by another Stockholder from a Designated Stockholder upon an assignment not involving a Public Offering, may be included in a Registration Statement filed pursuant to this Section 4, and no sales of such shares shall be effected by the Affected Stockholders under such Registration Statement prior to the delivery to the Company of a certificate of the Affected Stockholders to such effect. iii. The proposed and actual filing by the Company of a Registration Statement pursuant to this Section 4 shall not entitle any Stockholder to registration rights pursuant to Section 3 herein. iv. The offering, sale and delivery of Registrable Shares pursuant to any Registration Statement filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules under this Section 4 shall be suspended if, at the time of any offering, AGREEMENT AND PLAN OF MERGER ANNEX E-2-10 121 sale and delivery pursuant to a shelf registration statement, the Company has material inside information as to which it believes it has a valid business purpose in refraining from disclosing publicly for the time being and that current public disclosure of such information would have a material adverse effect on the Company. Such suspension period shall commence upon notice by the Company to the Affected Stockholders and shall continue until the earlier of (a) the expiration of 60 days thereafter; (b) the public announcement of such material inside information; or (c) the date on which the Company gives the Affected Stockholders notice that such suspension is no longer required; provided, however, that the same material inside information shall not constitute a basis for continuation of this suspension period. v. The Company shall be obligated to maintain the effectiveness of a Registration Statement filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules under this Section 4 until the third anniversary of the effective date thereof and no longer. Section 5. Registration Procedures. If the Company is required by the provisions of Section 2, 3 or 4 to effect the Registration of any of the Registrable Shares, the Company shall, as expeditiously as possible: A. Filing. Prepare and file with the Commission a Registration Statement with respect to such shares of Common Stock and use its best efforts to cause such Registration Statement to become and, subject to Subsection C of this Section 5, remain effective. B. Amendments. Prepare and file with the Commission during the Registration Period such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to permit such Registration Statement to become effective in accordance with the Securities Act and the Securities Act Rules and to ensure that such Registration Statement and the prospectus used in connection therewith comply with the disclosure standards of Section 11 of the Securities Act and Section 10(b) of the Exchange Act and that such prospectus complies with Section 10 of the Securities Act, in each case during the Effective Period. C. Maintenance of Effectiveness. Subject to the provisions of Section 4.D herein, use its best efforts to maintain the effectiveness of such Registration Statement and to ensure compliance of the prospectus contained therein with Section 10(a) of the Securities Act for the Effective Period. D. Copies. Furnish to each Affected Stockholder (i) such number of copies of such Registration Statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such Registration Statement (including each preliminary prospectus, summary prospectus and prospectus supplement), in conformity with the requirements of the Securities Act, and such other documents as such Affected Stockholder may reasonably require in order to facilitate the offering, sale and delivery or other disposition of the Registrable Shares owned by such Affected Stockholder and (ii), during the AGREEMENT AND PLAN OF MERGER ANNEX E-2-11 122 Registration Period and the Effective Period, copies of any written correspondence or memoranda relating to oral communications in each case with the Commission and copies of any request by the Commission for any amendment of or supplement to the Registration Statement or the prospectus included therein or for additional information. E. Blue Sky Laws. Use its best efforts to register or qualify the Common Stock covered by such Registration Statement under the securities or blue sky laws of such jurisdictions as the managing underwriter of such Distribution may reasonably request (excluding, however, any jurisdiction in which the filing would subject the Company to additional tax liability and any jurisdiction in which the Company would thereby be required to execute a general consent to service of process) and use all reasonable efforts to do such other acts and things as may be required to enable the Affected Stockholders to consummate the public sale or other disposition in such jurisdictions of the Registrable Shares owned by such Affected Stockholders. F. Earnings Statement. Make available to its holders of Common Stock, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, but not more than 18 months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. G. Amended Prospectuses. Notify each Affected Stockholder immediately if the Company shall become aware at any time during the Effective Period that the prospectus included in the Registration Statement, as such prospectus may be amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading in light of the circumstances then existing, and at the request of any Affected Stockholder to prepare promptly and to furnish to each Affected Stockholder such number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading in the light of the circumstances then existing. H. Underwriting Agreements. Enter into such agreements (including an underwriting agreement in customary form and containing customary provisions relating to legal opinions and accountants' letters, representations and warranties and mutual indemnification and contribution between the Company and the underwriters for the Affected Stockholders) and use all reasonable efforts to take such other actions as the Affected Stockholders may reasonably request in order to expedite or facilitate the disposition of such Registrable Shares. I. Inspection. Make available for inspection by the Affected Stockholders, by any underwriter participating in any distribution to be effected pursuant to such Registration Statement and by any attorney, accountant or other agent retained by the Affected Stockholders or any such underwriter all pertinent financial and other records, pertinent corporate documents and properties of the Company and cause all of the Company's officers, directors and employees to supply all such AGREEMENT AND PLAN OF MERGER ANNEX E-2-12 123 information requested by the Affected Stockholders, such underwriter, attorney, accountant or agent, as is reasonably needed in connection with such Registration. 6. Classes of Stock. The parties hereto intend that any capital stock sold by a Stockholder pursuant to the provisions of this Agreement shall be Class A Common Stock if sold prior to January 1, 2002 or Common Stock if sold thereafter. Accordingly, subject to the proviso to Article Fourth, II-A-4, of the Certificate of Incorporation of the Company, each Stockholder agrees to convert any Class B Common Stock that is included as Registrable Shares in a Registration Statement filed pursuant to any provision of this Agreement into Class A Common Stock prior to the effective date of such Registration Statement under the Securities Act. 7. Expenses; Limitations on Registration. The Registration Expenses relating to any Registration effected by the Company pursuant to this Agreement shall be for the account of the Company; provided, however, that any and all underwriting discounts and commissions attributable to the sale of the shares of Common Stock of the Affected Stockholders shall be for the account of the Affected Stockholders. For purposes of this Section 7, the Company shall be obligated to pay the fees and expenses of only one law firm representing the Affected Stockholders. If more than one such firm shall represent the Affected Stockholders in connection with a Registration under this Agreement, the Affected Stockholders shall notify the Company as to which firm shall be deemed to represent the Affected Stockholders for purposes of this Section 7. Section 8. Stockholders' Information. The Affected Stockholders shall provide all information reasonably requested by the Company for inclusion in any Registration Statement to be filed hereunder. The actual provision of such information shall be a condition precedent to the obligation of the Company to take any action pursuant to this Agreement in respect of the Registration of Registrable Shares of any Affected Stockholder. Section 9. Indemnification. A. In connection with the Registration of any Registrable Shares under the Securities Act pursuant to this Agreement, the Company agrees to indemnify and hold harmless each Affected Stockholder, its partners, directors, officers and employees, and each other Person, if any, who controls such Affected Stockholder within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Affected Stockholder or any such partner, director, officer, employee or controlling Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or any alleged untrue statement of a material fact contained in the Registration Statement or the prospectus included therein at the time the Registration Statement is declared effective or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) any untrue statement of a material fact or alleged untrue AGREEMENT AND PLAN OF MERGER ANNEX E-2-13 124 statement of a material fact contained in the Registration Statement, any preliminary prospectus, the prospectus included therein or any amendment or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements concerning the Company therein, in the light of the circumstances under which they were made, not misleading and shall reimburse each Affected Stockholder and each such partner, director, officer, employee and controlling Person for any legal or other expenses reasonably incurred by such Affected Stockholder or such partner, director, officer employee or controlling Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished by or on behalf of an Affected Stockholder to the Company expressly for use therein; and provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if such untrue statement or alleged untrue statement or omission or alleged omission was corrected in the final prospectus included in the Registration Statement at the time it became effective and the Affected Stockholder, in the case of a Market Public Offering, or the managing underwriter, in the case of an Underwritten Public Offering, failed to provide the final prospectus as required by the Securities Act and the Securities Act Rules. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Affected Stockholder or any such partner, director, officer, employee or controlling Person, and shall survive the transfer of such securities by any Affected Stockholder. B. Each Affected Stockholder agrees to indemnify and hold harmless the Company, its directors, officers and employees, each other Person, if any, who controls the Company and each other Affected Stockholder against any losses, claims, damages or liabilities, joint or several, to which the Company, any such director, officer or employee, any such controlling Person or such other Affected Stockholder may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or any alleged untrue statement of a material fact contained in the Registration Statement or the prospectus included therein at the time the Registration Statement is declared effective or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) any untrue statement of a material fact or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus, the prospectus included therein or any amendment or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements concerning the Company therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such alleged untrue statement or alleged omission was made in such Registration Statement, preliminary prospectus, prospectus, amendment or supplement in reliance upon and in conformity with written information furnished by or on behalf of an Affected AGREEMENT AND PLAN OF MERGER ANNEX E-2-14 125 Stockholder to the Company expressly for use therein, and shall reimburse the Company or such director, officer, employee or other Person for any legal or any other expenses reasonably incurred in connection with investigating or defending any such loss, claim, damage, liability or action. C. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding involving a claim referred to in subsection (A) or (B) of this Section 9, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligation under this subsection C to the extent the indemnifying party is not materially prejudiced by such failure. In case any such action is brought against an indemnified party, the indemnified party shall permit the indemnifying party to assume the defense of such action or proceeding, provided that counsel for the indemnifying party, who shall conduct the defense of such action or proceeding, shall be approved by the indemnified party (whose approval shall not be unreasonably withheld) and the indemnified party may participate in such defense (in which case, such participation shall be at such indemnified party's expense, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified party and the indemnifying party shall exist in respect of such claim, in which event the indemnifying party shall pay the reasonable fees and expense of separate counsel for the indemnified party). No indemnifying party shall consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. The indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm for all indemnified parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent. D. Indemnification similar to that specified in the preceding subsections of this Section 9 shall be given by the Company and each Affected Stockholder (with such modifications as shall be appropriate) with respect to liability related to any required registration or other qualification of Registrable Shares under any Federal or state law or regulation of governmental authority other than the Securities Act. E. If the indemnification provided for in this Section 9 is unavailable or insufficient to hold harmless an indemnified party under subsection (A) or (B) above, then the indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (A) or (B) above, in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and each Affected Stockholder, on the other, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Affected Stockholder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. AGREEMENT AND PLAN OF MERGER ANNEX E-2-15 126 The Company and the Affected Stockholders agree that it would not be just and equitable if contributions pursuant to this subsection (E) were to be determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the first sentence of this subsection (E). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (E) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim (which shall be limited as provided in subsection (C) above if the indemnifying party has assumed the defense of any such action in accordance with the provisions thereof) that is the subject of this subsection (E). Notwithstanding the provisions of this subsection (E), in respect of any loss, claim, damage or liability based upon any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact that relates to information other than information supplied by any Affected Stockholder, no Affected Stockholder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Shares offered by it and distributed to the public exceeds the amount of any damages that such Affected Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Promptly after receipt by an indemnified party under this subsection (E) of notice of the commencement of any action against such party in respect of which a claim for contribution may be made against an indemnifying party under this subsection (E), such indemnified party shall notify the indemnifying party in writing of the commencement thereof if the notice specified in subsection (C) above has not been given with respect to such action; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party under this subsection (E) to the extent such omission is not prejudicial. Section 10. Public Availability of Information. The Company shall comply with all applicable public information reporting requirements of the Commission, to the extent required from time to time to enable each Stockholder to sell Registrable Shares without Registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Stockholder, the Company will deliver to such Stockholder a written statement as to whether it has complied with such requirements. Section 11. Supplying Information. The Company shall cooperate with each Stockholder in supplying such information as may be necessary for such Stockholder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Registrable Shares. Section 12. Specific Performance. Each party hereto acknowledges and agrees that each other party hereto would be irreparably harmed and would have no adequate remedy of law if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, it is agreed that, in addition to any other remedies by law AGREEMENT AND PLAN OF MERGER ANNEX E-2-16 127 or in equity which may be available, the parties hereto shall be entitled to obtain preliminary and permanent injunctive relief with respect to any breach or threatened breach of, or otherwise obtain specific performance of, the covenants and other agreements contained in this Agreement. Section 13. Representations and Warranties of the Company. The Company represents and warrants to each Stockholder that, as of the date of this Agreement, (a) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) the execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or any of the transactions contemplated hereby, and (c) this Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, and, assuming that this Agreement constitutes a valid and binding obligation of each of the Designated Stockholders, is enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance and similar laws affecting creditors' rights generally from time to time and to general principles of equity and except as the enforceability thereof may be limited by considerations of public policy. Section 14. Representations and Warranties. Each of the Designated Stockholders represents and warrants to the Company that, as of the date of this Agreement, (a) to the extent it is a legal entity, it is an organization duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the organizational power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) to the extent it is a legal entity, the execution and delivery of this Agreement by such Stockholder and the consummation by such Stockholder of the transactions contemplated hereby have been duly authorized by all necessary organizational action on the part of such Stockholder and no other organizational proceedings on the part of such Stockholder are necessary to authorize this Agreement or any of the transactions contemplated hereby and (c) this Agreement has been duly executed and delivered by such Stockholder and constitutes a valid and binding obligation of such Stockholder and, assuming that this Agreement constitutes a valid and binding obligation of the Company, is enforceable against such Stockholder in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance and similar laws affecting creditors' rights generally from time to time and to general principles of equity and except as the enforceability thereof may be limited by considerations of public policy. Section 15. Expiration. This Agreement and the rights, benefits, duties and obligations hereunder of the parties hereto and their successors and permitted assigns shall expire and be of no further force or effect on May 31, 2004. Section 16. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or transmitted by telex, telegram or facsimile AGREEMENT AND PLAN OF MERGER ANNEX E-2-17 128 transmission or mailed by registered or certified mail (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): (a) if to any Designated Stockholder, to such Designated Stockholder at the address of such Designated Stockholder set forth on Annex A hereto with a copy to: Reed Smith Shaw & McClay LP One Liberty Place Philadelphia, PA 19103 Attn.: Ms. Lori L. Lasher Facsimile: (215) 851-1420 (b) if to the Company, to: NATCO Group, Inc. Brookhollow Central III 2950 North Loop West Suite 750 Houston, Texas 77092 Attn.: Mr. Nathaniel A. Gregory, Chairman and Chief Executive Officer Facsimile No.: (713) 683-7814 with a copy to: Vinson & Elkins L.L.P. First City Tower 1001 Fannin Street Houston, Texas 77002-6760 Attn.: Mr. William E. Joor III Facsimile No.: (713) 615-5201 Section 17. Benefit and Assignment. (a) The terms and conditions of this Agreement shall inure to the benefit of and be binding on the parties hereto and their respective successors and permitted assigns; provided, however, that, except as otherwise provided in this Section, this Agreement shall not be assignable by any party hereto except by operation of law or with the prior express written consent of the other parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. AGREEMENT AND PLAN OF MERGER ANNEX E-2-18 129 (b) If any Designated Stockholder shall transfer and assign shares of Common Stock to any Person otherwise than in an Underwritten Public Offering (including any transfer on foreclosure of indebtedness secured by the grant of a security interest in such shares of Common Stock), such Designated Stockholder (or any Person who shall be a transferee or assignee pursuant to this subsection (b)), as the case may be, may assign such portion of its rights and benefits under this Agreement as is necessary to permit such Person to act as a Stockholder hereunder; provided, however, that such Person shall agree in writing to be bound by the duties and obligations of a Stockholder hereunder. Section 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to the application of doctrines of conflicts of law. Section 19. Counterparts. This Agreement may be executed simultaneously in one or more counterparts, any of which may have been transmitted and received by facsimile transmission and each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their officers thereunto duly authorized. NATCO GROUP, INC. BY: ------------------------------------------- Nathaniel A. Gregory Chairman and Chief Executive Officer THE DESIGNATED STOCKHOLDERS ---------------------------------------------------- William R. Dimeling ---------------------------------------------------- Robert J. Hamaker ---------------------------------------------------- Douglas P. Heller ---------------------------------------------------- George K. Hickox, Jr. AGREEMENT AND PLAN OF MERGER ANNEX E-2-19 130 ---------------------------------------------------- Ralph M. Kelly ---------------------------------------------------- Steven G. Park ---------------------------------------------------- Richard R. Schreiber ---------------------------------------------------- John C. Tuten, Jr. THE 1998 TRUST FOR JODY SMITH HAMAKER By: ----------------------------------------------- Name: --------------------------------------------- Title: -------------------------------------------- BANC ONE CAPITAL PARTNERS II, LTD. By: ----------------------------------------------- Name: Earle J. Bensing Title: Authorized Signer AGREEMENT AND PLAN OF MERGER ANNEX E-2-20 131 ANNEX F STOCKHOLDERS' AGREEMENT This Stockholders' Agreement (this "Agreement") is made as of the 18th day of November, 1998 by and among Capricorn Investors, L.P., a Delaware limited partnership ("Cap I"), Capricorn Investors II, L.P., a Delaware limited partnership ("Cap II"), NATCO Group Inc., a Delaware corporation ("Natco") and each of the Designated Stockholders (as hereinafter defined). R E C I T A L S: Natco is the owner of all the outstanding capital stock of National Tank Company, a Delaware corporation ("National Tank"), and Natco, through National Tank, is engaged in the business of designing, fabricating and servicing oil and gas process equipment and systems. On November 18, 1998, the Certificate of Incorporation of Natco was amended to authorize two classes of common stock, par value $0.01 per share ("Common Stock"), to wit: 45,000,000 shares of Class A Common Stock ("Class A Common Stock") and 5,000,000 shares of Class B Common Stock ("Class B Common Stock"), and to convert each of the then outstanding shares of common stock of Natco into one share of Class A Common Stock (the "Charter Amendment"). As a result of the Charter Amendment, Cap I and Cap II, as the owners of record and beneficially of all then outstanding Common Stock, acquired and now own 5,563,667 shares and 2,582,259 shares of Class A Common Stock, respectively. Natco, National Tank, The Cynara Company, a Delaware corporation ("Cynara"), and Natco Acquisition Company, a Delaware corporation and a wholly owned subsidiary of Natco ("Newco") are parties to an Amended and Restated Agreement and Plan of Merger dated November 17, 1998 but effective as of March 26, 1998 (the "Merger Agreement") that, among other things, provides that Cynara will merge, upon the terms and subject to the conditions of the Merger Agreement and in accordance with the General Corporation Law of Delaware, with and into National Tank and National Tank will be the Surviving Corporation (the "Merger"). On November 18, 1998, Natco and Cap II consummated the transaction contemplated by that certain Investment Agreement dated November 17, 1998, pursuant to which Natco issued and sold, and Cap II purchased, a non-negotiable promissory note in the principal amount of $5,300,000 for a like amount of cash, such note being automatically convertible into 504,762 shares of Class A Common Stock of Natco upon expiration or termination of the waiting period under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended. It is a condition to the obligations of Cynara under the Merger Agreement that Cap I and Cap II and each of the Designated Stockholders shall have entered into a Stockholders' Agreement substantially similar in form and substance to this Agreement. AGREEMENT AND PLAN OF MERGER ANNEX F-1 132 NOW, THEREFORE, in consideration of the premises, the mutual covenants hereinafter expressed and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 under the Exchange Act. "Agreement", "hereof", "hereunder", and words of similar import shall refer to this Stockholders' Agreement, as it may be amended from time to time. "Associate" shall have the meaning ascribed thereto in Rule 405 of the General Rules and Regulations under the Securities Act of 1933, as amended. "Cap I" shall mean Capricorn Investors, L.P., a Delaware limited partnership. "Cap II" shall mean Capricorn Investors II, L.P., a Delaware limited partnership. "Capricorn Registration Rights Agreement" shall mean that certain Registration Rights Agreement dated as of November 18, 1998 among Natco, Cap I and Cap II. "Charter Amendment" shall have the meaning ascribed to such term in the second recital to this Agreement. "Class A Common Stock" shall have the meaning ascribed to such term in the second recital to this Agreement. "Class B Common Stock" shall have the meaning ascribed to such term in the second recital to this Agreement. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Common Stock" shall have the meaning ascribed to such term in the second recital to this Agreement. "Cynara" shall mean The Cynara Company, a Delaware corporation. "Designated Stockholder" shall mean each of the holders of record and beneficially of common stock of Cynara immediately prior to the effective date of the Merger (assuming the exercise of all outstanding Cynara warrants). "Drag-Along Notice" shall have the meaning ascribed to such term in Section 2(f)(i) herein. AGREEMENT AND PLAN OF MERGER ANNEX F-2 133 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Merger" shall have the meaning ascribed to such term in the fourth recital to this Agreement. "Merger Agreement" shall have the meaning ascribed to such term in the fourth recital to this Agreement. "Natco" shall mean NATCO Group Inc., a Delaware corporation. "National Tank" shall mean National Tank Company, a Delaware corporation and a wholly owned subsidiary of Natco. "Overallotment Shares" shall have the meaning ascribed to such term in Section 2(e)(ii) herein. "Person" means and includes natural persons, corporations, limited partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks and other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "Principal Stockholder" shall mean either Cap I or Cap II so long as it owns of record and beneficially 1% or more of the outstanding Common Stock. "Public Sale" shall mean a Sale of Common Stock pursuant to an effective registration statement under the Securities Act. "Purchase Offer" shall have the meaning ascribed to such term in Section 2(f) herein. "Purchaser" shall have the meaning ascribed to such term in Section 2(f) herein. "Remaining Stockholders" shall have the meaning ascribed to such term in Section 2(f)(i) herein. "Sale" shall mean any offer, offer to sell, offer for sale, sale, assignment, contract of sale, disposition of an interest in or transfer, grant of a participation in, pledge or other disposal of any Common Stock (or any solicitation of any offers to buy or otherwise acquire, or take a pledge of, any Common Stock). "Sale Notice" shall have the meaning ascribed to such term in Section 2(e)(i) herein. "Securities Act" shall mean the Securities Act of 1933, as amended. "Selling Principal Stockholder" shall have the meaning ascribed to such term in Section 2(f) herein. AGREEMENT AND PLAN OF MERGER ANNEX F-3 134 "Stockholder" shall mean, for so long as such Person owns of record any shares of Common Stock, Cap I, Cap II, each Designated Stockholder and any assignee thereof (or any other Person who shall acquire and hold of record shares of Common Stock) who shall have agreed to be bound by the terms of this Agreement. 2. Restrictions on Certain Sales. (a) General Restrictions. The provisions of this Agreement, including this Section 2, apply to all the holdings of Common Stock of each Stockholder, whether held on the date of this Agreement or hereafter acquired, including without limitation the shares of Class A Common Stock to be acquired by Cap II upon conversion of the promissory note issued by Natco pursuant to the Investment Agreement. Each Stockholder agrees that it will not, directly or indirectly, effect a Sale of any Common Stock, except in compliance with the Securities Act and this Agreement. No Stockholder shall effect a Sale other than a Sale to Natco or another Stockholder, or a Public Sale, unless the Stockholder first obtains a written opinion of counsel (which opinion and counsel, who may be counsel for Natco, shall be reasonably satisfactory to Natco), to the effect that the proposed Sale is exempt from registration under the Securities Act and all applicable state securities laws. (b) Legend. Each certificate evidencing outstanding Common Stock issued to any Stockholder shall bear a legend in substantially the following form: THE OFFERING, SALE AND DELIVERY OF THE SHARES REPRESENTED BY THIS CERTIFICATE WERE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THUS NEITHER SUCH SHARES NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSACTION IS REGISTERED UNDER THAT ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS PROVIDED TO THE COMPANY PRIOR TO THE PROPOSED TRANSACTION THAT REGISTRATION UNDER SUCH ACT IS NOT REQUIRED. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF A STOCKHOLDERS AGREEMENT DATED AS OF NOVEMBER 18, 1998, AS THE SAME MAY BE AMENDED (A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY), AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS SUCH TRANSFER, SALE OR HYPOTHECATION COMPLIES WITH THE TERMS OF SUCH AGREEMENT. (c) Distributions of Common Stock. Each of Cap I and Cap II may distribute, whether in liquidation or otherwise, all or part of the Common Stock owned by it to any of its general or limited partners if each such general or limited partner agrees in writing in connection AGREEMENT AND PLAN OF MERGER ANNEX F-4 135 with such distribution to be bound by all of the provisions of this Agreement applicable by their terms to a Stockholder (other than a Principal Stockholder). (d) Specific Restrictions. Each Stockholder further agrees that it will not effect any Sale, other than a Sale to Natco or another Stockholder, a Public Sale or a Sale to a Purchaser pursuant to Section 2(f) herein, unless the Person to whom such Sale is made shall have agreed in writing to be bound by all of the provisions of this Agreement applicable by their terms to a Stockholder (other than a Principal Stockholder). Any such transferee shall have all the rights and benefits, and be subject to all the obligations, of this Agreement applicable by its terms to a Stockholder. Any purported Sale that would contravene the provisions of this Section 2(d) shall be null and void. (e) Right of First Refusal. Each Stockholder, other than either Principal Stockholder, agrees not to effect a Sale, other than a Sale permitted by clause (iv) of this subsection 2(e), unless, in any such case, prior to such Sale: (i) Such Stockholder shall have given to Natco and to each Principal Stockholder that then holds Common Stock written notice (a "Sale Notice") of such Stockholder's intention to effect the Sale. The Sale Notice shall include (x) the number of shares of Common Stock that the Stockholder proposing the Sale desires to sell, (y) the principal terms of the Sale, including the price at which such shares of Common Stock are intended to be sold and such other information with respect to such Sale as Natco or either Principal Stockholder shall reasonably request in writing and (z) an offer to sell to Natco or either Principal Stockholder, on terms and conditions substantially identical to those contained in the Sale Notice, a number of shares of Common Stock determined in accordance with Section 2(e)(ii) hereof. (ii) (A) Natco shall first have the right to purchase any number of shares of Common Stock up to the aggregate number of such shares of Common Stock that the selling Stockholder intends to sell in the Sale, and Natco shall promptly, but in any event within 10 days after receipt of the Sale Notice, advise the Selling Stockholder and each Principal Stockholder in writing of its determination in that regard. (B) Each Principal Stockholder shall then have the right to purchase a number of shares of Common Stock included in the Sale equal to (x) the total number of shares of Common Stock included in the Sale less (y) the number of shares of Common Stock purchased by Natco pursuant to clause (A) above which result shall be (z) multiplied by a fraction, the numerator of which is the aggregate number of shares of Common Stock then held by such Principal Stockholder and the denominator of which is the aggregate number of shares of Common Stock then held by the Principal Stockholders who accept the offer made in the Sale Notice. If either Principal Stockholder under this clause (B) elects to purchase fewer than the maximum number of shares of Common Stock to which such Principal Stockholder is entitled pursuant to the preceding sentence, the other Principal Stockholder shall then be entitled to purchase the remaining number of shares of Common Stock (the "Overallotment Shares") to be included in the Sale. Each Principal Stockholder AGREEMENT AND PLAN OF MERGER ANNEX F-5 136 shall advise the other, if any, in writing promptly, but in any event within 15 days after receipt of the Sale Notice, as to any Overallotment Shares available to the other for purchase. (iii) Within 20 days after receiving the Sale Notice, each Principal Stockholder desiring to accept the offer made therein shall so notify the selling Stockholder in writing, specifying the maximum number of shares of Common Stock that such Principal Stockholder wishes to purchase. If Natco or either Principal Stockholder does not, within the appropriate time period specified in subsection (e)(ii) or (e)(iii), so signify its intention to participate in the Sale, Natco or such Principal Stockholder as the case may be shall be deemed to have waived all of its rights under this Section 2(e) with respect to such Sale. If the aggregate of the number of shares of Common Stock that Natco and the Principal Stockholders have agreed to purchase pursuant to the allocation provisions of paragraph (ii) of this Section 2(e) shall be less than the number of shares of Common Stock included in the Sale Notice, Natco and the Principal Stockholders shall be deemed to have waived their rights under this Section 2(e) with respect to such Sale. If Natco and each Principal Stockholder waive their rights with respect to such Sale, the selling Stockholder shall thereafter be free, for a period of 90 days, to consummate such Sale for the number of shares of Common Stock set forth in the Sale Notice at a price not less than the price set forth in the Sale Notice and on terms otherwise no more favorable to the purchasers than as set forth therein. (iv) Anything to the contrary herein notwithstanding, the provisions of this subsection (e) shall not apply to a Sale to Natco or another Stockholder, a Public Sale or a Sale to a Purchaser pursuant to subsection 2(f) herein. In addition, the provisions of this subsection (e) shall not apply to (A), subject to compliance with the provisions of subsection 2(d) herein, a Sale by any Stockholder to any Affiliate of such Stockholder or (B), subject to compliance with the provisions of subsection 2(c) herein, to a distribution, whether in liquidation or otherwise, by Cap I or Cap II to the limited and general partners thereof or (C), subject to compliance with the provisions of subsection 2(d) herein, in the case of a Stockholder who is an individual, to any transfer by operation of law, by death pursuant to a will or the laws of descent and distribution, by transfer to a member of the immediate family of such Stockholder or a trust for the benefit of any such family member or by transfer to a commercial bank or other lending institution in accordance with the terms of a bona fide pledge (including without limitation a pledge of Common Stock by Winokur (as such term is defined in the Capricorn Registration Rights Agreement) contemplated by Section 4 of the Capricorn Registration Rights Agreement) or (D), subject to compliance with the provisions of subsection 2(d) herein, in the case of a Stockholder that is a legal entity, by such entity to a successor of such entity or to the purchaser of all or substantially all of that entity's assets, each of which exceptions described in clauses (C) and (D) shall be permitted if the transferor or transferee shall give notice of such assignment, together with such information as may be reasonably necessary to evidence qualification of the transferee to be an assignee thereof, to Natco. (f) Rights to Compel Sale or to Offer Opportunity to Sell; Drag-Along Rights; Tag-Along Rights. If a Principal Stockholder owning at least 10% of the outstanding Common AGREEMENT AND PLAN OF MERGER ANNEX F-6 137 Stock (the "Selling Principal Stockholder") proposes to effect a Sale of all shares of Common Stock held by it to a third party that is not an Affiliate or Associate of Natco or either Principal Stockholder (the "Purchaser") for cash, cash equivalents or readily marketable securities (the "Purchase Offer"), such Selling Principal Stockholder shall consult with the other Principal Stockholder, if any, and, after any such consultation, either (x), if the other Principal Stockholder, if any, has agreed to sell all its shares of Common Stock to the Purchaser on the same terms and conditions, require each and every other Stockholder to sell or (y), if the other Principal Stockholder, if any, has not agreed to sell all its shares of Common Stock to the Purchaser on the same terms and conditions, offer each and every other Stockholder, including the other Principal Stockholder, if any, the opportunity to sell, any and all shares of Common Stock held by such Stockholders to the Purchaser, in each case, for the same consideration per share and otherwise on the same terms and conditions upon which the Selling Principal Stockholder proposes to sell its shares. If, at the time a Selling Principal Stockholder proposes to effect a Sale pursuant to this subsection (f), there is no other Principal Stockholder, the Selling Principal Stockholder may, at its option, proceed in accordance with clause (x) or (y) of this subsection (f). (i) Exercise of Right. The Selling Principal Stockholder shall cause the Purchase Offer to be reduced to writing and shall provide a written notice (the "Drag-Along Notice") in which it complies with the provisions of clauses (x) or (y) of this subsection (f) to each other Stockholder, including the other Principal Stockholder, if any (the other Stockholders, excluding the other Principal Stockholder, if any, being herein called the "Remaining Stockholders"). The Drag-Along Notice shall include information concerning the nature and amount of the consideration per share to be paid by the Purchaser and the other terms and conditions of the Purchase Offer. Any Sale pursuant to clause (x) of this subsection 2(f) shall entail all the outstanding shares of Common Stock owned by the Selling Principal Stockholder and the other Principal Stockholder, if any, and the Remaining Stockholders, but any Sale pursuant to clause (y) of this subsection 2(f) shall entail only those shares of Common Stock owned by the Selling Principal Stockholder and those owned by the Remaining Stockholders and the other Principal Stockholder, if any, to the extent that such Remaining Stockholders and the other Principal Stockholder, if any, have elected to participate in such Sale. No later than five business days before the closing date of the Sale set forth in either the Drag-Along Notice or in a subsequent notice from the Selling Principal Stockholder, each other Stockholder participating in the Sale pursuant to the provisions of clause (x) or (y) of this subsection (f) (a "Participating Stockholder") shall deliver to a representative of the Selling Principal Stockholder designated in the Drag-Along Notice or such subsequent notice certificates representing all the shares of Common Stock held by such Participating Stockholder to be sold in such Sale, duly endorsed in blank for transfer, with signatures guaranteed, together with all other documents required to be executed in connection with such Purchase Offer or, if such delivery is not permitted by applicable law, an unconditional agreement to deliver such shares of Common Stock pursuant to this subsection (f) at the closing of such Sale against delivery to such Participating Stockholder of the consideration therefor. If any Participating Stockholder shall fail to deliver such certificates to the Selling Principal Stockholder, Natco shall cause its books and records to show that such shares of Common Stock are bound by the provisions of this subsection (f) AGREEMENT AND PLAN OF MERGER ANNEX F-7 138 and that such shares of Common Stock shall be transferred only to the Purchaser upon surrender thereof for transfer by the Participating Stockholder. (ii) Return of Stock. If, for any reason the Selling Principal Stockholder determines that it cannot complete the sale of all the shares of Common Stock, the Selling Principal Stockholder shall return to each Participating Stockholder all certificates representing shares of Common Stock that such Participating Stockholder delivered for sale pursuant hereto, together with all other documents delivered pursuant hereto by such Participating Stockholder, and all the restrictions on sale or other disposition contained in this Agreement with respect to such shares of Common Stock shall continue in effect. (iii) Remittance of Consideration. At the closing of the sale of all shares of Common Stock pursuant to this subsection 2(f), the consideration with respect to the shares of Common Stock of any Participating Stockholders sold pursuant hereto shall be paid directly to each such Participating Stockholder pursuant to written instructions of such Participating Stockholder. The Selling Principal Stockholder shall furnish such other evidence of the completion and time of completion of such Sale and the terms thereof as may be reasonably requested by such Participating Stockholders. (iv) No Liability. Notwithstanding anything contained in this subsection 2(f), there shall be no liability on the part of the Selling Principal Stockholder to any Participating Stockholder if the Sale of shares of Common Stock pursuant to this subsection 2(f) is not consummated for whatever reason and, in such circumstances, the Selling Principal Stockholder's only obligation shall be to return the shares of Common Stock and other documents to the Participating Stockholders as contemplated by clause (ii) of this subsection 2(f). Whether to effect a sale of shares of Common Stock pursuant to this subsection 2(f) shall be in the sole and absolute discretion of the Selling Principal Stockholder. (v) Costs. All costs and expenses incurred by any seller in connection with a Sale pursuant to this subsection 2(f), including without limitation all attorneys' fees, costs and disbursements and any finders' fees or brokerage commissions, shall be allocated pro rata among the sellers, with each bearing that portion of such costs and expenses equal to a fraction, the numerator of which shall be the amount of the gross proceeds received by such seller from such Sale, and the denominator of which shall be the total amount of the gross proceeds received by all sellers from such Sale. (g) Inapplicability and Termination of Certain Provisions. The provisions contained in subsections (c), (d), (e) and (f) of this Section 2, including without limitation all restrictions on the ability of any Stockholder to effect a Sale as set forth in subsection (d) or (e) of this Section 2, shall be inapplicable to the sale of Class A Common Stock or Common Stock by Natco and any Stockholder in the initial public offering thereof and shall terminate and be of no further force or effect at such time as Natco is required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. AGREEMENT AND PLAN OF MERGER ANNEX F-8 139 3. Related Party Transactions. So long as either Principal Stockholder continues to own more than 10% of the outstanding Common Stock and except as contemplated hereby or as the other Stockholders shall consent thereto in writing, such Principal Stockholder shall not engage in any financial transaction with Natco unless each other Stockholder has been offered the right to participate in such transaction proportionately in accordance with such Stockholder's ownership of Common Stock; provided, however, that this Section 3 shall not apply to the conversion of the Promissory Note (as such term is defined in that certain Investment Agreement dated as of November 17, 1998 between Natco and Capricorn Investors II, L.P.). 4. Specific Performance. The parties hereto each acknowledge and agree that, in the event of any breach of this Agreement, each non-breaching party would be irreparably harmed and could not be made whole by monetary damages. It is accordingly agreed that such parties, in addition to any other remedy to which they may be entitled at law or in equity, shall be entitled to compel specific performance of this Agreement in any action instituted in the United States District Court for the Southern District of New York, or, in the event such court would not have jurisdiction for such action, in any court of the United States or any state having subject matter jurisdiction. The parties hereto each consent to personal jurisdiction in any such action brought in the United States District Court for the Southern District of New York. 5. Entire Agreement; Amendments. This Agreement supercedes all prior agreements and understandings among the parties with respect to its subject matter, including without limitation that certain Stockholders' Agreement dated as of June 30, 1997 among Cummings Point Industries, Inc., a Delaware corporation (now NATCO Group, Inc.), Cap I and Cap II which is hereby terminated and rendered of no further force or effect. This Agreement contains the entire understanding of the parties with respect to the subject matter of this Agreement. There are no restrictions, agreements, promises, warranties, covenants, or undertakings other than those expressly set forth herein or therein. This Agreement may not be amended except by an instrument in writing signed on behalf of all of the parties hereto. Any agreement on the part of a party hereto to any extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. 6. Interpretation. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever reference is made herein to specific numbers of shares of stock (as opposed to percentages, proportions and like ratable computations) such numbers shall, in the event of any stock split, stock dividend, reclassification or similar event, be appropriately adjusted to reflect the impact of such event upon such number of shares. AGREEMENT AND PLAN OF MERGER ANNEX F-9 140 7. Notice. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, or by facsimile copy, receipt of which has been acknowledged, addressed as follows: To Natco: NATCO Group Inc. Brookhollow Central III 2950 North Loop West Houston, Texas 77092 Attention: Nathaniel A. Gregory Chairman of the Board and Chief Executive Officer Telecopy No.: 713/683-7841 To Cap I: Capricorn Investors, L.P. c/o Winokur Holdings, Inc. 30 East Elm Street Greenwich, Connecticut 06830 Attention: Herbert S. Winokur, Jr. President Telecopy No.: 203/861-6671 To Cap II: Capricorn Investors II, L.P. c/o Capricorn Holdings, LLC 30 East Elm Street Greenwich, Connecticut 06830 Attention: Herbert S. Winokur, Jr. Manager Telecopy No.: 203/861-6671 To the Designated c/o George K. Hickox, Jr. Stockholders: Heller, Hickox, Dimeling, Schreiber & Park 1629 Locust Street Philadelphia, Pennsylvania 19103 Telecopier No.: 215/546-1041 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications hereunder shall be effective when actually received by the addressee. 8. Termination. This Agreement shall terminate in its entirety on the earlier of the tenth anniversary of the date hereof and the date on which less than fifty percent (50%) of the outstanding Common Stock shall be held of record, in the aggregate, by Cap I, Cap II, each Person who is as of the date of this Agreement or prior to the liquidation and dissolution, if any, of Cap I or Cap II, was a general AGREEMENT AND PLAN OF MERGER ANNEX F-10 141 or limited partner of Cap I and Cap II, the Designated Stockholders, Nathaniel A. Gregory and their affiliates. 9. Governing Law. This Agreement shall be governed by and construed in all respects in accordance with the laws of the State of New York, without regard to the principles of conflicts of laws thereof which might refer such interpretation to the laws of a different state or jurisdiction. 10. Counterparts. This Agreement may be executed simultaneously in one or more counterparts, any of which may have been transmitted and received by facsimile transmission and each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. (The remainder of this page intentionally left blank.) AGREEMENT AND PLAN OF MERGER ANNEX F-11 142 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as of the date first above written. NATCO GROUP INC. By: ------------------------------------- Title: ---------------------------------- CAPRICORN INVESTORS, L.P. By: Capricorn Holdings, G.P., its general partner By: Winokur Holdings, Inc., its general partner By: ------------------------------------- Herbert S. Winokur, Jr. President CAPRICORN INVESTORS II, L.P. By: Capricorn Holdings, LLC, its general partner By: ------------------------------------- Herbert S. Winokur, Jr. Manager DESIGNATED STOCKHOLDERS ----------------------------------------- William R. Dimeling ----------------------------------------- Robert J. Hamaker ----------------------------------------- Douglas P. Heller AGREEMENT AND PLAN OF MERGER ANNEX F-12 143 ----------------------------------------- George K. Hickox, Jr. ----------------------------------------- Ralph M. Kelly ----------------------------------------- Steven G. Park ----------------------------------------- Richard R. Schreiber ----------------------------------------- John C. Tuten, Jr. THE 1998 TRUST FOR JODY SMITH HAMAKER By: ------------------------------------- Name: Title: BOCP II, L.L.C. By: ------------------------------------- Name: Earle J. Bensing Title: Authorized Signer AGREEMENT AND PLAN OF MERGER ANNEX F-13 144 EXHIBIT I EXAMPLE #1 CTOC project is awarded to Cynara 12/98 Billed revenues by quarter as follows: Quarter ending 3/31/99 $3,000,000 Quarter ending 6/30/99 $8,000,000 Quarter ending 9/30/99 $11,000,000 Total contract sales revenue $67,000,000. No other SE Asia contracts awarded. CYNARA GROUP NATCO CLASS B SHAREHOLDINGS A. Shares conveyed at closing not subject to escrow, (Section 3.01 (a) in the Amended and Restated Plan of Merger "ARPM") 500,000 B. Shares released from escrow on 9/30/99 or as soon thereafter as reasonably practicable equal to the lesser of 450,000 or ($3,000,000 + $8,000,000 + $11,000,000)/1,000 = 22 shares/$ = 484,000) 450,000 (Section 7.10 in the ARPM) C. Shares earned under the "CTOC Earnout Shares" provision equal to the lesser of 140,000 shares (2.73 shares per fully diluted Cynara share) or ($3,000,000 + $8,000,000 + $11,000,000 - $20,454,545)/1000 * 22 shares/$ (Annex A, definition, in the ARPM) issued on "CTOC Payout Date" 11/30/99 (Section 3.01(a) in the ARPM) 34,000 D. Shares earned under the "Additional Shares" provision and issued on the "Initial Payment Date", 5/31/00 (Annex A and Section 3.01(a) of the ARPM) $67,000,000 / 176.06 shares/$ 380,552 E. Shares earned under the "Supplemental Shares" provision and issued on the Supplemental Payout Date 2/28/01 (Annex A and Section 3.01(a) of the ARPM) 0 TOTAL 1,364,552 --------- Exhibit I -1- 145 EXAMPLE #2 CTOC project is awarded to Cynara 12/98 Billed revenues by quarter as follows: Quarter ending 3/31/99 $5,000,000 Quarter ending 6/30/99 $10,000,000 Quarter ending 9/30/99 $15,000,000 Total contract sales revenue $67,000,000. No other SE Asia contracts awarded.
CYNARA GROUP NATCO CLASS B SHAREHOLDINGS A. Shares conveyed at closing not subject to escrow. (Section 3.01 (a) in the Amended and Restated Plan of Merger ("ARPM") 500,000 B. Shares released from escrow on 9/30/99 or as soon thereafter as reasonably practicable equal to the lesser of 450,000 or ($5,000,000 + $10,000,000 + $15,000,000) divided by 1000 * 22 shares/$ = 660,000) (Section 7.10 in the ARPM) 450,000 C. Shares earned under the "CTOC Earnout Shares" provision equal to the lesser of 140,000 shares (2.73 shares per fully diluted Cynara share) or ($5,000,000 + $10,000,000 + $15,000,000) - $20,454,545) divided by 1000 * 22 shares/$ = 210,000) shares (Annex A, definition, in the ARPM) issued on "CTOC Payout Date" 11/30/99 (Section 3.01(a) in the ARPM) 140,000 D. Shares earned under the "Additional Shares" provision and issued on the "Initial Payment Date", 5/31/00 (Annex A and Section 3.01(a) of the ARPM) $67,000,000 divided by 176.06 shares/$ 380,552 E. Shares earned under the "Supplemental Shares" provision and issued on the Supplemental Payout Date 2/28/01 (Annex A and Section 3.01(a) of the ARPM) 0 TOTAL 1,470,552 =========
Exhibit I -2- 146 EXAMPLE #3 CTOC project is awarded to Cynara 12/98 Billed revenues by quarter as follows: Quarter ending 3/31/99 $ 5,000,000 Quarter ending 6/30/99 $10,000,000 Quarter ending 9/30/99 $15,000,000 Total contract sales revenue $67,000,000. Three other SE Asia contracts awarded between 4/1/00 and 12/31/00 with sales revenue of $200,000,000.
CYNARA GROUP NATCO CLASS B SHAREHOLDINGS A. Shares conveyed at closing not subject to escrow. (Section 3.01(a) in the Amended and Restated Plan of Merger "ARPM") 500,000 B. Shares released from escrow on 9/30/99 or as soon thereafter as reasonably practicable equal to the lesser of 450,000 or ($5,000,000 + $10,000,000 + $15,000,000) / 1000 * 22 shares/$ = 660,000) 450,000 (Section 7.10 in the ARPM) C. Shares earned under the "CTOC Earnout Shares" provision equal to the lesser of 140,000 shares (2.73 shares per fully diluted Cynara Share) or ($5,000,000 + $10,000,000 + $15,000,000 - $20,454,545) / 1000 * 22 shares/$ = 210,000 shares (Annex A, definition, in the ARPM) issued on "CTOC Payout Date" 11/30/99 (Section 3.01(a) in the ARPM) 140,000 D. Shares earned under the "Additional Shares" provision and issued on the "Initial Payment Date", 5/31/00 (Annex A and Section 3.01(a) of the ARPM) $67,000,000 / 176.06 shares/$ 380,552 E. Shares earned under the "Supplemental Shares" provision and issued on the Supplemental Payout Date 2/28/01 (Annex A and Section 3.01(a) of the ARPM) $200,000,000 / 352.11 shares/$ = 568,004 shares; however, this earnout is subject to an overall limitation on total C + D + E shares of 18.525 shares of Acquiror Class B stock per fully diluted Cynara share = 950,000 shares 429,448 TOTAL 1,900,000 ---------
Exhibit I -3- 147 EXAMPLE #4 CTOC project is awarded to Cynara 12/98 Billed revenues by quarter as follows: Quarter ending 3/31/99 $2,000,000 Quarter ending 6/30/99 $3,000,000 Quarter ending 9/30/99 $3,000,000 Total contract sales revenue $67,000,000. Three other SE Asia contracts awarded between 4/1/00 and 12/31/00 with sales revenue of $200,000,000.
CYNARA GROUP NATCO CLASS B SHAREHOLDINGS A. Shares conveyed at closing not subject to escrow. (Section 3.01 (a) in the Amended and Restated Plan of Merger "ARPM") 500,000 B. Shares released from escrow on 9/30/99 or as soon as thereafter as reasonably practicable equal to the lesser of 450,000 or ($2,000,000+$3,000,000+$3,000,000) divided by 1000*22 shares/$=176,000) 176,000 (Section 7.10 in the ARPM) C. Shares earned under the "CTOC Earnout Shares" provision equal to the lesser of 140,000 shares (2.73 shares per fully diluted Cynara share) or ($2,000,000+$3,000,000+$3,000,000-$20,454,545) /1000 * 22 shares/$=0 shares (Annex A, definition, in the ARPM) issued on "CTOC Payout Date" 11/30/99 (Section 3.01(a) in the ARPM) 0 D. Shares earned under the "Additional Shares" provision and issued on the "Initial Payment Date", 5/31/00 (Annex A and Section 3.01(a) of the ARPM) $67,000,000 divided by 176.06 shares/$ 380,552 E. Shares earned under the "Supplemental Shares" provision and issued on the Supplemental Payout Date 2/28/01 (Annex A and Section 3.01(a) of the ARPM) $200,000,000/352.11 shares/$ = 568,004 shares; however, this earnout is subject to an overall limitation on total C+D+E shares of 18.525 shares of Acquiror Class B stock per fully diluted Cynara share = 950,000 shares 568,004 TOTAL 1,624,556 ---------
This example illustrates a.) No negative shares can be calculated in C. above; and b.) C + D + E is not limited by cancellation of escrow shares due to not reaching ceiling in calculation B. above. Exhibit I -4- EX-3.1 3 RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF NATCO GROUP INC. FIRST: The name of the corporation is NATCO Group Inc. SECOND: The address of the registered office of the Corporation in the State of Delaware is The Corporation Trust Company, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware Code. FOURTH: The aggregate number of shares of capital stock that the Corporation shall have authority to issue is 55,000,000 shares, of which 5,000,000 shall be shares of Preferred Stock, par value $.01 per share ("Preferred Stock"), and 50,000,000 shall be shares of Common Stock, par value of $.01 per share ("Common Stock"). The following is a statement fixing certain of the designations and powers, voting powers, preferences, and relative, participating, optional or other rights of the Preferred Stock and the Common Stock of the Corporation, and the qualifications, limitations or restrictions thereof, and the authority with respect thereto expressly granted to the Board of Directors of the Corporation: I. Preferred Stock The Board of Directors is hereby expressly vested with the authority to adopt a resolution or resolutions providing for the issuance of authorized but unissued shares of Preferred Stock, which shares may be issued from time to time in one or more series and in such amounts as may be determined by the Board of Directors in such resolution or resolutions. The voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional or other special rights, if any, of each series of Preferred Stock and the qualifications, limitations or restrictions, if any, of such preferences and/or rights (collectively the "Series Terms"), shall be such as are stated and expressed in a resolution or resolutions providing for the creation or revision of such Series Terms (a "Preferred Stock Series Resolution") adopted by the Board of Directors. Any of the Series Terms, including voting rights, of any series may be made dependent upon facts ascertainable outside this Certificate of Incorporation and the Preferred Stock Series Resolution, provided that the manner in which such facts shall operate upon such Series Terms is clearly and expressly set forth in this Certificate of Incorporation or in the Preferred Stock Series Resolution. 2 Except in respect of characteristics of a particular series fixed by the Board of Directors, all shares of Preferred Stock shall be of equal rank and shall be identical. All shares of any one series of Preferred Stock so designated by the Board of Directors shall be alike in every particular, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative, II. Common Stock 1. Dividends. Subject to the provisions of any Preferred Stock Series Resolution, the Board of Directors may, in its discretion, out of funds legally available for the payment of dividends and at such times and in such manner as determined by the Board of Directors, declare and pay dividends on the Common Stock. 2. Liquidation. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and payment or setting aside for payment of any preferential amount due to the holders of any other class or series of stock, the holders of the Common Stock shall be entitled to receive ratably any or all assets remaining to be paid or distributed, 3. Voting Rights. Except as may otherwise be required by law, this Certificate of Incorporation or the provisions of any Preferred Stock Series Resolution, each holder of Common Stock shall have one vote for each share of such stock held by such holder on each matter voted upon by the stockholders. III. No Preemptive Rights No holder of shares of stock of the Corporation shall have any preemptive or other rights, except as such rights are expressly provided by contract, to purchase or subscribe for or receive any shares of any class, or series thereof, of stock of the Corporation, whether now or hereafter authorized, or any warrants, options, bonds, debentures or other securities convertible into, exchangeable for or carrying any right to purchase any shares of any class, or series thereof, of stock. FIFTH: The Board of Directors shall have the power to adopt, amend or repeal the bylaws of the Corporation, except as may otherwise be provided in the bylaws. SIXTH: Meetings of stockholders may be held within or without the State of Delaware, as the bylaws of the Corporation may provide. The books of the Corporation may be kept (subject to any provision contained in applicable law) outside the State of Delaware at such place as may be designated from time to time by the Board of Directors or the bylaws of the Corporation, SEVENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in the Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. 2 3 EIGHTH: No action required or permitted by the Delaware General Corporation Law to be taken at any annual or special meeting of the stockholders of the Corporation may be taken without a meeting, pursuant to Section 228 of the Delaware General Corporation Law or otherwise, unless a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of all the outstanding capital stock entitled to vote with respect to such matter if the matter had been presented at an annual or special meeting of stockholders of the Corporation duly called and convened. NINTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation. TENTH: To the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended, a director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. ELEVENTH: The Corporation may indemnify any director, officer, employee or agent of the Corporation to the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended. TWELFTH: The number of directors which shall constitute the whole board shall be such as from time to time shall be fixed in the manner provided in the bylaws of the Corporation or, in the absence of any such provision, by resolution of the Board of Directors, but in no case shall the number be less than three. The right to cumulate votes in the election of directors is expressly prohibited. The election of directors shall be by written ballot. The directors shall be classified with respect to the time for which they shall severally hold office by dividing them into three classes, which classes shall consist of an equal, or as near to equal as possible, number of directors. At the first election of directors following the effective time of the 3 4 certificate of amendment to the certificate of incorporation of the Corporation reflecting this Article, the director or directors of the first class shall be elected for a term expiring at the next succeeding annual meeting of stockholders to be held in 1999; the director or directors of the second class for a term expiring at the annual meeting to be held in 2000; and the director or directors of the third class for a term expiring at the annual meeting to be held in 2001. At each annual meeting, commencing with the annual meeting in 1999, the successor or successors to the class of directors whose term shall expire in that year shall be elected to hold office for the term of three years, so that the term of office for one class of directors shall expire in each year. Any increase or decrease in the number of directors constituting the Board shall be apportioned among the classes so as to maintain the number of directors in each class as near as possible to one-third of the whole number of directors as so adjusted. Any director elected or appointed to fill a vacancy shall hold office for the remaining term of the class to which such directorship is assigned. No decrease in the number of directors constituting the Corporation's Board of Directors shall shorten the term of any incumbent director. Any vacancy in the Board of Directors, whether arising through death, resignation or removal of a director, or through an increase in the number of directors of any class, shall be filled by the majority vote of the remaining directors, although less than a quorum, or by a sole remaining director. The bylaws may contain any provision regarding classification of the Corporation's directors not inconsistent with the terms hereof. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the Preferred Stock Series Resolutions applicable thereto, and such directors so elected shall not be subject to the provisions of this Article Twelfth unless expressly provided by such terms. 4 5 EXHIBIT 3.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF NATCO GROUP INC. THE UNDERSIGNED SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF NATCO GROUP INC., A DELAWARE CORPORATION (THE "CORPORATION"), DOES HEREBY CERTIFY: I. That the Board of Directors of the Corporation adopted at a meeting duly called and held resolutions setting forth proposed amendments of the Certificate of Incorporation of the Corporation, approving such amendments, declaring such amendments advisable and recommending such amendments to the stockholders of the Corporation for approval thereof. The resolutions setting forth the proposed amendments are as follows: RESOLVED, that the first paragraph of Article Fourth of the Certificate of Incorporation of the Corporation be amended so as to be and read in its entirety as follows: FOURTH: The aggregate number of shares of capital stock that the Corporation shall have authority to issue is 55,000,000 shares, of which 5,000,000 shall be shares of Preferred Stock, par value $.01 per share ("Preferred Stock"), and 50,000,000 shall be shares of Common Stock, par value of $.01 per share ("Common Stock"), divided into 45,000,000 shares of Class A Common Stock ("Class A Common Stock") and 5,000,000 shares of Class B Common Stock ("Class B Common Stock"). and further RESOLVED, that Section II of Article Fourth of the Certificate of Incorporation of the Corporation be amended so as to be and read in its entirety as follows: II. Common Stock The Common Stock of the Corporation shall consist of two classes: Class A Common Stock and Class B Common Stock. Each such class of Common Stock shall have the relative rights, powers, preferences, limitations and restrictions set forth in this Section II: A. Class A Common Stock and Class B Common Stock. 1. Dividends. Subject to the provisions of any Preferred Stock Series Resolution, the Board of Directors may, in its discretion, out of funds legally available for the payment of dividends and at such times and in such manner as determined by the Board of Directors, declare and pay dividends on the Class A 6 Common Stock and the Class B Common Stock, equally and ratably as if such classes were but a single class. 2. Liquidation. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and payment or setting aside for payment of any preferential amount due to the holders of any other class or series of stock, the holders of the Class A Common Stock and Class B Common Stock shall be entitled to receive any or all assets remaining to be paid or distributed, equally and ratably as if such classes were but a single class; provided, however, that, if any obligation of the Corporation to purchase shares of Class B Common Stock pursuant to the exercise of a Put is then pending, then upon any voluntary or involuntary liquidation, dissolution, or winding-up of the Corporation, the holders of Class B Common Stock at the time outstanding will be entitled to receive out of the net assets of the Corporation legally available for distribution to shareholders after satisfaction of liabilities to creditors as required by the Texas Business Corporation Act, subject to the rights of the holders of any stock of the Corporation ranking senior to the Class B Common Stock in respect of distributions of assets upon liquidation, dissolution, or winding-up of the Corporation but before any distribution of assets is made with respect to any shares of Class A Common Stock, an amount equal to the aggregate of the liquidation preference specified in paragraph 6 of this subsection B. 3. Voting Rights. Except as may otherwise be required by law, this Certificate of Incorporation or the provisions of any Preferred Stock Series Resolution, the holders of Class A Common Stock and Class B Common Stock, voting together as a single class, shall have one vote for each share of such stock held by such holder on each matter voted upon by the stockholders. 4. Other Rights. Neither class of Common Stock shall be subject to mandatory redemption or to redemption at the option of the Corporation. Except as hereinafter provided, neither class of Common Stock shall have any rights of conversion or exchange. The registered owner of any shares of Class B Common Stock may at any time and from time to time convert any or all such shares into Class A Common Stock on the basis of one share of Class A Common Stock for each share of Class B Common Stock. Such conversion rate shall be subject to equitable adjustment in the event the outstanding shares of Class A Common Stock or Class B Common Stock are changed into a different number of shares or a different class by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares. In addition, any shares of Class B Common Stock outstanding on January 1, 2002 shall automatically and without any action on the part of the holder thereof be converted into shares of Class A Common Stock on the basis of one share of Class A Common Stock for each share of Class B Common Stock and thereupon the Common Stock of the Corporation shall consist of a single class consisting of 50,000,000 authorized shares, designated as Common Stock; 7 provided, however, that, if any Exercise Notice (as defined below) shall have been given and be outstanding on January 1, 2002, such conversion shall be deferred until such time as the Put transaction contemplated hereby to occur as the result of the giving of such Exercise Notice has been consummated. B. Additional Rights of Class B Common Stock. 1. Definitions. The following additional terms have the respective meanings specified below: "Bank Credit Agreement" shall mean that certain Loan Agreement to be dated as of November 18, 1998 among, inter alia, the Corporation, as U.S. Borrower, NATCO Canada, Ltd., as Canadian Borrower, and Chase Bank of Texas, National Association, as U.S. Agent for the lenders thereunder, Bank of Nova Scotia, as Canadian Agent for the lenders thereunder, and such lenders, as amended from time to time. "Business Day" means any day other than a day on which banks in the State of Texas are authorized or obligated to be closed. "Corporate Statute" shall mean the General Corporation Law of the State of Delaware. "Effective Time" shall have the meaning ascribed to such term in paragraph (1) of subsection D of this Section II. "Exercise Notice" shall have the meaning ascribed to such term contained in paragraph 4 of this subsection B. "Holder" shall mean the registered owner of shares of Class B Common Stock as indicated by the stock transfer records for the Class B Common Stock of the Corporation. "Put" shall have the meaning ascribed to such term contained in paragraph 2 of this subsection B. "Put Period" shall have the meaning ascribed to such term contained in paragraph 2 of this subsection B. 2. Put. Each Holder of Class B Common Stock shall have the option (the "Put"), commencing on June 30, 2000 and ending on December 31, 2001 (the "Put Period"), of causing the Corporation to purchase from time to time any or all the shares of Class B Common Stock then held by such Holder at a cash purchase price per share of $13.00 per share. 8 3. Applicable Covenant. The rights of each Holder of Class B Common Stock under this Section II are subject to the covenants of the Corporation contained in Section 8.5 of the Bank Credit Agreement. 4. Method of Exercise. Any Holder of Class B Common Stock may exercise a Put by giving, during the Put Period, written notice (an "Exercise Notice") to the Corporation specifying in such Exercise Notice the number of shares of Class B Common Stock to be sold to the Corporation, the certificate numbers of the stock certificates that evidence such shares of Class B Common Stock and the aggregate purchase price specified herein to be received by such Holder of Class B Common Stock therefor. 5. Consummation. Subject to fulfillment or waiver of the conditions thereto, the closing of such sale shall be effected on the 20th Business Day following receipt of the Exercise Notice by the Corporation. At the closing, the Holder of Class B Common Stock shall deliver to the Corporation one or more stock certificates registered in the name of such Holder and evidencing the number of shares of Class B Common Stock to be sold by the Holder thereof pursuant to the Put, and the Corporation shall deliver to or for the account of such Holder the aggregate purchase price for such shares in immediately available funds. 6. Conditions. The obligation of the Corporation to consummate a transaction pursuant to the exercise of a Put shall be subject to the fulfillment or waiver of the following conditions: (a) Compliance with Corporate Statute. The consummation of the purchase by the Corporation of the shares of Class B Common Stock tendered for purchase by a Holder thereof pursuant to the exercise of a Put shall then comply with the applicable provisions of the Corporate Statute and the Bank Credit Agreement, as amended from time to time. (b) Reporting Company Status. Neither the Corporation nor any issuer of any class or series of security or securities into which the Class B Common shall have been converted or for which the Class B Common Stock shall have been exchanged, in either case pursuant to any merger, consolidation, share exchange, sale of all or substantially all of the Corporation's assets or liquidation or dissolution of the Corporation, shall then be or have previously been subject to the reporting obligations imposed by Section 15(d) or Section 13 of the Securities Exchange Act of 1934, as amended. If a transaction pursuant to the exercise of a Put is not consummated as a result of the nonfulfillment of the condition contained in subparagraph (a) of this paragraph 6, then the obligation of the Corporation to purchase shares of Class B Common Stock pursuant to such Put shall continue in full force and effect, regardless of any expiration of the time periods provided herein for the exercise of any such Put, until 9 the Corporation shall have complied with the terms of the Put so exercised; provided, however, that the price per share of Class B Common Stock of the Corporation payable pursuant to paragraph 2 of this subsection B shall increase by a factor equivalent to interest thereon at a rate per annum equal to the prime rate of interest in effect from time to time at The Chase Manhattan Bank for its most creditworthy corporate customers from the date on which such price would otherwise have been paid in accordance with the other provisions of this subsection B until the date on which actually paid; provided, however, that, commencing on the first anniversary of the related Exercise Notice, such rate shall increase to such prime rate plus 250 basis points. The aggregate amount of the Corporation's obligation to purchase shares of Class B Common Stock pursuant to such Put pending at any given time shall constitute a liquidation preference of the Class B Common Stock. At such time as the condition contained in subparagraph (b) of this paragraph 6 shall occur (regardless of whether a Put shall then have been exercised), the obligation of the Corporation to purchase shares of Class B Common Stock pursuant to any Put shall terminate. 7. Representations and Warranties. At the closing of the sale of any shares of Class B Common Stock pursuant to the exercise of a Put, the Holder of such shares of Class B Common Stock shall represent and warrant in writing to the Corporation that: (i) such Holder of Class B Common Stock has full right, power and authority to sell and deliver such shares of Class B Common Stock to the Corporation, (ii) such Holder of Class B Common Stock owns such shares of Class B Common Stock of record and beneficially, free and clear of any liens, encumbrances and adverse claims and (iii), upon delivery thereof to the Corporation pursuant to the exercise of a Put by the Holder of Class B Common Stock, the Corporation will acquire good title to such shares of Class B Common Stock free and clear of any liens, encumbrances and adverse claims (other than any that may have been created by the Corporation). 8. Nonassignability. The rights of the Holder of Class B Common Stock pursuant to this subsection B are personal to the Holder of Class B Common Stock and may not be assigned by any Holder of Class B Common Stock other than proportionally in connection with an assignment of such shares of Class B Common Stock by operation of law, by death pursuant to a will or the laws of descent and distribution, by transfer to a member of the immediate family of the Holder of Class B Common Stock or a trust for the benefit of any such family member, by transfer to a commercial bank or other lending institution in accordance with the terms of a bona fide pledge or, in the case of a Holder of Class B Common Stock that is a legal entity at the Effective Time, by such entity to an affiliate (no further assignment being permitted) or successor of such entity or to the purchaser of all or substantially all of that entity's assets, any or all of which exceptions shall be permitted if the transferor or transferee shall give notice of such assignment, together with such information as may be reasonably necessary to evidence qualification of the transferee to be an assignee thereof, to the Corporation. Any assignment or transfer 10 of shares of Class B Common Stock that is not in compliance with the provisions of this paragraph 8 shall cause the relinquishment and termination of the rights contained in this subsection B as they would otherwise apply to such shares of Class B Common Stock. C. Limited Rights to Class Vote. 1. So long as any shares of Class B Common Stock are outstanding, the consent of the holders of not less than a majority of the number of shares of Class B Common Stock then outstanding, given in person or by proxy either at a regular meeting or at a special meeting called for that purpose or pursuant to written consents, at which or pursuant to which, as the case may be, the holders of Class B Common Stock shall vote separately as a class, shall be necessary (i) to approve the issuance by the Corporation of any additional shares of Class B Common Stock and (ii) for effecting, validating or authorizing any amendment, alteration or repeal of any of the provisions of this Section II of Article Fourth of this Certificate of Incorporation, or any amendment thereto, or any other certificate filed pursuant to law (excluding, however, any such amendment, alteration or repeal effected by any merger or consolidation to which the Corporation is a party to the extent provided in paragraph 2 of this subsection C) that would adversely affect any of the designations, preferences, limitations or relative rights of the shares of Class B Common Stock then outstanding; provided, however, that any amendment or amendments to the provisions of the Certificate of Incorporation, as amended, so as to authorize or create, or to increase the authorized amount of, any capital stock of the Corporation ranking pari passu with or senior or junior to the Class B Common Stock as to the payment of dividends or as to the distribution of assets upon any liquidation, dissolution or winding-up of the Corporation shall not be deemed to affect adversely the designations, preferences, limitations or relative rights of the Class B Common Stock. 2. The class vote accorded to the Class B Common Stock by paragraph 1 of this subsection B shall not apply to any amendment, alteration or repeal of any of the provisions of this Section II effected by a merger to which the Corporation is a party: (a) if the Class B Common Stock would in such merger be converted into (i) a right to receive cash; (ii) any equity security if that equity security is registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or was issued by a corporation that is then subject to the reporting obligations imposed by Section 15(d) of the Securities Exchange Act of 1934, as amended, as a result of registration of an offering of that 11 equity security under the registration provisions of the Securities Act of 1933, as amended ("Equity Security"); (iii) any security immediately convertible into or exchangeable for an Equity Security; (iv) any option or warrant immediately exercisable with respect to an Equity Security; or (v) any combination of any of the foregoing; or (b) if the Class B Common Stock would in such merger be converted, in whole or in part, into any security not contemplated by subparagraph (a) of this paragraph 2 ("Other Security") if the relevant documents provide that the Put shall continue after the effective date of such merger as a right to cause the Corporation or any successor thereto, subject to the other provisions of this Section II, to purchase, at the per share price specified in paragraph 2 of subsection B less the amount of any cash consideration per share of Class B Common Stock paid in the merger, the number of shares or other units of such Other Security into which each share of Class B Common Stock was converted in the merger. 3. So long as any shares of the Class B Common Stock remain outstanding, the holders of shares of the Class B Common Stock, voting separately as a class, shall have the right to nominate and to elect, by a majority vote of such shares, one director to the Board of Directors of the Corporation and to fill such position at any regular meeting of stockholders or special meeting called for that purpose or pursuant to written consents. Any director who shall have been elected by holders of shares of Class B Common Stock may be removed at any time, either for or without cause, by, and only by, the affirmative vote of the holders of a majority of the number of shares of Class B Common Stock then outstanding, voting separately as a class, given at any regular meeting of stockholders or a special meeting of such stockholders called for that purpose or pursuant to written consents, and any vacancy thereby created may be filled only by the holders of shares of Class B Common Stock. Such director shall be a member of the Class II Directors. Any director so nominated and elected shall serve until the next annual meeting of stockholders at which members of Class II Directors are elected and until his successor shall have been duly elected or until his earlier resignation, removal or death. The first individual designated by the holders of the Class B Common Stock to serve as a director of the Corporation shall be George K. Hickox, Jr., the term of such director to commence at the effective time of the first issuance of any shares of Class B Common Stock. D. Exchange of Common Stock for Class A Common Stock. 12 1. Issued Shares. Upon the filing of a Certificate of Amendment reflecting these amendments to the Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware (the "Effective Time"), each then issued share of common stock, par value $0.01 per share, of the Corporation (the "Prior Common Stock"), including any such shares held in the treasury of the Corporation, shall be converted, without any action on the part of the holder thereof, into one share of Class A Common Stock. 2. Reserved Shares. From and after the Effective Time, each unissued share of the Prior Common Stock reserved for issuance shall be converted, without any action on the part of any Person, into one share of Class A Common Stock and any obligation of the Corporation, whether contractual or otherwise, to issue any shares of the Prior Common Stock shall be deemed to be an obligation to issue an identical number of shares of Class A Common Stock upon the same terms and conditions. 3. Certificates. From and after the Effective Time, each holder of a certificate theretofore evidencing shares of the Prior Common Stock may be surrendered by the holder thereof in exchange for a certificate or certificates evidencing an equivalent number of shares of Class A Common Stock. II. That in lieu of a special meeting and vote of the stockholders, the stockholders of the Corporation, by written consent, approved, adopted and consented to such amendments in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. III. That such amendments were duly adopted in accordance with the provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. The undersigned, being the duly elected and currently acting Senior Vice President and Chief Financial Officer of NATCO Group Inc., the Corporation to which reference is made in this Certificate, does make this Certificate as of the 18th day of November, 1998, and affirms and acknowledges, under penalties of perjury, that this Certificate is the act and deed of the Corporation and that the facts stated herein are true. /s/ WILLIAM B. WIENER III ------------------------------------------------- William B. Wiener III Senior Vice President and Chief Financial Officer NATCO Group Inc. EX-4.3 4 REGISTRATION RIGHTS AGREEMENT - DATED 11/18/1998 1 EXHIBIT 4.3 Cap I and Cap II REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of November 18, 1998 by and between NATCO Group Inc., a Delaware corporation (the "Company"), and Capricorn Investors, L.P., a Delaware limited partnership ("Cap I"), and Capricorn Investors II, L.P., a Delaware limited partnership ("Cap II"). R E C I T A L S: On November 18, 1998, the Certificate of Incorporation of the Company was amended to authorize two classes of common stock, par value $0.01 per share ("Common Stock"), to wit: 45,000,000 shares of Class A Common Stock ("Class A Common Stock") and 5,000,000 shares of Class B Common Stock ("Class B Common Stock"), and to convert each of the then outstanding shares of common stock of the Company into one share of Class A Common Stock (the "Charter Amendments"). After giving effect to the Charter Amendments, Cap I owns of record and beneficially 5,563,667 shares (68.3%) of the outstanding Class A Common Stock. After giving effect to the Charter Amendments, Cap II owns of record and beneficially 2,582,259 shares (31.7%) of the outstanding Class A Common Stock. Together, Cap I and Cap II own of record and beneficially, as of the date of this Agreement, all the outstanding Class A Common Stock, being all the outstanding Common Stock. The Company, National Tank Company, a Delaware corporation and a wholly owned subsidiary of the Company ("Natco"), Natco Acquisition Company, a Delaware corporation and a wholly owned subsidiary of the Company ("Newco") and The Cynara Company, a Delaware corporation ("Cynara"), are parties to an Amended and Restated Agreement and Plan of Merger dated November 17, 1998 but effective as of March 26, 1998 (the "Merger Agreement"), pursuant to which Cynara will be merged with and into Natco (the "Merger") and the Designated Stockholders will receive shares of Class B Common Stock through conversion of the outstanding shares of Cynara common stock. The Company and Cap II have executed and delivered an Investment Agreement dated November 17, 1998 pursuant to which the Company has agreed to issue and sell, and Cap II has agreed to purchase, a non-negotiable promissory note convertible upon the occurrence of the events therein specified into 504,762 shares of Class A Common Stock. The stockholders of Cynara have entered into a Registration Rights Agreement of even date herewith between the Company and such stockholders which contains terms and provisions substantially similar to those herein (the "Cynara Registration Rights Agreement"). 2 NOW, THEREFORE, for and in consideration of the foregoing, the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions and Usage. A. Definitions. The terms defined in this Section, wherever used in this Agreement, shall, unless the context otherwise requires, have the respective meanings hereinafter specified. "Affected Stockholders" shall mean each Stockholder all or a portion of whose shares of Common Stock have been included in a Registration Statement filed with the Commission pursuant to the provisions of this Agreement. "Agreement" shall mean this Registration Rights Agreement. "Cap I" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Cap II" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Class A Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Class B Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Commission" shall mean the United States Securities and Exchange Commission. "Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Company" shall mean NATCO Group Inc., a Delaware corporation, and any successor corporation by merger, consolidation or otherwise and any parent corporation resulting from the merger or consolidation of the Company with or into a subsidiary of another corporation. "Cynara" shall mean The Cynara Corporation, a Delaware corporation. "Cynara Registration Rights Agreement" shall have the meaning ascribed to such term in the recitals to this Agreement. "Distribution Public Offering" shall mean a distribution (as such term is used in the Securities Act and the Securities Act Rules) of Common Stock by Cap I or Cap II to its general and REGISTRATION RIGHTS AGREEMENT 2 3 limited partners pursuant to a Registration Statement filed and declared effective under the Securities Act and the Securities Act Rules. "Effective Period" shall mean such period as shall be required under the provisions of the Securities Act and the Securities Act Rules for delivery of a prospectus meeting the requirements of Section 10(a) of the Securities Act to any Person purchasing Common Stock in connection with an Underwritten Public Offering, a Distribution Public Offering or a Market Public Offering, as the case may be; provided, however, that such period shall not include any delivery requirement with respect to the distribution by an underwriter of its unsold allotment relating to an Underwritten Public Offering. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, as the same shall be in effect at the date of any determination to be made hereunder. "Exchange Act Rules" shall mean the rules and regulations promulgated by the Commission under the Exchange Act, as the same shall be in effect at the date of any determination to be made hereunder. "Initial Public Offering" shall mean a public offering of Common Stock by the Company as a result of which the Company first becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. "Market Public Offering" shall mean a public offering for cash of shares of Common Stock into an existing trading market for outstanding shares of Common Stock at other than a fixed price on or through the facilities of a national securities exchange or to or through a market maker otherwise than on an exchange, but in any case pursuant to a Registration Statement filed and declared effective under the Securities Act and the Securities Act Rules. "Merger" shall have the meaning ascribed to such term in the recitals to this Agreement. "Merger Agreement" shall have the meaning ascribed to such term in the recitals to this Agreement. "Notice of Intent to File" shall mean a written notice given by the Company pursuant to Section 2.D or Section 3.A that the Company is preparing to file a Primary Distribution Registration Statement or a Secondary Distribution Registration Statement under the Securities Act relating to an Underwritten Public Offering of Common Stock. "Notice of Registration Request" shall mean a written notice given by the Company pursuant to Section 2.A to the Stockholder that did not send the applicable Registration Request or pursuant to Section 2.B to all Stockholders (other than the Stockholder who sent the applicable Registration Request), in each case notifying such Stockholders that the applicable Registration Request has been received by the Company and briefly advising such Stockholders that they have the right to request REGISTRATION RIGHTS AGREEMENT 3 4 Registration for the distribution of their holdings of Common Stock, subject to the terms and provisions of this Agreement. "Person" shall mean an individual, a corporation, a partnership, a trust, an unincorporated organization or a government or any agency or political subdivision thereof. "Primary Distribution" shall mean an Underwritten Public Offering of Common Stock offered, sold and delivered by the Company. "Primary Distribution Registration Statement" shall mean a Registration Statement filed by the Company and declared effective under the Securities Act and the Securities Act Rules relating to a Primary Distribution. "Public Offering" shall mean either a Distribution Public Offering, a Market Public Offering or an Underwritten Public Offering "Registrable Shares" shall mean shares of Common Stock owned of record by any Stockholder as to which such Stockholder has requested Registration pursuant to the provisions of Section 2.A, 2.B, 3.B or 4.A. "Registration" shall mean the registration under the registration provisions of the Securities Act of the offering, sale and delivery of shares of Common Stock. "Registration Expenses" shall mean the expenses associated with the preparation and filing of any registration statement pursuant to Section 2.C, 3.C or 4.A herein and any sale covered thereby (including the reasonable fees and expenses of legal counsel to the Affected Stockholders, fees related to blue sky qualifications and filing fees in respect of the National Association of Securities Dealers, Inc.), but excluding underwriting discounts or commissions in respect of shares of Common Stock to be sold by the Affected Stockholders. "Registration Request" shall mean a written notice from a Stockholder requesting that the Company file a Registration Statement with respect to a Distribution Public Offering pursuant to Section 2.A herein, an Underwritten Public Offering pursuant to Section 2.B herein or a Public Offering pursuant to Section 4.A herein, in which the Stockholder advises the Company as to the number of shares of Common Stock that the Stockholder wishes to include in the applicable Registration and in which the Stockholder agrees to (i) the specified method of distribution, (ii), in the case of an Underwritten Public Offering, the designated managing underwriter and (iii) agrees to provide to the Company all such information as may be required by the Company pursuant to Section 6 herein. "Registration Period" shall mean the period of time from the decision of the Company to prepare and file a Registration Statement to and including the effective date of such Registration Statement. REGISTRATION RIGHTS AGREEMENT 4 5 "Registration Statement" shall mean a registration statement filed on Form S-1, S-2 or S-3 (or any successor form) under the registration provisions of the Securities Act and the Securities Act Rules. "Request Period" shall mean a period of ten business days after receipt pursuant to Section 2.A by the Stockholder that did not send the applicable Registration Request or after receipt pursuant to Section 2.B by all Stockholders (other than the Stockholder who sent the applicable Registration Request) of the Notice of Registration Request. "Secondary Distribution" shall mean an Underwritten Public Offering of Common Stock offered, sold and delivered by shareholders of the Company other than the Stockholders, but including the holders of Common Stock acquired pursuant to the Merger and subject to the Cynara Registration Rights Agreement. "Secondary Distribution Registration Statement" shall mean a Registration Statement filed by the Company and declared effective under the Securities Act and the Securities Act Rules relating to a Secondary Distribution, including a distribution requested by the shareholders subject to the Cynara Registration Rights Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, as the same shall be in effect at the date of any determination to be made hereunder. "Securities Act Rules" shall mean the rules and regulations promulgated by the Commission pursuant to the Securities Act, as the same shall be in effect at the date of any determination to be made hereunder. "Stockholders" shall mean Cap I and Cap II and, upon registration of record ownership of shares of Common Stock by them, Nathaniel A. Gregory, Winokur and the general and limited partners of Cap I and Cap II and any assignee of any of them; provided, however, that, in the case of any such record owner, the offering, sale and delivery of shares of such Common Stock are not exempt from the registration provisions of the Securities Act pursuant to Section 4(1) thereof (without regard to the exemption provided by Rule 144 under the Securities Act unless paragraph (k) of Rule 144 is applicable thereto); and provided, further, that, in the case of any assignee other than Nathaniel A. Gregory, Winokur and such general and limited partners, such assignee has agreed to be bound by the provisions of this Agreement in accordance with Section 15 herein. "Supplemental Registration Request" shall mean a written notice given by any Stockholder pursuant to the provisions of Section 2.A, 2.B or 3.B herein, in which the Stockholder advises the Company as to the number of shares of Common Stock that the Stockholder wishes to include in the applicable Registration and in which the Stockholder agrees to (i) the specified method of distribution, (ii), in the case of an Underwritten Public Offering, the designated managing underwriter and (iii) agrees to provide to the Company all such information as may be required by the Company pursuant to Section 7 herein. REGISTRATION RIGHTS AGREEMENT 5 6 "Underwritten Public Offering" shall mean a firm commitment underwritten public offering for cash of shares of Common Stock pursuant to a Registration Statement filed and declared effective under the Securities Act and the Securities Act Rules. "Winokur" shall mean Herbert S. Winokur, Jr. or any legal entity (other than Cap I or Cap II) of which Mr. Winokur is the predominant beneficial owner. B. Rules of Construction. Unless the context otherwise requires, as used in this Agreement: (a) a term has the meaning ascribed to it; (b) "or" is not exclusive; (c) "including" means "including without limitation;" (d) words in the singular include the plural; (e) words in the plural include the singular; (f) words applicable to one gender shall be construed to apply to each gender; (g) the terms "hereof," "herein," "hereby," "hereto" and derivative or similar words refer to this entire Agreement; and (h) the term "Section" shall refer to the specified Section of this Agreement. Section 2. Registration Rights. A. Distribution Registration Request. If the Company shall receive a Registration Request from Cap I or Cap II requesting that the Company file a Registration Statement relating to a Distribution Public Offering of shares of Common Stock owned by such Stockholder, the Company shall, if the other Stockholder (Cap I or Cap II) has not theretofore distributed its holdings of Common Stock to its partners in complete or partial liquidation, give promptly (and in any event within ten business days) a Notice of Registration Request to the Stockholder that did not send the Registration Request of the receipt of the Registration Request, enclosing a copy of the Registration Request. During the Request Period, the other Stockholder shall be entitled to give a Supplemental Registration Request to the Company in which such Stockholder requests that the Company register pursuant to the Securities Act and the Securities Act Rules the shares of Common Stock owned by such Stockholder to be distributed in a Distribution Public Offering. B. Registration Request. If the Company shall receive a Registration Request from a Stockholder requesting that the Company file a Registration Statement relating to an Underwritten Public Offering of shares of Common Stock owned by such Stockholder, the Company shall give promptly (and in any event within ten business days) a Notice of Registration Request to each other Stockholder of the receipt of the Registration Request, enclosing a copy of the Registration Request. During the Request Period, the other Stockholders shall be entitled to give a Supplemental Registration Request to the Company in which any or all such Stockholders request that the Company register pursuant to the Securities Act and the Securities Act Rules all or any portion of the shares of Common Stock owned by such Stockholders to be distributed in an Underwritten Public Offering. C. Required Registration. At the end of the Request Period in the case of a Registration Request made pursuant to Section 2.A or 2.B herein, the Company shall, subject to the provisions of Section 2.D herein, prepare as promptly as practicable and file a Registration Statement with REGISTRATION RIGHTS AGREEMENT 6 7 respect to the distribution in accordance with the applicable method of distribution of the Registrable Shares to be included therein and use its best efforts to cause the Registration Statement to become effective under the Securities Act in accordance with the Securities Act Rules,. D. Suspension of Obligations. The Company's obligations under Section 2.C and Section 4.A herein to prepare and file a Registration Statement and to seek its effectiveness shall be subject to the following provisions: i. The Company shall be required to file no more than an aggregate of five (5) Registration Statements pursuant to Section 2.A and Section 2.B and one (1) Registration Statement pursuant to Section 4.A herein. ii. The Company's obligations to prepare, file and seek effectiveness of a requested Registration Statement shall be suspended: (a) in the case of an Underwritten Public Offering, if the aggregate number of Registrable Shares to be included in such requested Registration Statement is less than 750,000 shares of the then issued and outstanding Common Stock; (b) in any case, during the period from the time that it gives a Notice of Intent to File to Stockholders that it is preparing to file a Primary Distribution Registration Statement until 90 days (or such shorter period as to which the managing underwriter of the Primary Distribution to which the Primary Distribution Registration Statement relates shall consent in writing) have lapsed following the effective date of a Primary Distribution Registration Statement under the Securities Act; provided, however, that (A) such Notice of Intent to File is given prior to the time of receipt by the Company of a Registration Request by any Stockholder and (B) that the Company shall use its best efforts to cause such Primary Distribution Registration Statement to be declared effective as promptly as practicable; and provided further that the obligation to file a Registration Statement on behalf of any Stockholder shall be reinstated if the Company does not file a Primary Distribution Registration Statement within 30 days after giving the Notice of Intent to File; (c) in any case, during the period from the time that it gives a Notice of Intent to File to Stockholders that it is preparing to file a Secondary Distribution Registration Statement until 90 days (or such shorter period as to which the managing underwriter of a Secondary Distribution effected by means of a Secondary Distribution Registration Statement shall consent in writing) have lapsed following the effective date of the Secondary Distribution Registration Statement under the Securities Act; provided, however, that (A) such Notice of Intent to File is given prior to time of receipt by the Company of a Registration Request by any Stockholder and (B) that the Company shall use its best efforts to cause such Secondary Distribution Registration Statement to be declared effective as promptly as practicable; and REGISTRATION RIGHTS AGREEMENT 7 8 provided further that the obligation to file a Registration Statement on behalf of any Stockholder shall be reinstated if the Company does not file a Secondary Distribution Registration Statement within 30 days after giving the Notice of Intent to File; or (d) in any case, if at the time of receipt by the Company of a Registration Request the Company has material inside information as to which it believes it has a valid business purpose in refraining from disclosing publicly for the time being and that current public disclosure of such information would have a material adverse effect on the Company, for a period commencing with the date of receipt of the Registration Request and ending on the earlier of (a) 60 days after such receipt of the Registration Request; (b) the public announcement of such material inside information; or (c) the date on which the Company gives the Stockholder who issued the Registration Request a notice that suspension of its obligation is no longer required; provided, however, that the same material inside information shall not constitute a basis for continuation of this suspension period. iii. A Registration Statement filed pursuant to a Registration Request made under Section 2.B herein shall first include all Registrable Shares requested to be included by any and all Stockholders and, only after such inclusion, may include Common Stock being sold for the account of the Company or any other security holders. Any Common Stock to be offered on behalf of the Company or such other security holders will be included in such Registration Statement only to the extent that, in the reasonable opinion of the managing underwriter for the Underwritten Public Offering of Registrable Shares on behalf of Stockholders, such inclusion will not materially adversely affect the distribution of Registrable Shares on behalf of such Stockholders. E. Underwriter. The selection of an underwriter for an Underwritten Public Offering of Registrable Shares by Stockholders shall be subject to the approval of the Company, which shall not be unreasonably withheld. F. Withdrawn Registration Statement. For purposes of Section 2.D(i) herein, if a requested Registration Statement is filed and the Company otherwise complies with its obligations hereunder, and i. the Registration Statement is withdrawn with the consent of the Affected Stockholders as a result of a delay in the offering requested by the Company, then no requested Registration Statement shall be deemed to have been filed; or ii. the Affected Stockholders cease to prosecute the Public Offering subject thereto actively and in good faith, the Company shall have the right to withdraw the Registration Statement without the consent of the Affected Stockholders and the requested Registration Statement shall be deemed to have been filed. REGISTRATION RIGHTS AGREEMENT 8 9 Section 3. Incidental/"Piggy-back" Registration. A. Notice of Intent to File. If the Company at any time proposes to file a Primary Distribution Registration Statement or a Secondary Distribution Registration Statement under the Securities Act relating to an Underwritten Public Offering of Common Stock that would permit the inclusion therein of shares of Common Stock to be distributed in accordance with the method of distribution contemplated by such Registration Statement, the Company shall give to each Stockholder a Notice of Intent to File promptly after a determination has been made by the Company to prepare and file such Registration Statement, but in any event not less than ten days before the filing with the Commission of such Registration Statement, which notice shall set forth the intended method of distribution (including the name of the managing underwriter) of the securities proposed to be registered. The Notice of Intent to File shall include an offer to include in such filing, subject to the other provisions of this Agreement, such amount of Registrable Shares as each Stockholder may request. B. Supplemental Registration Request. If any Stockholder wishes to have Registrable Shares registered pursuant to this Section 3, it shall advise the Company by giving a Supplemental Registration Request within 20 days after the date of receipt of the Notice of Intent to File (or such shorter period, but in any event not less than ten days, as the Company shall specify in its Notice of Intent to File), setting forth the amount of Registrable Shares for which Registration is requested. C. Registration Obligation. Subject to the provisions of the next sentence, the Company shall include all Registrable Shares specified in the Supplemental Registration Requests received by it in accordance with subsection B of this Section 3. If, however, the managing underwriter of the proposed Primary Distribution or Secondary Distribution shall advise the Company in writing that, in the reasonable opinion of such managing underwriter, the inclusion in the Registration Statement of the aggregate number of shares of Common Stock requested by the Stockholders to be included in the Primary Distribution or Secondary Distribution would materially adversely affect such distribution of securities, then the Company shall so advise the Affected Stockholders and the number of such shares of Common Stock included in the Registration Statement shall be reduced to the number acceptable to such managing underwriter and such reduced number of shares shall be allocated pro rata among the Affected Stockholders based on the Registrable Shares held by each. If any Stockholder does not agree to the terms of underwriting of such Primary Distribution or Secondary Distribution, the shares of Common Stock owned by such Stockholder shall be excluded therefrom by written notice from the Company or such managing underwriter. D. Underwriting Agreement. Any obligation of the Company to include shares of Common Stock of any Stockholder in a Registration Statement prepared and filed pursuant to this Section 3 shall be conditioned upon the agreement of such Stockholder to enter into an underwriting agreement with the Company, other security holders, if any, and the managing underwriter of the Primary Distribution or the Secondary Distribution of the type described in subsection (H) of Section 5. REGISTRATION RIGHTS AGREEMENT 9 10 Section 4. Special Registration Right. A. Preparation and Filing. If at any time during the term hereof, (i) Winokur acquires the record and beneficial ownership of any Common Stock from Cap I or Cap II, (ii) in the opinion of counsel, reasonably satisfactory to the Company, all or part of such shares may not be sold by Winokur without registration under the Securities Act or reliance on an exemption from the registration provisions thereof (other than Section 4(1) of the Securities Act) and (iii) Winokur desires in good faith to pledge all or a portion of such shares as collateral for borrowings by Winoker from one or more lenders ("Lenders"), then, upon receipt by the Company of a Registration Request from Winokur or the Lenders, the Company shall, subject to the provisions of Section 2.D herein, prepare as promptly as practicable and file a Registration Statement with respect to the offering, sale and delivery by the Lenders of all or any part of the shares of Common Stock pledged by Winokur to the Lenders in accordance with the applicable method of distribution of the Registrable Shares to be included therein and use its best efforts to cause the Registration Statement to become effective under the Securities Act in accordance with the Securities Act Rules. If so requested by Winokur or the Lenders, the Registration Statement shall be filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules. B. Distribution. The applicable method of distribution of the Registrable Shares shall be as requested by the Lenders (or Winokur on behalf of the Lenders) and the methods of distribution may include a distribution by one or more broker-dealers named in the Registration Statement "at the market" pursuant to a Market Public Offering. The Company agrees that it will amend the Registration Statement or supplement the prospectus to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. C. Limitations. The preparation and filing of a Registration Statement pursuant to this Section 4 and the offering, sale and delivery of Registrable Shares pursuant thereto shall be subject to the following limitations: i. The Company shall be obligated to prepare, file and cause to become effective only one Registration Statement pursuant to this Section 4. ii. The only offering, sale and delivery of Registrable Shares under such Registration Statement shall be for the account of the Lenders after a foreclosure of the lien against such shares following a default in payment of the borrowings made against such collateral, and no sales of such shares shall be effected by the Lenders under such Registration Statement prior to the delivery to the Company of a certificate of the Lenders to such effect. iii. The proposed and actual filing by the Company of a Registration Statement pursuant to this Section 4 shall not entitle any Stockholder to registration rights pursuant to Section 3 herein. REGISTRATION RIGHTS AGREEMENT 10 11 iv. The offering, sale and delivery of Registrable Shares pursuant to any Registration Statement filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules under this Section 4 shall be suspended if, at the time of any offering, sale and delivery pursuant to a shelf registration statement, the Company has material inside information as to which it believes it has a valid business purpose in refraining from disclosing publicly for the time being and that current public disclosure of such information would have a material adverse effect on the Company. Such suspension period shall commence upon notice by the Company to Winokur and the Lenders and shall continue until the earlier of (a) the expiration of 60 days thereafter; (b) the public announcement of such material inside information; or (c) the date on which the Company gives Winokur and the Lenders notice that such suspension is no longer required; provided, however, that the same material inside information shall not constitute a basis for continuation of this suspension period. v. The Company shall be obligated to maintain the effectiveness of a Registration Statement filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules under this Section 4 until the third anniversary of the effective date thereof and no longer. D. Benefits. Upon receipt by the Company of a Registration Request under this Section 4, the Lenders shall have the benefits and obligations of an Affected Stockholder under Sections 5, 6, 7 and 8 of this Agreement and of a Stockholder under Sections 9, 10, 11, 12, 13, 16 and 17 of this Agreement. Section 5. Registration Procedures. If the Company is required by the provisions of Section 2, 3 or 4 to effect the Registration of any of the Registrable Shares, the Company shall, as expeditiously as possible: A. Filing. Prepare and file with the Commission a Registration Statement with respect to such shares of Common Stock and use its best efforts to cause such Registration Statement to become and, subject to subsection C of this Section 5, remain effective. B. Amendments. Prepare and file with the Commission during the Registration Period such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to permit such Registration Statement to become effective in accordance with the Securities Act and the Securities Act Rules and to ensure that such Registration Statement and the prospectus used in connection therewith comply with the disclosure standards of Section 11 of the Securities Act and Section 10(b) of the Exchange Act and that such prospectus complies with Section 10 of the Securities Act, in each case during the Effective Period. C. Maintenance of Effectiveness. Subject to the provisions of Section 4.C herein, use its best efforts to maintain the effectiveness of such Registration Statement and to ensure compliance of the prospectus contained therein with Section 10(a) of the Securities Act for the Effective Period. REGISTRATION RIGHTS AGREEMENT 11 12 D. Copies. Furnish to each Affected Stockholder (i) such number of copies of such Registration Statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such Registration Statement (including each preliminary prospectus, summary prospectus and prospectus supplement), in conformity with the requirements of the Securities Act, and such other documents, as such Affected Stockholder may reasonably require in order to facilitate the offering, sale and delivery or other disposition of the Registrable Shares owned by such Affected Stockholder and (ii), during the Registration Period and the Effective Period, copies of any written correspondence or memoranda relating to oral communications in each case with the Commission and copies of any request by the Commission for any amendment of or supplement to the Registration Statement or the prospectus included therein or for additional information. E. Blue Sky Laws. Use its best efforts to register or qualify the Common Stock covered by such Registration Statement under the securities or blue sky laws of such jurisdictions as the managing underwriter of such Distribution may reasonably request (excluding, however, any jurisdiction in which the filing would subject the Company to additional tax liability and any jurisdiction in which the Company would thereby be required to execute a general consent to service of process) and use all reasonable efforts to do such other acts and things as may be required to enable the Affected Stockholders to consummate the public sale or other disposition in such jurisdictions of the Registrable Shares owned by such Affected Stockholders. F. Earnings Statement. Make available to its holders of Common Stock, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, but not more than 18 months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. G. Amended Prospectuses. Notify each Affected Stockholder immediately if the Company shall become aware at any time during the Effective Period that the prospectus included in the Registration Statement, as such prospectus may be amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading in light of the circumstances then existing, and at the request of any Affected Stockholder to prepare promptly and to furnish to each Affected Stockholder such number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading in the light of the circumstances then existing. H. Underwriting Agreements. Enter into such agreements (including an underwriting agreement in customary form and containing customary provisions relating to legal opinions and accountants' letters, representations and warranties and mutual indemnification and contribution between the Company and the underwriters for the Affected Stockholders) and use all reasonable REGISTRATION RIGHTS AGREEMENT 12 13 efforts to take such other actions as the Affected Stockholders may reasonably request in order to expedite or facilitate the disposition of such Registrable Shares. I. Inspection. Make available for inspection by the Affected Stockholders, by any underwriter participating in any distribution to be effected pursuant to such Registration Statement and by any attorney, accountant or other agent retained by Affected Stockholders or any such underwriter all pertinent financial and other records, pertinent corporate documents and properties of the Company and cause all of the Company's officers, directors and employees to supply all such information requested by the Affected Stockholders, such underwriter, attorney, accountant or agent, as is reasonably needed in connection with such Registration. 6. Classes of Stock. The parties hereto intend that any capital stock sold by a Stockholder pursuant to the provisions of this Agreement shall be Class A Common Stock if sold prior to January 1, 2002 or Common Stock if sold thereafter. Accordingly, any reference herein to the inclusion of Common Stock in a Registration Statement for offering, sale and delivery by a Stockholder hereunder shall, subject to the proviso to Article Fourth, II-A-4, of the Certificate of Incorporation of the Company, prior to January 1, 2002 be deemed to refer to Class A Common Stock and thereafter to Common Stock. 7. Expenses; Limitations on Registration. The Registration Expenses relating to any Registration effected by the Company pursuant to this Agreement shall be for the account of the Company; provided, however, that any and all underwriting discounts and commissions attributable to the sale of the shares of Common Stock of the Affected Stockholders shall be for the account of the Affected Stockholders. For purposes of this Section 7, the Company shall be obligated to pay the fees and expenses of only one law firm representing the Affected Stockholders. If more than one such firm shall represent the Affected Stockholders in connection with a Registration under this Agreement, the Affected Stockholders shall notify the Company as to which firm shall be deemed to represent the Affected Stockholders for purposes of this Section 7. Section 8. Stockholders' Information. The Affected Stockholders shall provide all information reasonably requested by the Company for inclusion in any Registration Statement to be filed hereunder. The actual provision of such information shall be a condition precedent to the obligation of the Company to take any action pursuant to this Agreement in respect of the Registration of Registrable Shares of any Affected Stockholder. Section 9. Indemnification. A. In connection with the Registration of any Registrable Shares under the Securities Act pursuant to this Agreement, the Company agrees to indemnify and hold harmless each Affected Stockholder, its partners, directors, officers and employees, and each other Person, if any, who controls such Affected Stockholder within the meaning of Section 15 of the Securities Act, against REGISTRATION RIGHTS AGREEMENT 13 14 any losses, claims, damages or liabilities, joint or several, to which such Affected Stockholder or any such partner, director, officer, employee or controlling Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or any alleged untrue statement of a material fact contained in the Registration Statement or the prospectus included therein at the time the Registration Statement is declared effective or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) any untrue statement of a material fact or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus, the prospectus included therein or any amendment or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements concerning the Company therein, in the light of the circumstances under which they were made, not misleading and shall reimburse each Affected Stockholder and each such partner, director, officer, employee and controlling Person for any legal or other expenses reasonably incurred by such Affected Stockholder or such partner, director, officer employee or controlling Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished by or on behalf of an Affected Stockholder to the Company expressly for use therein; and provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if such untrue statement or alleged untrue statement or omission or alleged omission was corrected in the final prospectus included in the Registration Statement at the time it became effective and the Affected Stockholder, in the case of a Distribution Public Offering or a Market Public Offering, or the managing underwriter, in the case of an Underwritten Public Offering, failed to provide the final prospectus as required by the Securities Act and the Securities Act Rules. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Affected Stockholder or any such partner, director, officer, employee or controlling Person, and shall survive the transfer of such securities by any Affected Stockholder. B. Each Affected Stockholder agrees to indemnify and hold harmless the Company, its directors, officers and employees, each other Person, if any, who controls the Company and each other Affected Stockholder against any losses, claims, damages or liabilities, joint or several, to which the Company, any such director, officer or employee, any such controlling Person or such other Affected Stockholder may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or any alleged untrue statement of a material fact contained in the Registration Statement or the prospectus included therein at the time the Registration Statement is declared effective or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements therein not misleading or REGISTRATION RIGHTS AGREEMENT 14 15 (ii) any untrue statement of a material fact or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus, the prospectus included therein or any amendment or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements concerning the Company therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such alleged untrue statement or alleged omission was made in such Registration Statement, preliminary prospectus, prospectus, amendment or supplement in reliance upon and in conformity with written information furnished by or on behalf of an Affected Stockholder to the Company expressly for use therein, and shall reimburse the Company or such director, officer, employee or other Person for any legal or any other expenses reasonably incurred in connection with investigating or defending any such loss, claim, damage, liability or action. C. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding involving a claim referred to in subsection (A) or (B) of this Section 9, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligation under this subsection C to the extent the indemnifying party is not materially prejudiced by such failure. In case any such action is brought against an indemnified party, the indemnified party shall permit the indemnifying party to assume the defense of such action or proceeding, provided that counsel for the indemnifying party, who shall conduct the defense of such action or proceeding, shall be approved by the indemnified party (whose approval shall not be unreasonably withheld) and the indemnified party may participate in such defense (in which case, such participation shall be at such indemnified party's expense, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified party and the indemnifying party shall exist in respect of such claim, in which event the indemnifying party shall pay the reasonable fees and expense of separate counsel for the indemnified party). No indemnifying party shall consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. The indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm for all indemnified parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent. D. Indemnification similar to that specified in the preceding subsections of this Section 9 shall be given by the Company and each Affected Stockholder (with such modifications as shall be appropriate) with respect to liability related to any required registration or other qualification of Registrable Shares under any Federal or state law or regulation of governmental authority other than the Securities Act. E. If the indemnification provided for in this Section 9 is unavailable or insufficient to hold harmless an indemnified party under subsection (A) or (B) above, then the indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, REGISTRATION RIGHTS AGREEMENT 15 16 damages or liabilities referred to in subsection (A) or (B) above, in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and each Affected Stockholder, on the other, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Affected Stockholder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Affected Stockholders agree that it would not be just and equitable if contributions pursuant to this subsection (E) were to be determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the first sentence of this subsection (E). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (E) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim (which shall be limited as provided in subsection (C) above if the indemnifying party has assumed the defense of any such action in accordance with the provisions thereof) that is the subject of this subsection (E). Notwithstanding the provisions of this subsection (E), in respect of any loss, claim, damage or liability based upon any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact that relates to information other than information supplied by any Affected Stockholder, no Affected Stockholder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Shares offered by it and distributed to the public exceeds the amount of any damages that such Affected Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Promptly after receipt by an indemnified party under this subsection (E) of notice of the commencement of any action against such party in respect of which a claim for contribution may be made against an indemnifying party under this subsection (E), such indemnified party shall notify the indemnifying party in writing of the commencement thereof if the notice specified in subsection (C) above has not been given with respect to such action; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party under this subsection (E) to the extent such omission is not prejudicial. Section 10. Public Availability of Information. The Company shall comply with all applicable public information reporting requirements of the Commission, to the extent required from time to time to enable each Stockholder to sell Registrable Shares without Registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Stockholder, the Company will deliver to such Stockholder a written statement as to whether it has complied with such requirements. REGISTRATION RIGHTS AGREEMENT 16 17 Section 11. Supplying Information. The Company shall cooperate with each Stockholder in supplying such information as may be necessary for such Stockholder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Registrable Shares. Section 12. Specific Performance. Each party hereto acknowledges and agrees that each other party hereto would be irreparably harmed and would have no adequate remedy of law if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, it is agreed that, in addition to any other remedies by law or in equity which may be available, the parties hereto shall be entitled to obtain preliminary and permanent injunctive relief with respect to any breach or threatened breach of, or otherwise obtain specific performance of, the covenants and other agreements contained in this Agreement. Section 13. Representations and Warranties of the Company. The Company represents and warrants to each Stockholder that, as of the date of this Agreement, (a) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) the execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or any of the transactions contemplated hereby and (c) this Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, and, assuming that this Agreement constitutes a valid and binding obligation of each of Cap I and Cap II, is enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance and similar laws affecting creditors' rights generally from time to time and to general principles of equity and except as the enforceability thereof may be limited by considerations of public policy. Section 14. Representations and Warranties of Cap I and Cap II. Each of Cap I and Cap II represents and warrants to the Company that, as of the date of this Agreement, (a) it is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and has the organizational power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) the execution and delivery of this Agreement by such Stockholder and the consummation by such Stockholder of the transactions contemplated hereby have been duly authorized by all necessary organizational action on the part of such Stockholder and no other organizational proceedings on the part of such Stockholder are necessary to authorize this Agreement or any of the transactions contemplated hereby and (c) this Agreement has been duly executed and delivered by such Stockholder and constitutes a valid and binding obligation of such Stockholder and, assuming that this Agreement constitutes a valid and binding obligation of the Company, is enforceable against such Stockholder in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance and similar laws affecting creditors' REGISTRATION RIGHTS AGREEMENT 17 18 rights generally from time to time and to general principles of equity and except as the enforceability thereof may be limited by considerations of public policy. Section 15. Expiration. This Agreement and the rights, benefits, duties and obligations hereunder of the parties hereto and their successors and permitted assigns shall expire and be of no further force or effect on the 180th day after the later to occur of (i) May 31, 2004 and (ii) the first date on which each and all of Cap I, Cap II, Nathaniel A. Gregory and, to the extent that Winokur has acquired the record and beneficial ownership of shares of Common Stock from Cap I or Cap II, Winokur is able to sell shares of Common Stock subject hereto in reliance upon the exemption from the registration provisions of the Securities Act contained in Rule 144(k) or any successor Securities Act Rule. Section 16. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or transmitted by telex, telegram or facsimile transmission or mailed by registered or certified mail (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): (a) if to Cap I, to: Capricorn Investors, L.P. c/o Winokur Holdings, Inc. 30 East Elm Street Greenwich, Connecticut 06830 Attention: Herbert S. Winokur, Jr. President Telecopy No.: (203) 861-6671 with a copy to: O'Melveny & Myers LLP 153 E. 53rd Street 53rd Floor New York, New York 10022-4611 Attn.: Mr. Jeffrey J. Rosen Facsimile: (212) 326-2061 (b) if to Cap II, to: Capricorn Investors II, L.P. c/o Capricorn Holdings, LLC 30 East Elm Street Greenwich, Connecticut 06830 Attention: Manager Telecopy No.: (203) 861-6671 REGISTRATION RIGHTS AGREEMENT 18 19 with a copy to: O'Melveny & Myers LLP 153 E. 53rd Street 53rd Floor New York, New York 10022-4611 Attn.: Mr. Jeffrey J. Rosen Facsimile: (212) 326-2061 (c) if to the Company, to: NATCO Group, Inc. Brookhollow Central III 2950 North Loop West Suite 750 Houston, Texas 77092 Attn.: Mr. Nathaniel A. Gregory, Chairman and Chief Executive Officer Facsimile No.: (713) 683-7814 with a copy to: Vinson & Elkins L.L.P. First City Tower 1001 Fannin Street Houston, Texas 77002-6760 Attn.: Mr. William E. Joor III Facsimile No.: (713) 615-5201 Section 17. Benefit and Assignment. (a) The terms and conditions of this Agreement shall inure to the benefit of and be binding on the parties hereto and their respective successors and permitted assigns; provided, however, that, except as otherwise provided in this Section, this Agreement shall not be assignable by any party hereto except by operation of law or with the prior express written consent of the other parties hereto. Upon registration of record ownership of shares of Common Stock by Nathaniel A. Gregory, Winokur or any general or limited partner of Cap I or Cap II, such person shall become a Stockholder and a third party beneficiary of all the rights of a Stockholder hereunder. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto, their respective successors and permitted assigns and such third party beneficiaries, any rights, remedies, obligations or liabilities under or by reason of this Agreement. (b) If Cap I or Cap II shall transfer and assign shares of Common Stock to any Person otherwise than in a Distribution Public Offering or an Underwritten Public Offering, Cap I or Cap II (or any Person who shall be a transferee or assignee pursuant to this subsection (b)), as the case may be, may assign such portion of its rights and benefits under REGISTRATION RIGHTS AGREEMENT 19 20 this Agreement as is necessary to permit such Person to act as a Stockholder hereunder; provided, however, that such Person shall agree in writing to be bound by the duties and obligations of a Stockholder hereunder. Section 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to the application of doctrines of conflicts of law. Section 19. Counterparts. This Agreement may be executed simultaneously in one or more counterparts, any of which may have been transmitted and received by facsimile transmission and each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. (The remainder of this page left blank intentionally.) REGISTRATION RIGHTS AGREEMENT 20 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their officers thereunto duly authorized. NATCO GROUP INC. BY: /s/ NATHANIEL A. GREGORY ------------------------------------- Nathaniel A. Gregory Chairman and Chief Executive Officer CAPRICORN INVESTORS, L.P. By: Capricorn Holdings, G.P., its general partner By: Winokur Holdings, Inc., its general partner By: /s/ HERBERT S. WINOKUR, JR. ------------------------------------- Herbert S. Winokur, Jr. President. CAPRICORN INVESTORS II, L.P. By: Capricorn Holdings, LLC, its general partner By: /s/ HERBERT S. WINOKUR, JR. ------------------------------------- Herbert S. Winokur, Jr. Manager REGISTRATION RIGHTS AGREEMENT 21 EX-4.4 5 REGISTRATION RIGHTS AGREEMENT - DATED 11/18/1998 1 EXHIBIT 4.4 Cynara REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of November 18, 1998 by and between NATCO Group Inc., a Delaware corporation (the "Company"), and the undersigned holders of Common Stock of the Company (the "Designated Stockholders"). R E C I T A L S: On November 18, 1998, the Certificate of Incorporation of the Company was amended to authorize two classes of common stock, par value $0.01 per share ("Common Stock"), to wit: 45,000,000 shares of Class A Common Stock ("Class A Common Stock") and 5,000,000 shares of Class B Common Stock ("Class B Common Stock"), and to convert each of the then outstanding shares of common stock of the Company into one share of Class A Common Stock (the "Charter Amendments"). After giving effect to the Charter Amendments, Cap I owns of record and beneficially 5,563,667 shares (68.3%) of the outstanding Class A Common Stock. After giving effect to the Charter Amendments, Cap II owns of record and beneficially 2,582,259 shares (31.7%) of the outstanding Class A Common Stock. Together, Cap I and Cap II own of record and beneficially, as of the date of this Agreement, all the outstanding Class A Common Stock, being all the outstanding Common Stock. The Company, National Tank Company, a Delaware corporation and a wholly owned subsidiary of the Company ("Natco"), Natco Acquisition Company, a Delaware corporation and a wholly owned subsidiary of the Company ("Newco") and The Cynara Company, a Delaware corporation ("Cynara"), are parties to an Amended and Restated Agreement and Plan of Merger dated November 17 1998 but effective as of March 26, 1998 (the "Merger Agreement"), pursuant to which Cynara will be merged with and into Natco (the "Merger") and the Designated Stockholders will receive shares of Class B Common Stock through conversion of the outstanding shares of Cynara common stock. The Company and Cap II have executed and delivered an Investment Agreement dated November 17, 1998 pursuant to which the Company has agreed to issue and sell, and Cap II has agreed to purchase, a non-negotiable promissory note convertible upon occurrence of the events therein specified into 504,762 shares of Class A Common Stock. Cap I and Cap II have entered into a Registration Rights Agreement of even date herewith between the Company and such stockholders which contains terms and provisions substantially similar to those herein (the "Capricorn Registration Rights Agreement"). 2 It is a condition to consummation of the Merger that the stockholders of Cynara who will become stockholders of the Company upon consummation of the Merger shall have entered into a registration rights agreement as contemplated by the Merger Agreement. NOW, THEREFORE, for and in consideration of the foregoing, the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions and Usage. A. Definitions. The terms defined in this Section, wherever used in this Agreement, shall, unless the context otherwise requires, have the respective meanings hereinafter specified. "Affected Stockholders" shall mean each Stockholder all or a portion of whose shares of Common Stock have been included in a Registration Statement filed with the Commission pursuant to the provisions of this Agreement. "Agreement" shall mean this Registration Rights Agreement. "Cap I" shall mean Capricorn Partners, L.P., a Delaware limited partnership. "Cap II" shall mean Capricorn Partners II, L.P., a Delaware limited partnership. "Capricorn Registration Rights Agreement" shall have the meaning ascribed to such term in the recitals to this Agreement. "Class A Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Class B Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Commission" shall mean the United States Securities and Exchange Commission. "Common Stock" shall have the meaning ascribed to such term in the recitals to this Agreement. "Company" shall mean NATCO Group Inc., a Delaware corporation, and any successor corporation by merger, consolidation or otherwise and any parent corporation resulting from the merger or consolidation of the Company with or into a subsidiary of another corporation. "Cynara" shall mean The Cynara Corporation, a Delaware corporation. REGISTRATION RIGHTS AGREEMENT 2 3 "Designated Stockholders" shall have the meaning ascribed to such term in the first paragraph of this Agreement. "Earnout Shares" shall mean the CTOC Earnout Shares, the Initial Earnout Shares and the Supplemental Earnout Shares as those terms are defined in the Merger Agreement. "Effective Period" shall mean such period as shall be required under the provisions of the Securities Act and the Securities Act Rules for delivery of a prospectus meeting the requirements of Section 10(a) of the Securities Act to any Person purchasing Common Stock in connection with an Underwritten Public Offering or a Market Public Offering; provided, however, that such period shall not include any delivery requirement with respect to the distribution by an underwriter of its unsold allotment relating to an Underwritten Public Offering. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, as the same shall be in effect at the date of any determination to be made hereunder. "Exchange Act Rules" shall mean the rules and regulations promulgated by the Commission under the Exchange Act, as the same shall be in effect at the date of any determination to be made hereunder. "Market Public Offering" shall mean a public offering for cash of shares of Common Stock into an existing trading market for outstanding shares of Common Stock at other than a fixed price on or through the facilities of a national securities exchange or to or through a market maker otherwise than on an exchange, but in any case pursuant to a Registration Statement filed and declared effective under the Securities Act and the Securities Act Rules. "Merger" shall have the meaning ascribed to such term in the recitals to this Agreement. "Merger Agreement" shall have the meaning ascribed to such term in the recitals to this Agreement. "Notice of Intent to File" shall mean a written notice given by the Company pursuant to Section 2.C or Section 3.A that the Company is preparing to file a Primary Distribution Registration Statement or a Secondary Distribution Registration Statement under the Securities Act relating to an Underwritten Public Offering of Common Stock. "Notice of Registration Request" shall mean a written notice given by the Company pursuant to Section 2.A or 4.A to each Stockholder that did not send the applicable Registration Request, notifying such Stockholders that the applicable Registration Request has been received by the Company and briefly advising such Stockholders that they have the right to request Registration for the distribution of their holdings of Common Stock, subject to the terms and provisions of this Agreement. REGISTRATION RIGHTS AGREEMENT 3 4 "Person" shall mean an individual, a corporation, a partnership, a trust, an unincorporated organization or a government or any agency or political subdivision thereof. "Primary Distribution" shall mean an Underwritten Public Offering of Common Stock offered, sold and delivered by the Company. "Primary Distribution Registration Statement" shall mean a Registration Statement filed by the Company and declared effective under the Securities Act and the Securities Act Rules relating to a Primary Distribution. "Public Offering" shall mean either an Underwritten Public Offering or a Market Public Offering. "Registrable Shares" shall mean shares of Common Stock owned of record by any Stockholder as to which such Stockholder has requested Registration pursuant to the provisions of Section 2.A, 3.B or 4.A. "Registration" shall mean the registration under the registration provisions of the Securities Act of the offering, sale and delivery of shares of Common Stock. "Registration Expenses" shall mean the expenses associated with the preparation and filing of any registration statement pursuant to Section 2.B, 3.C or 4.B herein and any sale covered thereby (including the reasonable fees and expenses of legal counsel to the Affected Stockholders, fees related to blue sky qualifications and filing fees in respect of the National Association of Securities Dealers, Inc.), but excluding underwriting discounts or commissions in respect of shares of Common Stock to be sold by the Affected Stockholders. "Registration Request" shall mean a written notice from a Stockholder requesting that the Company file a Registration Statement with respect to an Underwritten Public Offering pursuant to Section 2.A herein or with respect to a Public Offering pursuant to Section 4.A herein. "Registration Period" shall mean the period of time from the decision of the Company to prepare and file a Registration Statement to and including the effective date of such Registration Statement. "Registration Statement" shall mean a registration statement filed on Form S-1, S-2 or S-3 (or any successor form) under the registration provisions of the Securities Act and the Securities Act Rules. "Request Period" shall mean a period of fifteen (15) business days after receipt of a Notice of Registration Request from the Company pursuant to Section 2.A or 4.A by each Stockholder that did not send the applicable Registration Request. REGISTRATION RIGHTS AGREEMENT 4 5 "Secondary Distribution" shall mean an Underwritten Public Offering of Common Stock offered, sold and delivered by shareholders of the Company other than the Stockholders, but including the holders of Common Stock subject to the Capricorn Registration Rights Agreement. "Secondary Distribution Registration Statement" shall mean a Registration Statement filed by the Company and declared effective under the Securities Act and the Securities Act Rules relating to a Secondary Distribution, including a distribution requested by the shareholders subject to the Capricorn Registration Rights Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, as the same shall be in effect at the date of any determination to be made hereunder. "Securities Act Rules" shall mean the rules and regulations promulgated by the Commission pursuant to the Securities Act, as the same shall be in effect at the date of any determination to be made hereunder. "Stockholders" shall mean any or all of the Designated Stockholders and any assignee of shares of Common Stock theretofore held by any of them; provided, however, that, in the case of any such assignee, the offering, sale and delivery of shares of such Common Stock by such assignee are not exempt from the registration provisions of the Securities Act pursuant to Section 4(1) thereof (without regard to the exemption provided by Rule 144 under the Securities Act unless paragraph (k) of Rule 144 is applicable thereto); and provided, further, that, in the case of any assignee, such assignee has agreed to be bound by the provisions of this Agreement in accordance with Section 15 herein. "Supplemental Registration Request" shall mean a written notice given by any Stockholder pursuant to the provisions of Section 2.A, 3.B or 4.A herein, in which the Stockholder advises the Company as to the number of shares of Common Stock that the Stockholder wishes to include in the applicable Registration and in which the Stockholder agrees to (i) the specified method of distribution, (ii) if applicable, the designated managing underwriter and (iii) provide to the Company all such information as may be required by the Company pursuant to Section 7 herein. "Underwritten Public Offering" shall mean a firm commitment underwritten public offering for cash of shares of Common Stock pursuant to a Registration Statement filed and declared effective under the Securities Act and the Securities Act Rules. B. Rules of Construction. Unless the context otherwise requires, as used in this Agreement: (a) a term has the meaning ascribed to it; (b)"including" means "including without limitation;" (c) words in the singular include the plural; (d) words in the plural include the singular; (e) words applicable to one gender shall be construed to apply to each gender; (f) the terms "hereof," "herein," "hereby," "hereto" and derivative or similar words refer to this entire Agreement; and (g) the term "Section" shall refer to the specified Section of this Agreement. REGISTRATION RIGHTS AGREEMENT 5 6 Section 2. Registration Rights. A. Registration Request. If the Company shall receive a Registration Request from a Stockholder requesting that the Company file a Registration Statement relating to an Underwritten Public Offering of shares of Common Stock owned by such Stockholder, the Company shall give promptly (and in any event within ten business days) a Notice of Registration Request to each other Stockholder of the receipt of the Registration Request, enclosing a copy of the Registration Request. During the Request Period, the other Stockholders shall be entitled to give a Supplemental Registration Request to the Company in which any or all such Stockholders request that the Company register pursuant to the Securities Act and the Securities Act Rules all or any portion of the shares of Common Stock owned by such Stockholders to be distributed in an Underwritten Public Offering. B. Required Registration. At the end of the Request Period, the Company shall, subject to the provisions of Section 2.C herein, prepare as promptly as practicable and file a Registration Statement with respect to the distribution in accordance with the applicable method of distribution of the Registrable Shares to be included therein and use its best efforts to cause the Registration Statement to become effective under the Securities Act in accordance with the Securities Act Rules,. C. Suspension of Obligations. The Company's obligations under Section 2.B herein to prepare and file a Registration Statement and to seek its effectiveness shall be subject to the following provisions: i. The Company shall be required to file no more than two (2) Registration Statements pursuant to Section 2.A herein and one (1) Registration Statement pursuant to Section 4.B herein. ii. The Company's obligations to prepare, file and seek effectiveness of a requested Registration Statement shall be suspended: (a) if the aggregate number of Registrable Shares to be included in such requested Registration Statement is less than 500,000 shares of the then issued and outstanding Common Stock; (b) in any case, during the period from the time that it gives a Notice of Intent to File to Stockholders that it is preparing to file a Primary Distribution Registration Statement until 90 days (or such shorter period as to which the managing underwriter of the Primary Distribution to which the Primary Distribution Registration Statement relates shall consent in writing) have lapsed following the effective date of a Primary Distribution Registration Statement under the Securities Act; provided, however, that (A) such Notice of Intent to File is given prior to the time of receipt by the Company of a Registration Request by any Stockholder and (B) that the Company shall use its best efforts to cause such Primary Distribution REGISTRATION RIGHTS AGREEMENT 6 7 Registration Statement to be declared effective as promptly as practicable; and provided, further, that the obligation to file a Registration Statement on behalf of any Stockholder shall be reinstated if the Company does not file a Primary Distribution Registration Statement within 30 days after giving the Notice of Intent to File; (c) in any case, during the period from the time that it gives a Notice of Intent to File to Stockholders that it is preparing to file a Secondary Distribution Registration Statement until 90 days (or such shorter period as to which the managing underwriter of a Secondary Distribution effected by means of a Secondary Distribution Registration Statement shall consent in writing) have lapsed following the effective date of the Secondary Distribution Registration Statement under the Securities Act; provided, however, that (A) such Notice of Intent to File is given prior to time of receipt by the Company of a Registration Request by any Stockholder and (B) that the Company shall use its best efforts to cause such Secondary Distribution Registration Statement to be declared effective as promptly as practicable; and provided, further, that the obligation to file a Registration Statement on behalf of any Stockholder shall be reinstated if the Company does not file a Secondary Distribution Registration Statement within 30 days after giving the Notice of Intent to File; (d) if at the time of receipt by the Company of a Registration Request the Company has material inside information as to which it believes it has a valid business purpose in refraining from disclosing publicly for the time being and that current public disclosure of such information would have a material adverse effect on the Company, for a period commencing with the date of receipt of the Registration Request and ending on the earlier of (a) 60 days after such receipt of the Registration Request; (b) the public announcement of such material inside information; or (c) the date on which the Company gives the Stockholder who issued the Registration Request a notice that suspension of its obligation is no longer required; provided, however, that the same material inside information shall not constitute a basis for continuation of this suspension period; or (e) if at the time of receipt by the Company of a Registration Request the Company is not required to file reports with the Commission pursuant to Section 15(d) of the Securities Act or Section 13 of the Exchange Act. iii. A Registration Statement filed pursuant to a Registration Request made under Section 2.B herein shall first include all Registrable Shares requested to be included by any and all Stockholders and, only after such inclusion, may include Common Stock being sold for the account of the Company or any other security holders. Any Common Stock to be offered on behalf of the Company or such other security holders will be included in such Registration Statement only to the extent that, in the reasonable opinion of the managing underwriter for the Underwritten Public Offering of Registrable Shares on behalf of REGISTRATION RIGHTS AGREEMENT 7 8 Stockholders, such inclusion will not materially adversely affect the distribution of Registrable Shares on behalf of such Stockholders. D. Underwriter. The selection of an underwriter for an Underwritten Public Offering of Registrable Shares by Stockholders shall be subject to the approval of the Company, which shall not be unreasonably withheld. E. Withdrawn Registration Statement. For purposes of Section 2.C(i) herein, if a requested Registration Statement is filed and the Company otherwise complies with its obligations hereunder, and i. the Registration Statement is withdrawn with the consent of the Affected Stockholders as a result of a delay in the offering requested by the Company, then no requested Registration Statement shall be deemed to have been filed; or ii. the Affected Stockholders cease to prosecute the Public Offering subject thereto actively and in good faith, the Company shall have the right to withdraw the Registration Statement without the consent of the Affected Stockholders and the requested Registration Statement shall be deemed to have been filed. Section 3. Incidental/"Piggy-back" Registration. A. Notice of Intent to File. If the Company at any time proposes to file a Primary Distribution Registration Statement or a Secondary Distribution Registration Statement under the Securities Act relating to an Underwritten Public Offering of Common Stock that would permit the inclusion therein of shares of Common Stock to be distributed in accordance with the method of distribution contemplated by such Registration Statement, the Company shall give to each Stockholder a Notice of Intent to File promptly after a determination has been made by the Company to prepare and file such Registration Statement, but in any event not less than ten days before the filing with the Commission of such Registration Statement, which notice shall set forth the intended method of distribution (including the name of the managing underwriter) of the securities proposed to be registered. The Notice of Intent to File shall include an offer to include in such filing, subject to the other provisions of this Agreement, such amount of Registrable Shares as each Stockholder may request. B. Supplemental Registration Request. If any Stockholder wishes to have Registrable Shares (including Earnout Shares) registered pursuant to this Section 3, it shall advise the Company by giving a Supplemental Registration Request within 20 days after the date of receipt of the Notice of Intent to File (or such shorter period, but in any event not less than ten days, as the Company shall specify in its Notice of Intent to File), setting forth the amount of Registrable Shares for which Registration is requested. REGISTRATION RIGHTS AGREEMENT 8 9 C. Registration Obligation. Subject to the provisions of the next sentence, the Company shall include all Registrable Shares specified in the Supplemental Registration Requests received by it in accordance with Subsection B of this Section 3. If, however, the managing underwriter of the proposed Primary Distribution or Secondary Distribution shall advise the Company in writing that, in the reasonable opinion of such managing underwriter, the inclusion in the Registration Statement of the aggregate number of shares of Common Stock requested by the Stockholders to be included in the Primary Distribution or Secondary Distribution would materially adversely affect such distribution of securities, then the Company shall so advise the Affected Stockholders and the number of such shares of Common Stock included in the Registration Statement shall be reduced to the number acceptable to such managing underwriter and such reduced number of shares shall be allocated pro rata among the Affected Stockholders based on the Registrable Shares held by each. If any Stockholder does not agree to the terms of underwriting of such Primary Distribution or Secondary Distribution, the shares of Common Stock owned by such Stockholder shall be excluded therefrom by written notice from the Company or such managing underwriter. D. Underwriting Agreement. Any obligation of the Company to include shares of Common Stock of any Stockholder in a Registration Statement prepared and filed pursuant to this Section 3 shall be conditioned upon the agreement of such Stockholder to enter into an underwriting agreement with the Company, other security holders, if any, and the managing underwriter of the Primary Distribution or the Secondary Distribution of the type described in subsection (H) of Section 5. Section 4. Special Registration Right. Pursuant to the terms of the Merger Agreement, the Designated Stockholders may in the future receive Earnout Shares and, in order to provide liquidity to the Designated Stockholders who receive such Earnout Shares, the Company has agreed to provide a special right of Registration with respect to such Earnout Shares as in this Section 4 provided. A. Notices. If, at any time during the term hereof, (i) some or all of the Stockholders receive the record and beneficial ownership of Earnout Shares, whether from the Company upon original issue pursuant to the Merger Agreement or from one or more Designated Stockholders upon assignment not involving a Public Offering, (ii), in the opinion of counsel reasonably satisfactory to the Company, all or part of such Earnout Shares may not be sold by such Stockholders without registration under the Securities Act or reliance on an exemption from the registration provisions thereof (other than Section 4(1) of the Securities Act) and (iii) the Company shall receive a Registration Request from one or more such Stockholders requesting that the Company file a Registration Statement relating to a Public Offering of shares of Common Stock owned by such Stockholder or Stockholders, then the Company shall give promptly (and in any event within ten business days) a Notice of Registration Request to each other Stockholder who, to the knowledge of the Company, holds Earnout Shares of the receipt of the Registration Request, enclosing a copy of the Registration Request. During the Request Period, such other Stockholders shall be entitled to give a Supplemental Registration Request to the Company in which any or all such Stockholders request that the Company register pursuant to the Securities Act and the Securities Act Rules all or REGISTRATION RIGHTS AGREEMENT 9 10 any portion of the shares of Common Stock constituting Earnout Shares owned by such Stockholders. B. Preparation and Filing. After the Request Period, the Company shall, subject to the provisions of Section 2.C herein, prepare as promptly as practicable and file a Registration Statement with respect to the offering, sale and delivery by the Stockholders of all or any part of the shares of Common Stock constituting Earnout Shares in accordance with the applicable method of distribution of the Registrable Shares to be included therein specified in the Registration Request and use its best efforts to cause the Registration Statement to become effective under the Securities Act in accordance with the Securities Act Rules. If so requested by such Affected Stockholders, the Registration Statement shall be filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules. C. Distribution. The applicable method of distribution of the Registrable Shares shall be as requested by the Affected Stockholders and the methods of distribution may include a distribution by one or more broker-dealers named in the Registration Statement "at the market" pursuant to a Market Public Offering. The Company agrees that it will amend the Registration Statement or supplement the prospectus to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. D. Limitations. The preparation and filing of a Registration Statement pursuant to this Section 4 and the offering, sale and delivery of Registrable Shares pursuant thereto shall be subject to the following limitations: i. The Company shall be obligated to prepare, file and cause to become effective only one Registration Statement pursuant to this Section 4. ii. Only Earnout Shares, whether received by a Designated Stockholder from the Company upon original issue pursuant to the Merger Agreement or received by another Stockholder from a Designated Stockholder upon an assignment not involving a Public Offering, may be included in a Registration Statement filed pursuant to this Section 4, and no sales of such shares shall be effected by the Affected Stockholders under such Registration Statement prior to the delivery to the Company of a certificate of the Affected Stockholders to such effect. iii. The proposed and actual filing by the Company of a Registration Statement pursuant to this Section 4 shall not entitle any Stockholder to registration rights pursuant to Section 3 herein. iv. The offering, sale and delivery of Registrable Shares pursuant to any Registration Statement filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules under this Section 4 shall be suspended if, at the time of any offering, REGISTRATION RIGHTS AGREEMENT 10 11 sale and delivery pursuant to a shelf registration statement, the Company has material inside information as to which it believes it has a valid business purpose in refraining from disclosing publicly for the time being and that current public disclosure of such information would have a material adverse effect on the Company. Such suspension period shall commence upon notice by the Company to the Affected Stockholders and shall continue until the earlier of (a) the expiration of 60 days thereafter; (b) the public announcement of such material inside information; or (c) the date on which the Company gives the Affected Stockholders notice that such suspension is no longer required; provided, however, that the same material inside information shall not constitute a basis for continuation of this suspension period. v. The Company shall be obligated to maintain the effectiveness of a Registration Statement filed pursuant to Rule 415 (relating to "shelf registration statements") of the Securities Act Rules under this Section 4 until the third anniversary of the effective date thereof and no longer. Section 5. Registration Procedures. If the Company is required by the provisions of Section 2, 3 or 4 to effect the Registration of any of the Registrable Shares, the Company shall, as expeditiously as possible: A. Filing. Prepare and file with the Commission a Registration Statement with respect to such shares of Common Stock and use its best efforts to cause such Registration Statement to become and, subject to Subsection C of this Section 5, remain effective. B. Amendments. Prepare and file with the Commission during the Registration Period such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to permit such Registration Statement to become effective in accordance with the Securities Act and the Securities Act Rules and to ensure that such Registration Statement and the prospectus used in connection therewith comply with the disclosure standards of Section 11 of the Securities Act and Section 10(b) of the Exchange Act and that such prospectus complies with Section 10 of the Securities Act, in each case during the Effective Period. C. Maintenance of Effectiveness. Subject to the provisions of Section 4.D herein, use its best efforts to maintain the effectiveness of such Registration Statement and to ensure compliance of the prospectus contained therein with Section 10(a) of the Securities Act for the Effective Period. D. Copies. Furnish to each Affected Stockholder (i) such number of copies of such Registration Statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such Registration Statement (including each preliminary prospectus, summary prospectus and prospectus supplement), in conformity with the requirements of the Securities Act, and such other documents as such Affected Stockholder may reasonably require in order to facilitate the offering, sale and delivery or other disposition of the Registrable Shares owned by such Affected Stockholder and (ii), during the REGISTRATION RIGHTS AGREEMENT 11 12 Registration Period and the Effective Period, copies of any written correspondence or memoranda relating to oral communications in each case with the Commission and copies of any request by the Commission for any amendment of or supplement to the Registration Statement or the prospectus included therein or for additional information. E. Blue Sky Laws. Use its best efforts to register or qualify the Common Stock covered by such Registration Statement under the securities or blue sky laws of such jurisdictions as the managing underwriter of such Distribution may reasonably request (excluding, however, any jurisdiction in which the filing would subject the Company to additional tax liability and any jurisdiction in which the Company would thereby be required to execute a general consent to service of process) and use all reasonable efforts to do such other acts and things as may be required to enable the Affected Stockholders to consummate the public sale or other disposition in such jurisdictions of the Registrable Shares owned by such Affected Stockholders. F. Earnings Statement. Make available to its holders of Common Stock, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, but not more than 18 months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. G. Amended Prospectuses. Notify each Affected Stockholder immediately if the Company shall become aware at any time during the Effective Period that the prospectus included in the Registration Statement, as such prospectus may be amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading in light of the circumstances then existing, and at the request of any Affected Stockholder to prepare promptly and to furnish to each Affected Stockholder such number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading in the light of the circumstances then existing. H. Underwriting Agreements. Enter into such agreements (including an underwriting agreement in customary form and containing customary provisions relating to legal opinions and accountants' letters, representations and warranties and mutual indemnification and contribution between the Company and the underwriters for the Affected Stockholders) and use all reasonable efforts to take such other actions as the Affected Stockholders may reasonably request in order to expedite or facilitate the disposition of such Registrable Shares. I. Inspection. Make available for inspection by the Affected Stockholders, by any underwriter participating in any distribution to be effected pursuant to such Registration Statement and by any attorney, accountant or other agent retained by the Affected Stockholders or any such underwriter all pertinent financial and other records, pertinent corporate documents and properties of the Company and cause all of the Company's officers, directors and employees to supply all such REGISTRATION RIGHTS AGREEMENT 12 13 information requested by the Affected Stockholders, such underwriter, attorney, accountant or agent, as is reasonably needed in connection with such Registration. 6. Classes of Stock. The parties hereto intend that any capital stock sold by a Stockholder pursuant to the provisions of this Agreement shall be Class A Common Stock if sold prior to January 1, 2002 or Common Stock if sold thereafter. Accordingly, subject to the proviso to Article Fourth, II-A-4, of the Certificate of Incorporation of the Company, each Stockholder agrees to convert any Class B Common Stock that is included as Registrable Shares in a Registration Statement filed pursuant to any provision of this Agreement into Class A Common Stock prior to the effective date of such Registration Statement under the Securities Act. 7. Expenses; Limitations on Registration. The Registration Expenses relating to any Registration effected by the Company pursuant to this Agreement shall be for the account of the Company; provided, however, that any and all underwriting discounts and commissions attributable to the sale of the shares of Common Stock of the Affected Stockholders shall be for the account of the Affected Stockholders. For purposes of this Section 7, the Company shall be obligated to pay the fees and expenses of only one law firm representing the Affected Stockholders. If more than one such firm shall represent the Affected Stockholders in connection with a Registration under this Agreement, the Affected Stockholders shall notify the Company as to which firm shall be deemed to represent the Affected Stockholders for purposes of this Section 7. Section 8. Stockholders' Information. The Affected Stockholders shall provide all information reasonably requested by the Company for inclusion in any Registration Statement to be filed hereunder. The actual provision of such information shall be a condition precedent to the obligation of the Company to take any action pursuant to this Agreement in respect of the Registration of Registrable Shares of any Affected Stockholder. Section 9. Indemnification. A. In connection with the Registration of any Registrable Shares under the Securities Act pursuant to this Agreement, the Company agrees to indemnify and hold harmless each Affected Stockholder, its partners, directors, officers and employees, and each other Person, if any, who controls such Affected Stockholder within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Affected Stockholder or any such partner, director, officer, employee or controlling Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or any alleged untrue statement of a material fact contained in the Registration Statement or the prospectus included therein at the time the Registration Statement is declared effective or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) any untrue statement of a material fact or alleged untrue REGISTRATION RIGHTS AGREEMENT 13 14 statement of a material fact contained in the Registration Statement, any preliminary prospectus, the prospectus included therein or any amendment or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements concerning the Company therein, in the light of the circumstances under which they were made, not misleading and shall reimburse each Affected Stockholder and each such partner, director, officer, employee and controlling Person for any legal or other expenses reasonably incurred by such Affected Stockholder or such partner, director, officer employee or controlling Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished by or on behalf of an Affected Stockholder to the Company expressly for use therein; and provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if such untrue statement or alleged untrue statement or omission or alleged omission was corrected in the final prospectus included in the Registration Statement at the time it became effective and the Affected Stockholder, in the case of a Market Public Offering, or the managing underwriter, in the case of an Underwritten Public Offering, failed to provide the final prospectus as required by the Securities Act and the Securities Act Rules. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Affected Stockholder or any such partner, director, officer, employee or controlling Person, and shall survive the transfer of such securities by any Affected Stockholder. B. Each Affected Stockholder agrees to indemnify and hold harmless the Company, its directors, officers and employees, each other Person, if any, who controls the Company and each other Affected Stockholder against any losses, claims, damages or liabilities, joint or several, to which the Company, any such director, officer or employee, any such controlling Person or such other Affected Stockholder may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or any alleged untrue statement of a material fact contained in the Registration Statement or the prospectus included therein at the time the Registration Statement is declared effective or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) any untrue statement of a material fact or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus, the prospectus included therein or any amendment or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary in order to make the statements concerning the Company therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such alleged untrue statement or alleged omission was made in such Registration Statement, preliminary prospectus, prospectus, amendment or supplement in reliance upon and in conformity with written information furnished by or on behalf of an Affected REGISTRATION RIGHTS AGREEMENT 14 15 Stockholder to the Company expressly for use therein, and shall reimburse the Company or such director, officer, employee or other Person for any legal or any other expenses reasonably incurred in connection with investigating or defending any such loss, claim, damage, liability or action. C. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding involving a claim referred to in subsection (A) or (B) of this Section 9, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligation under this subsection C to the extent the indemnifying party is not materially prejudiced by such failure. In case any such action is brought against an indemnified party, the indemnified party shall permit the indemnifying party to assume the defense of such action or proceeding, provided that counsel for the indemnifying party, who shall conduct the defense of such action or proceeding, shall be approved by the indemnified party (whose approval shall not be unreasonably withheld) and the indemnified party may participate in such defense (in which case, such participation shall be at such indemnified party's expense, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified party and the indemnifying party shall exist in respect of such claim, in which event the indemnifying party shall pay the reasonable fees and expense of separate counsel for the indemnified party). No indemnifying party shall consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. The indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm for all indemnified parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent. D. Indemnification similar to that specified in the preceding subsections of this Section 9 shall be given by the Company and each Affected Stockholder (with such modifications as shall be appropriate) with respect to liability related to any required registration or other qualification of Registrable Shares under any Federal or state law or regulation of governmental authority other than the Securities Act. E. If the indemnification provided for in this Section 9 is unavailable or insufficient to hold harmless an indemnified party under subsection (A) or (B) above, then the indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (A) or (B) above, in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and each Affected Stockholder, on the other, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Affected Stockholder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The REGISTRATION RIGHTS AGREEMENT 15 16 Company and the Affected Stockholders agree that it would not be just and equitable if contributions pursuant to this subsection (E) were to be determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the first sentence of this subsection (E). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (E) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim (which shall be limited as provided in subsection (C) above if the indemnifying party has assumed the defense of any such action in accordance with the provisions thereof) that is the subject of this subsection (E). Notwithstanding the provisions of this subsection (E), in respect of any loss, claim, damage or liability based upon any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact that relates to information other than information supplied by any Affected Stockholder, no Affected Stockholder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Shares offered by it and distributed to the public exceeds the amount of any damages that such Affected Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Promptly after receipt by an indemnified party under this subsection (E) of notice of the commencement of any action against such party in respect of which a claim for contribution may be made against an indemnifying party under this subsection (E), such indemnified party shall notify the indemnifying party in writing of the commencement thereof if the notice specified in subsection (C) above has not been given with respect to such action; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party under this subsection (E) to the extent such omission is not prejudicial. Section 10. Public Availability of Information. The Company shall comply with all applicable public information reporting requirements of the Commission, to the extent required from time to time to enable each Stockholder to sell Registrable Shares without Registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Stockholder, the Company will deliver to such Stockholder a written statement as to whether it has complied with such requirements. Section 11. Supplying Information. The Company shall cooperate with each Stockholder in supplying such information as may be necessary for such Stockholder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Registrable Shares. Section 12. Specific Performance. Each party hereto acknowledges and agrees that each other party hereto would be irreparably harmed and would have no adequate remedy of law if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, it is agreed that, in addition to any other remedies by law REGISTRATION RIGHTS AGREEMENT 16 17 or in equity which may be available, the parties hereto shall be entitled to obtain preliminary and permanent injunctive relief with respect to any breach or threatened breach of, or otherwise obtain specific performance of, the covenants and other agreements contained in this Agreement. Section 13. Representations and Warranties of the Company. The Company represents and warrants to each Stockholder that, as of the date of this Agreement, (a) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) the execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or any of the transactions contemplated hereby, and (c) this Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, and, assuming that this Agreement constitutes a valid and binding obligation of each of the Designated Stockholders, is enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance and similar laws affecting creditors' rights generally from time to time and to general principles of equity and except as the enforceability thereof may be limited by considerations of public policy. Section 14. Representations and Warranties. Each of the Designated Stockholders represents and warrants to the Company that, as of the date of this Agreement, (a) to the extent it is a legal entity, it is an organization duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the organizational power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) to the extent it is a legal entity, the execution and delivery of this Agreement by such Stockholder and the consummation by such Stockholder of the transactions contemplated hereby have been duly authorized by all necessary organizational action on the part of such Stockholder and no other organizational proceedings on the part of such Stockholder are necessary to authorize this Agreement or any of the transactions contemplated hereby and (c) this Agreement has been duly executed and delivered by such Stockholder and constitutes a valid and binding obligation of such Stockholder and, assuming that this Agreement constitutes a valid and binding obligation of the Company, is enforceable against such Stockholder in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance and similar laws affecting creditors' rights generally from time to time and to general principles of equity and except as the enforceability thereof may be limited by considerations of public policy. Section 15. Expiration. This Agreement and the rights, benefits, duties and obligations hereunder of the parties hereto and their successors and permitted assigns shall expire and be of no further force or effect on May 31, 2004. Section 16. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or transmitted by telex, telegram or facsimile REGISTRATION RIGHTS AGREEMENT 17 18 transmission or mailed by registered or certified mail (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): (a) if to any Designated Stockholder, to such Designated Stockholder at the address of such Designated Stockholder set forth on Annex A hereto with a copy to: Reed Smith Shaw & McClay LP One Liberty Place Philadelphia, PA 19103 Attn.: Ms. Lori L. Lasher Facsimile: (215) 851-1420 (b) if to the Company, to: NATCO Group, Inc. Brookhollow Central III 2950 North Loop West Suite 750 Houston, Texas 77092 Attn.: Mr. Nathaniel A. Gregory, Chairman and Chief Executive Officer Facsimile No.: (713) 683-7814 with a copy to: Vinson & Elkins L.L.P. First City Tower 1001 Fannin Street Houston, Texas 77002-6760 Attn.: Mr. William E. Joor III Facsimile No.: (713) 615-5201 Section 17. Benefit and Assignment. (a) The terms and conditions of this Agreement shall inure to the benefit of and be binding on the parties hereto and their respective successors and permitted assigns; provided, however, that, except as otherwise provided in this Section, this Agreement shall not be assignable by any party hereto except by operation of law or with the prior express written consent of the other parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. REGISTRATION RIGHTS AGREEMENT 18 19 (b) If any Designated Stockholder shall transfer and assign shares of Common Stock to any Person otherwise than in an Underwritten Public Offering (including any transfer on foreclosure of indebtedness secured by the grant of a security interest in such shares of Common Stock), such Designated Stockholder (or any Person who shall be a transferee or assignee pursuant to this subsection (b)), as the case may be, may assign such portion of its rights and benefits under this Agreement as is necessary to permit such Person to act as a Stockholder hereunder; provided, however, that such Person shall agree in writing to be bound by the duties and obligations of a Stockholder hereunder. Section 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to the application of doctrines of conflicts of law. Section 19. Counterparts. This Agreement may be executed simultaneously in one or more counterparts, any of which may have been transmitted and received by facsimile transmission and each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their officers thereunto duly authorized. NATCO GROUP, INC. BY: /s/ NATHANIEL A. GREGORY ------------------------------------------- Nathaniel A. Gregory Chairman and Chief Executive Officer THE DESIGNATED STOCKHOLDERS /s/ WILLIAM R. DIMELING ---------------------------------------------------- William R. Dimeling /s/ ROBERT J. HAMAKER ---------------------------------------------------- Robert J. Hamaker /s/ DOUGLAS P. HELLER ---------------------------------------------------- Douglas P. Heller /s/ GEORGE K. HICKOX, JR. ---------------------------------------------------- George K. Hickox, Jr. REGISTRATION RIGHTS AGREEMENT 19 20 /s/ RALPH M. KELLY ---------------------------------------------------- Ralph M. Kelly /s/ STEVEN G. PARK ---------------------------------------------------- Steven G. Park /s/ RICHARD R. SCHREIBER ---------------------------------------------------- Richard R. Schreiber /s/ JOHN C. TUTEN, JR. ---------------------------------------------------- John C. Tuten, Jr. THE 1998 TRUST FOR JODY SMITH HAMAKER By: /s/ JODY SMITH HAMAKER ----------------------------------------------- Name: Jody Smith Hamaker --------------------------------------------- Title: Trustee -------------------------------------------- BANC ONE CAPITAL PARTNERS II, LTD. By: /s/ EARLE J. BENSING ----------------------------------------------- Name: Earle J. Bensing Title: Authorized Signer REGISTRATION RIGHTS AGREEMENT 20 EX-5.1 6 OPINION OF VINSON & ELKINS L.L.P. 1 EXHIBIT 5.1 [VINSON & ELKINS L.L.P. LETTERHEAD] _________________, 1999 NATCO Group Inc. Brookhollow Central III 2950 North Loop West, Suite 750 Houston, Texas 77092 Ladies and Gentlemen: We are acting as counsel for NATCO Group Inc., a Delaware corporation (the "Company"), in connection with the proposed offer and sale (the "Offering") by the Company and Capricorn Investors, L.P. (the "Selling Stockholder") to the several underwriters (the "Underwriters") set forth in the underwriting agreement (the "Underwriting Agreement") dated as of ______________, 1999 among the Company and the representatives of the Underwriters, pursuant to the prospectus forming a part of a Registration Statement on Form S-1, File No. 333-48851, originally filed with the Securities and Exchange Commission on March 30, 1998 (such Registration Statement, as amended at the effective date thereof, being referred to herein as the "Registration Statement"), of an aggregate of ___________ shares of Common Stock, par value $.01 per share ("Common Stock"), of the Company, together with a maximum of __________ shares of Common Stock which may be sold to the Underwriters pursuant to the over-allotment option provided in the Underwriting Agreement. Capitalized terms used but not defined herein have the meanings set forth in the Registration Statement. We are rendering this opinion as of the time the Registration Statement becomes effective in accordance with Section 8(a) of the Securities Act of 1933, as amended. In connection with this opinion, we have assumed that the Registration Statement, and any amendments thereto (including post-effective amendments), will have become effective and the shares of Common Stock will be issued and sold in compliance with applicable federal and state securities laws and in the manner described in the Registration Statement and the applicable prospectus. In connection with the opinion expressed herein, we have examined, among other things, the Restated Certificate of Incorporation, as amended, and the Amended and Restated Bylaws of the Company, the records of corporate proceedings that have occurred prior to the date hereof with respect to the Offering, the Registration Statement and the form of Underwriting Agreement to be 2 NATCO Group Inc. Page 2 ______________, 1999 executed among the Company, Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Smith Barney Inc. and Simmons & Company International, as representatives of the several Underwriters. We have also reviewed such questions of law as we have deemed necessary or appropriate. Based upon the foregoing, we are of the opinion that (i) the shares of Common Stock proposed to be issued and sold by the Company to the Underwriters have been validly authorized for issuance and, upon the issuance and delivery thereof in accordance with the provisions of the Underwriting Agreement (assuming that it is executed in the form reviewed by us), and as set forth in the Registration Statement, will be validly issued, fully paid and nonassessable and (ii) the shares of Common Stock proposed to be sold by the Selling Stockholder to the Underwriters, when they were issued to the Selling Stockholder, were duly authorized, validly issued and fully paid and nonassessable. This opinion is limited in all respects to the General Corporation Law of the State of Delaware. We hereby consent to the statements with respect to us under the heading "Legal Matters" in the prospectus forming a part of the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement, but we do not thereby admit that we are within the class of persons whose consent is required under the provisions of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission issued thereunder. Very truly yours, VINSON & ELKINS L.L.P. EX-10.12 7 EMPLOYMENT AGREEMENT - NATHANIEL A. GREGORY 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT, made as of this 31st day of July, 1997, by and between Cummings Point Industries, Inc., a corporation organized and existing under the laws of the State of Delaware (hereinafter referred to as "NATCO"), and Nathaniel A. Gregory (hereinafter referred to as "the Executive"). W I T N E S S E T H - - - - - - - - - - WHEREAS, the Executive and NATCO entered into a stock option agreement dated March 15, 1994, as amended on the 31st day of July, 1996 (the "Previous Stock Option Agreement") under which the Executive received options to purchase shares of common stock in a subsidiary of NATCO under certain terms and conditions; WHEREAS, the Executive and NATCO wish to update, clarify and amend the Previous Stock Option Agreement, primarily to substitute options to purchase shares of common stock in NATCO in place of existing options to purchase subsidiary stock, to specify terms and conditions for such options and to further modify other provisions as necessary; WHEREAS, the Executive and NATCO are therefore simultaneously herewith entering into a Stock Option Agreement (the "Stock Option Agreement"), attached hereto as Exhibit A, which supercedes the Previous Stock Option Agreement; WHEREAS, the Executive and a subsidiary of NATCO entered into an employment agreement dated March 15, 1994, as amended on the 31st day of July, 1996 (the "Previous Employment Agreement"), under which the Executive has agreed to employment by such subsidiary under certain terms and conditions, and under which the Executive is entitled to certain compensation, including various provisions for special bonus compensation, under certain terms and conditions; WHEREAS, the Executive and NATCO wish to update, clarify, and amend the Previous Employment Agreement, primarily to substitute employment by NATCO in place of existing employment by a subsidiary, to specify terms and conditions for such employment and for Executive's compensation, including various provisions for special bonus compensation, and to further modify other provisions as necessary; and WHEREAS, NATCO desires to continue the Executive in the employment capacity hereinafter set forth and the Executive agrees to accept such employment on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is hereby agreed by and between NATCO and the Executive as follows: 2 1. CAPACITY AND SERVICES (a) NATCO hereby agrees to continue to employ the Executive and the Executive hereby agrees to accept such employment by NATCO as Chairman and Chief Executive Officer of NATCO on the terms and conditions set forth herein. The employment of the Executive pursuant to this Employment Agreement shall commence on July 1, 1997 and continue through the Period of Active Employment, as defined in Section 1(e) of this Employment Agreement. In his capacity as Chairman and Chief Executive Officer of NATCO, the Executive shall assume such responsibilities, perform such duties, and have such authority, as may from time to time be assigned or delegated by the Board of Directors of NATCO (the may from time to time be assigned or delegated by the Board of Directors of NATCO (the "Board") consistent with the Executive's position. The Executive agrees to perform such duties in accordance with the By-laws of NATCO, the Board's instructions, and NATCO's policies. (b) The Executive shall devote a significant portion of his business time to his duties hereunder, provided, however, that the foregoing shall not prevent the Executive from devoting time and effort to the business of Capricorn Holdings, LLC, of which Executive is a Member, or from serving as a member of the board of directors of a corporation if the Board, or the appropriate Committee thereof, determines in its sole discretion that such membership is not adverse to the interests of NATCO. Subject to the foregoing, the Executive shall not engage in any business activities that are directly or indirectly competitive with any business then conducted by NATCO or any of its affiliated companies. (c) The Executive may be an investor, shareholder, joint venturer, or partner (hereinafter referred to as an "Investor") in any enterprise, association, corporation, joint venture or partnership (hereinafter referred to as an "Investment"), provided, however, that any such Investment does not (i) violate NATCO's conflict of interest policy as in effect from time to time, (ii) require the Executive's involvement in the management (except service on boards of directors to the extent permitted by Section 1(b) of this Employment Agreement) or operation of such Investment (recognizing that the Executive shall be permitted to monitor and oversee the Investment, as would any prudent Investor) or (iii) interfere with the performance of the Executive's duties and obligations hereunder. (d) The Executive shall fully and faithfully discharge his duties under the direction of the Board. (e) "Period of Active Employment", as used herein, shall mean the period beginning on July 1, 1997 and terminating on the date on which the first of the following events occurs: (1) The death of the Executive; (2) The disability of the Executive, as provided in Section 8 of this Employment Agreement; (3) The termination of the Executive's employment, as provided in Section 12 of this Employment Agreement; or 2 3 (4) expiration of this Employment Agreement, as provided in Section 2 hereof (or as such expiration may be extended pursuant to Section 3 hereof). 2. TERM OF EMPLOYMENT. The term of the Executive's employment hereunder shall commence on July 1, 1997 and shall expire on July 1, 1998 unless the Executive's employment is terminated before that time, as provided in Section 1(e) of this Employment Agreement or unless this Employment Agreement is renewed as provided in Section 3 hereof. 3. RENEWAL. This Employment Agreement shall be automatically renewed for one additional year after the expiration of the stated term, unless NATCO or the Executive gives notice, in writing, at least thirty (30) days prior to the expiration of this Employment Agreement (or any renewal of this Employment Agreement) of its desire to terminate the Employment Agreement or modify its terms. The Executive expressly acknowledges, however, that NATCO has not made any representations to the Executive as to the possible or expected duration of this Employment Agreement beyond July 1, 1998. 4. COMPENSATION AND BENEFITS. (a) During the Period of Active Employment, NATCO shall pay to the Executive as base compensation for his services hereunder, a base salary of $350,000 per annum ("Base Salary"), payable in arrears. Amounts payable shall be reduced by standard withholding and other authorized deductions. (b) During the Period of Active Employment, the Executive shall have the right to participate in any of NATCO's fringe benefit and insurance plans presently in effect or that may be established for the benefit of executives of NATCO. NATCO reserves the right to modify, suspend or discontinue any or all such plans or benefits at any time without recourse by the Executive. (c) The Executive shall be entitled to take vacation in accordance with NATCO's policy and practices for senior executives. (d) During the Period of Active Employment, NATCO shall, upon receipt of appropriate itemized vouchers for expenses, submitted to NATCO on a monthly basis in accordance with NATCO's procedures from time to time in effect, reimburse the Executive for any reasonable and actual costs of leasing an automobile for the Executive's business and private use during the Period of Active Employment ("Monthly Automobile Lease Cost"). The make, model, color and year of the leased automobile described herein may be selected by the Executive. In addition to reimbursement of the Monthly Automobile Lease Cost, during the Period of Active Employment, NATCO shall, upon receipt of itemized vouchers for expenses, submitted to NATCO on a monthly basis in accordance with NATCO's procedures from time to time in effect, reimburse the Executive for his reasonable and necessary expenses, including 3 4 maintenance, repairs, gasoline and insurance, incurred in the operation of the leased automobile described herein. (e) During the Period of Active Employment, NATCO shall reimburse the Executive for all actual and reasonable expenses associated with the Executive's personal travel between Houston, Texas and Greenwich, Connecticut. 5. BONUS COMPENSATION. (a) During each fiscal year in which the Executive is employed by NATCO under the terms and conditions of this Employment Agreement, the Executive will be eligible to receive Bonus Compensation in accordance with the policies and practices of NATCO. For these purposes, Executive's "target" annual bonus will be 60% of base compensation. The Board will determine, annually, the criteria which determine "target" performance. (b) In the event the Executive is employed by NATCO under the terms and conditions of this Employment Agreement for a period less than any full fiscal year and the Executive's employment with NATCO has not terminated pursuant to Section 11(a) or Section 11(c) hereof, any Bonus Compensation payable to the Executive under Section 5(a) of this Employment Agreement shall be prorated accordingly. If the Executive's employment with NATCO terminates as provided in Section 11(a) or Section 11(c) hereof, the Executive shall not be eligible for any Bonus Compensation under the Employment Agreement. (c) Any Bonus Compensation payment to which the Executive is entitled under the terms of Section 5(a) of this Employment Agreement shall be paid to the Executive as soon as practicable after financial statements have been prepared for the fiscal period to which such Bonus Compensation payment relates, but no later than ninety days from the date such financial statements shall have been prepared. (d) During each fiscal year in which the Executive is employed by NATCO under the terms and conditions of this Employment Agreement, the Executive will be eligible to receive additional bonus payments as the Board deems appropriate. Although it is the parties' intention that the Executive will receive a bonus payment if the Executive raises new capital for NATCO, any bonus payment awarded under this Section 5(a) shall be at the sole discretion of the Board. (e) In the event of a "Sale or Public Offering" as defined in this Section 5(c), NATCO shall pay to the Executive a bonus (in addition to any other bonuses for which Executive might be eligible under this Section 5 or otherwise) equal to one and one-half percent (1.5%) of the value of all securities owned by stockholders of CPI, including common stock valued at the price per share received in either the Sale or Public Offering, and any debt held by Stockholders. Any bonus to which the Executive is entitled under this Section 5(a) shall be paid in cash to the Executive coterminous with or as soon as practicable after the closing of the Sale or Public Offering, but in any event no later than ninety days after such closing. For purposes of this Section 5, a Sale or Public Offering will have occurred in the event of: (i) a sale, merger, reorganization or other transaction involving NATCO which results in a Change of Control as 4 5 defined in Section 14(b), and in which stockholders of CPI shall receive any combination of cash, debt, preferred stock, common stock of any unaffiliated party, or similar securities in exchange for no less than fifty percent (50%) of CPI's common stock ownership in NATCO as of the date of this agreement, or (ii) a registration and public offering under the Securities Act of common shares of NATCO as contemplated in the Stockholder's Agreement attached hereto as Exhibit B. (f) All references to Bonus Compensation herein are to the gross amounts thereof. NATCO shall have the right to deduct therefrom all taxes which may be required to be deducted or withheld under any provision of applicable law now in effect or which may become effective any time during the term of this Employment Agreement. 6. CERTAIN EXPENSES INCIDENT TO EMPLOYMENT. Subject to such rules and procedures as from time to time are specified by NATCO or the Board, NATCO agrees to reimburse the Executive for travel, entertainment or other reasonable business expenses or disbursements incurred ordinarily by the Executive as part of and in connection with the performance of his duties under this Employment Agreement. 7. DISABILITY. "Disability", as used in Section 1(e) of this Employment Agreement, shall mean a physical or mental incapacity of the Executive which has prevented him from performing the duties customarily assigned him by the Board for ninety (90) days, whether or not consecutive, out of any twelve (12) consecutive months and which thereafter can reasonably be expected, in the judgment of a physician selected by NATCO, to continue. 8. AGREEMENT NOT TO COMPETE. Except as otherwise provided by this Employment Agreement, the Executive hereby agrees that, during the Period of Active Employment, the Executive will not directly or indirectly, either through any form of ownership (other than ownership of securities of a publicly-held corporation of which the Executive owns less than one percent of any class of outstanding securities), or as a director, officer, principal agent, employer, advisor, consultant, co-partner, or in any individual or representative capacity, either for his own benefit or for the benefit of any other person, firm, corporation or other entity, engage in any business that is in competition with NATCO or any of its affiliated companies. 9. INTANGIBLE AND OTHER PROPERTY RIGHTS. (a) All right, title and interest of every kind and nature whatsoever, whether now known or unknown, in and to any intangible property, including all trade names, unregistered trademarks and service marks, brand names, patents, copyrights, registered trademarks and service marks and all trade secrets and confidential know-how (the "Intangible Property"), invented, created, written, developed, furnished, produced or disclosed by the Executive hereunder shall, as between the parties hereto, be and remain the sole and exclusive 5 6 property of NATCO for any and all purposes and uses whatsoever, and the Executive shall have no right, title or interest of any kind or nature therein or thereto, or in or to any results or proceeds therefrom. The Executive will, at the request of NATCO, execute such assignments, certificates and other instruments as NATCO may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, title and interest in and to any of the foregoing. (b) The Executive agrees that all "Intangible Property", materials, books, files, reports, correspondence, records and documents (collectively "NATCO Material") used, prepared or made available to the Executive in the course of rendering his services to NATCO hereunder shall remain the property of NATCO. At the end of the Period of Active Employment, all NATCO Material shall be returned immediately to NATCO. 10. CONFIDENTIALITY. The Executive shall hold in a fiduciary capacity for the benefit of NATCO all secret or confidential information, knowledge or data relating to NATCO and its affiliates, which shall have been obtained by the Executive during his employment by NATCO and which shall not be public knowledge. After termination of the Executive's employment with NATCO, he shall not, without the prior written consent of the Board, communicate or divulge any such information, knowledge or data to anyone other than the Board and those designated by the Board. 11. TERMINATION. (a) NATCO may terminate the Executive's employment under this Employment Agreement for just cause by giving the Executive ten (10) days advance written notice and an opportunity to be heard before the Board prior to such termination. In the event that the Executive's employment under this Employment Agreement is terminated for "cause", NATCO shall have no further obligations or responsibilities hereunder (except for Base Salary amounts earned but not yet paid to the Executive through the date of the Executive's termination) and the Executive shall not be entitled to receive any Bonus Compensation pursuant to Section 5 of this Employment Agreement or any severance pay specified in any severance plan or policy that NATCO presently has in effect or that NATCO may establish for employees of NATCO. Without limiting the foregoing, any one or more of the following events shall constitute "cause": (1) Theft, fraud, embezzlement, dishonesty or other similar behavior by the Executive; (2) Any habitual neglect of duty or misconduct of the Executive in discharging any of his duties and responsibilities hereunder; (3) A material breach by the Executive of the terms of this Employment Agreement; or -6- 7 (4) The Executive's conviction of a felony or of any crime involving moral turpitude. (b) In the event that NATCO terminates the Executive's employment under this Employment Agreement for any reason other than just cause, the Executive shall be entitled to severance pay in accordance with any severance plan or policy that NATCO then has in effect. (c) If the Executive terminates this Employment Agreement for any reason, other than by reason of NATCO's material breach of the terms of this Employment Agreement, NATCO shall have no further obligations or responsibilities hereunder (except for Base Salary amounts earned but not yet paid to the Executive through the date of the Executive's termination) and the Executive shall not be entitled to receive any Bonus Compensation pursuant to Section 5 of this Employment Agreement or any severance pay specified in any severance plan or policy that NATCO presently has in effect or that NATCO may establish for employees of NATCO. 12. REPRESENTATION AND WARRANTY. The Executive hereby represents and warrants that the execution and performance of this Employment Agreement will not result in or constitute a default, breach or violation, or an event which, with notice or lapse of time or both, would be a default, breach or violation, of any understanding, agreement or commitment, written or oral, express or implied, to which the Executive is a party or by which the Executive or his property is bound. 13. RIGHTS AND WAIVERS. All rights and remedies of the parties hereto are separate and cumulative, and no one of them, whether exercised or not, shall be deemed to be to the exclusion of any other rights or remedies or shall be deemed to limit or prejudice any other legal or equitable rights or remedies under this Employment Agreement unless such waiver is in writing and signed by such party. No delay or omission on the part of either party in exercising any right or remedy shall operate as a waiver of such right or remedy or any other rights or remedies. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. 14. SUCCESSORS. (a) NATCO and the Executive agree that if a Change in Control of NATCO occurs during the Period of Active Employment, the Executive shall, at the time of the Change in Control of NATCO, be permitted to terminate his employment with NATCO under this Employment Agreement and receive from NATCO (1) all Base Salary amounts earned but not yet paid to the Executive through the date of the Executive's termination; (2) all Bonus Compensation payable to the Executive, if any, pursuant to Section 5 herein, pro rated accordingly; and (3) severance pay equal to 18 months base compensation. In the event that the Executive terminates his employment with NATCO as provided for in this Section 14, NATCO's obligations and responsibilities to the Executive under this Employment Agreement are limited to those stated in Sections 14(a)(1), 14(a)(2) and 14(a)(3) above. -7- 8 (b) For purposes of this Section 14, a "Change in Control of NATCO" shall mean any acquisition by any Unrelated Party of eighty percent (80%) or more of the common stock of NATCO issued and outstanding immediately prior to such acquisition and/or securities of NATCO which may be converted into shares of common stock of NATCO, computing such percentage as if such securities acquired had been converted and are issued and outstanding for the purpose of determining such percentage (a series of acquisitions by an "Unrelated Party" shall be treated as a single acquisition to the extent the aggregate number of shares and/or securities referred to above acquired in such series exceeds eighty percent (80%)). "Unrelated Party" shall mean any party or group of parties acting together, excluding, however, the Executive, Capricorn Investors, L.P., Capricorn Investors II, L.P., and Cummings Point Industries, Inc. 15. NON-ASSIGNABILITY OF EXECUTIVE'S DUTIES. This Employment Agreement is personal to the Executive and, with the exception of the Executive's rights to compensation and benefits hereunder, which may be transferred by will or operation of law, this Agreement shall not, without the prior written consent of the Board, be assignable by the Executive. 16. SAVINGS CLAUSE. If any provision of this Employment Agreement or the application hereof is held invalid, the invalidity shall not affect other provisions or application of this Employment Agreement that can be given effect without the invalid provisions or application, and to this end the provisions of this Employment Agreement are declared to be severable. 17. CONSTRUCTION. Each party has cooperated in the drafting and preparation of this Employment Agreement. Hence, in any construction to be made of this Employment Agreement, the same shall not be construed against any party on the basis of that party being the "drafter." 18. ENTIRE AGREEMENT. This Employment Agreement supersedes all prior agreements between the parties concerning the subject matter hereof and this Employment Agreement constitutes the entire Employment Agreement between the parties with respect thereto. This Employment Agreement may be modified only with a written instrument duly executed by each of the parties. No person has any authority to make any representations or promises on behalf of any of the parties not set forth herein and this Employment Agreement has not been executed in reliance upon any representation or promise except those contained herein. 19. SECTION HEADINGS. The section headings and captions of this Employment Agreement are for reference purposes only, are not part of the provisions hereof and shall not effect in any way the meaning or interpretation of this Employment Agreement. -8- 9 20. GOVERNING LAW. This Employment Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. 21. ARBITRATION. Any dispute between the parties to this Employment Agreement relating to or in respect of this Employment Agreement, its negotiation, execution, performance, subject matter, or any course of conduct or dealing or actions under or in respect of this Employment Agreement, shall be submitted to, and resolved exclusively by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). Such arbitration shall take place in New York, New York. Arbitration shall be commenced by filing a demand for arbitration with the AAA within sixty (60) days after such dispute has arisen. The prevailing party in such an arbitration proceeding shall be entitled to recover reasonable attorneys' fees, all reasonable out-of-pocket costs and disbursements, as well as any and all charges that may be made for the cost of the arbitration and the fees of the arbitrators. 22. ENFORCEMENT OF ARBITRATION AWARD. In the event of litigation to enforce an arbitration award in connection with or concerning the subject matter of this Employment Agreement, the prevailing party shall be entitled to recover all reasonable costs and expenses incurred by such party in connection therewith, including reasonable attorneys' fees. 23. NOTICE All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive, to him at: Nathaniel A. Gregory Frost Road Greenwich, Connecticut 06830 If to NATCO, to it at: Natco Holdings Incorporated Brookhollow Central III 2950 North Loop West, Suite 750 Houston, Texas 77092 Attention: Chief Financial Officer -9- 10 With a copy to: Vinson & Elkins (to be provided) or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications hereunder shall be effective when actually received by the addressee. 24. LEGAL COUNSEL. In entering into this Employment Agreement, the parties represent that they have relied upon the advice of their attorneys, who are attorneys of their own choice, and that the terms of this Employment Agreement have been completely read and explained to them by their attorneys, and that those terms are fully understood and voluntarily accepted by them. In witness whereof, the parties hereto have executed this Agreement as of the date first above written. On behalf of CUMMINGS POINT INDUSTRIES NATHANIEL A. GREGORY By /s/ HERBERT S. WINOKUR, JR. /s/ NATHANIEL A. GREGORY ---------------------------- -------------------------- Title: ----------------------- -10- 11 EMPLOYMENT AGREEMENT AMENDMENT 1 THIS AMENDMENT is to that certain Employment Agreement, dated the 31st day of July 1997, by and between NATCO Group Inc. f/k/a Cummings Point Industries ("NATCO") and Nathaniel A. Gregory ("Executive"). NATCO and Executive may individually be referred to as "party" and collectively referred to as "parties". 1. Section 5(e) is deleted in its entirety. 2. A new Section 5(g) shall be included in the Employment Agreement, as follows: (g) Within fourteen days of execution of this Amendment, NATCO shall loan the Executive $1,205,489.92 with full recourse and with interest accruing at an annual rate of 6%. The proceeds from the loan shall be used by the Executive, to purchase 136,832 shares of NATCO stock ("Shares"). Payment of the principal balance and all accrued interest shall be due (i) seven years from the date of the loan, (ii) upon successful sale of NATCO, or (iii) after a successful initial public offering (or sale of NATCO where the consideration received is stock of the acquiring party), whichever occurs first. Notwithstanding the foregoing, in the event (iii) occurs and the Shares (or shares of stock received in exchange for the Shares in a sale of NATCO) are deemed "restricted securities" within the meaning of Rule 144 of the Securities Act of 1933 or are subject to "lock-up" provisions with underwriters of an initial public offering, the Executive shall not be required to repay that portion of the loan equal to the estimated local, state, federal, and FICA taxes due on the bonus referred to in Section 3(h) below, until the expiration of both impediments. For purposes of this Section 5, a successful sale will have occurred in the event of a sale, merger, reorganization, or other transaction involving NATCO that results in a Change of Control as defined in Section 14(b), and in which stockholders of Cummings Point Industries shall receive any combination of cash, debt, preferred stock, common stock of any unaffiliated party, or similar securities in exchange for no less than 50% of Cummings Point Industries' common stock ownership in NATCO as of the date of this agreement. For purposes of this Section 5, an initial public offering will have occurred upon a registration and public offering under the Securities Act of common shares of NATCO as contemplated in the Stockholder's Agreement attached to the Employment Agreement as Exhibit B. 3. A new Section 5(h) shall be included in the Employment Agreement, as follows: 12 (h) In the event of a successful sale or an initial public offering of NATCO, NATCO shall pay the executive a bonus (in addition to any other bonuses to which the Executive might be eligible under Section 5 of the Employment Agreement) equal to the outstanding balance (principal and accrued interest) of the loan described in Section 5(g) above. 4. A new Section 5(i) shall be included in the Employment Agreement, as follows: (i) Any bonus that the Executive is entitled to under this Section 5 shall be paid in cash to the Executive coterminous with or as soon as practicable after the closing of a successful sale of NATCO or a successful initial public offering, but in any event no later than ninety days after the successful closing of either event. 5. All other terms and conditions of the Employment Agreement remain in full force and effect without change. In witness whereof, the parties have executed this Agreement as of the 12th day of July 1999. NATCO Gregory /s/ HERBERT S. WINOKUR, JR. /s/ NATHANIEL A. GREGORY --------------------------- -------------------------- Herbert S. Winokur, Jr. Nathaniel A. Gregory EX-10.13 8 STOCK OPTION AGREEMENT - NATHANIEL A. GREGORY 1 EXHIBIT 10.13 EXHIBIT A STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THE OPTIONS GRANTED HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THIS STOCK OPTION AGREEMENT, dated as of this 31st day of July, 1997, by and between Cummings Point Industries, a corporation existing under the laws of the State of Delaware (hereinafter referred to as "NATCO") and Nathaniel A. Gregory (hereinafter referred to as "the Executive"). W I T N E S S E T H ------------------- WHEREAS, the Executive and a subsidiary of NATCO entered into an employment agreement dated March 15, 1994, as amended on the 31st day of July, 1996 (the "Previous Employment Agreement"), under which the Executive has agreed to employment by such subsidiary under certain terms and conditions, and under which the Executive is entitled to certain compensation, including various provisions for special bonus compensation, under certain terms and conditions; WHEREAS, the Executive and NATCO wish to update, clarify, and amend the Previous Employment Agreement, primarily to substitute employment by NATCO in place of existing employment by a subsidiary, to specify terms and conditions for such employment and for Executive's compensation, including various provisions for special bonus compensation, and to further modify other provisions as necessary; WHEREAS, the Executive and NATCO are therefore simultaneously herewith entering into an Employment Agreement (the "Employment Agreement") which supersedes the Previous Employment Agreement; WHEREAS, the Executive and NATCO entered into a stock option agreement dated March 15, 1994, as amended on the 31st day of July, 1996 (the "Previous Stock Option Agreement"), under which the Executive received options to purchase shares of common stock in a subsidiary of NATCO under certain terms and conditions; WHEREAS, the Executive and NATCO wish to update, clarify and amend the Previous Stock Option Agreement, primarily to substitute options to purchase shares of common stock in NATCO in place of existing options to purchase subsidiary stock, to specify terms and conditions for such options and to further modify other provisions as necessary; and WHEREAS, in order to provide the Executive with an incentive to devote his best skills and efforts to the success of NATCO, NATCO deems it to be in its best interests to provide the Executive with Options to purchase shares of NATCO; 1 2 NOW, THEREFORE, in consideration of the representations, warranties, covenants and conditions herein and in the Employment Agreement contained, the parties hereto hereby agree as follows: 1. Options. (a) Subject to the terms and upon the conditions contained herein, the Executive shall have the right, privilege, and option to purchase 416,666 shares of common stock of NATCO at a purchase price of $1.96 per share (the "First Option"). The Executive may partially exercise the First Option. (b) Subject to the terms and upon the conditions contained herein, the Executive shall have the additional right, privilege, and option to purchase 138,889 shares of common stock of NATCO at a purchase price of $4.77 per share (the "Second Option"). The Executive may partially exercise the Second Option. (c) Subject to the terms and upon the conditions contained herein, the Executive shall have the additional right, privilege, and option to purchase 123,272 shares of common stock of NATCO at a purchase price of $6.71 per share (the "Third Option"). The Executive may partially exercise the Third Option. (d) If, at any time during the Period of Active Employment, capital is raised by NATCO through the offer and sale of Equity Securities to an Unaffiliated Party, the Executive shall have the option to purchase Equity Securities of the type being offered and sold equivalent to an additional five (5) percent of the aggregate amount of Equity Securities being sold to Unaffiliated Parties other than the Executive at a purchase price equal to the purchase price at which such Equity Securities are sold (the "Fourth Option", and together with the First, Second and Third Option, the "Options"). For purposes of this Section 1(d), an "Unaffiliated Party" is any person other than Capricorn Investors, L.P., or Capricorn Investors II, L.P., or any of their affiliates, and "Equity Securities" shall mean any stock or similar security or any security convertible, with or without consideration, into such security, or carrying any warrant, option or right to subscribe for or purchase such a security, or any such warrant, option or right. The Executive may exercise this option in whole or in part. (e) If subsequent to the date of this Agreement the Company shall declare and pay any stock dividend or shall divide or combine the outstanding Common Stock through any stock split, stock combination or other recapitalization, the number of shares and purchase price for shares under the Options shall be appropriately adjusted to reflect such stock dividend, stock split, stock combination or other recapitalization. (f) If the Company shall at any time issue (i) shares of common stock (other than common stock issued to the Company's employees and directors pursuant to stock option agreements), (ii) rights or warrants to subscribe for or purchase shares of common stock (other than options issued to the Company's employees and directors) or other securities of the Company convertible into or exchangeable for shares of common stock ("Convertible Securities"), or (iii) Convertible Securities, in each case at a purchase, exercise or conversion price per share (taking into account, in cases (ii) and (iii), any consideration received by the Company for such rights, warrants or Convertible Securities, the value of such consideration, if 2 3 other than cash, to be determined in good faith by the Board of Directors) less than the fair value or average market price per share of the common stock on the applicable record date (in cases where the issuance is to all shareholders) or issuance date (in other cases), then in each such case, the number of shares thereafter issuable upon exercise of the Options after such record or issuance date, as the case may be, shall be determined by multiplying the number of shares issuable upon exercise of the Options on the date immediately preceding such record or issuance date, as the case may be, by a fraction, the numerator of which shall be the sum of the number of shares of common stock outstanding on such record or issuance date and the number of additional shares of common stock so offered for subscription or purchase in connection with such rights or warrants or issuable upon conversion of such Convertible Securities, and the denominator of which shall be the sum of the number of shares of common stock outstanding on such record or issuance date and the number of shares of common stock which the aggregate offering price of the total number of shares so offered or so issuable would purchase at such average market price; provided, however, if all the shares of common stock offered in cases (i), (ii) or (iii), as the case may be, are not delivered (whether upon their offering, the exercise of such rights or warrants or the conversion of such Convertible Securities) upon the termination of the offering or the expiration of such rights or warrants or the conversion option of such Convertible Securities, as the case may be, the number of shares issuable upon exercise of the Options shall thereafter be readjusted to the number of shares which would have been in effect had the numerator and the denominator of the foregoing fraction and the resulting adjustment been made based upon the number of shares of common stock actually delivered rather than upon the number of shares of common stock offered for subscription or purchase or issuable upon conversion. Such adjustment shall be made whenever common stock or any such rights, warrants or Convertible Securities are issued to all holders of the common stock, and shall become effective, as the case may be, on the date of issuance or retroactive to the record date for determination of shareholders entitled to receive the common stock or such warrants, rights or Convertible Securities. 2. TIME OF EXERCISE OPTIONS. Subject to the terms and upon the conditions contained herein, the Options may be exercised at any time prior to the earlier to occur of termination of the Options pursuant to Section 5 hereof and (i) seven (7) years from the 31st day of July 1996 in the case of the First and Second Options, (ii) seven (7) years from the 31st day of July 1997 in the case of the Third Option, or (iii) seven (7) years from the date on which Equity Securities are sold in the case of the Fourth Option (the "Option Period"). 3. METHOD OF EXERCISE. (a) The Options may be exercised only within the Option Period and only (1) by notice in writing of the Executive's exercise of the Options, delivered to the Chief Financial Officer of NATCO or mailed by registered or certified mail, return receipt requested, postage pre-paid, addressed to the Chief Financial Officer of NATCO, c/o National Tank Company, Brookhollow Central III, Suite 750, 2950 North Loop West, Houston, Texas 77092, and (2) by contemporaneous payment to NATCO of the full amount of the purchase price of the common stock being purchased by the Executive pursuant to these Options (together with any amount which is necessary to satisfy any applicable federal, state or local tax requirements), by certified check or official bank check payable to the order of NATCO. 3 4 (b) NATCO may require of the Executive at the time the Options are exercised, that the Executive make or enter into representations and agreements as may be necessary or desirable, in the opinion of NATCO, in order to assure compliance with the terms of this Stock Option Agreement and all applicable federal and state securities laws and stock exchange regulations. (c) NATCO shall make immediate delivery of all shares purchased by the Executive upon the exercise of the Option, provided that if any law or regulation requires NATCO to take any action with respect to the shares being purchased by the Executive pursuant to these Options, then the date of delivery of such shares shall be extended for the period necessary to take such action. 4. STOCKHOLDERS AGREEMENT. In the event the Executive exercises the Options and purchases shares of common stock of NATCO, the Executive shall be subject to the terms of the Stockholders Agreement dated the 30th day of June, 1997, by and among Capricorn Investors, L.P., Capricorn Investors II, L.P. and Cummings Point Industries, Inc., attached hereto as Exhibit B. 5. TERMINATION OF OPTIONS. (a) The Options, to the extent not heretofore exercised, shall terminate and cease to be exercisable on the date on which the first of the following events occurs: (l) one year after the termination of the Executive's employment with NATCO pursuant to Section 1(e)(l) or Section 1(e)(2) of the Employment Agreement; (2) the termination of the Executive's employment with NATCO pursuant to Section 11(a) of the Employment Agreement; (3) the sale of all of the common stock of NATCO to any party or parties other than the Executive, regardless of whether such sale is effected in a single transaction or a series of related or unrelated transactions and provided that NATCO gives the Executive written notice at least 30 days prior to any transaction that would result in the termination of the Executive's Options pursuant to this Section 5(a)(3); or (4) expiration of the Option Period as provided in Section 2 of this Stock Option Agreement. 6. NON-TRANSFERABILITY OF OPTIONS. The Options may not be sold, hypothecated, transferred or otherwise disposed of, and may only be exercised by the Executive, or his estate provided that the estate exercises such Options within two years of the Executive's death. If the Executive's estate exercises the Options, the estate shall be bound by all conditions, restrictions, and limitations that otherwise would have applied to the Executive had the Executive exercised the Options. 4 5 7. NO RIGHTS AS STOCKHOLDER. The Executive shall have none of the rights of a stockholder of NATCO with respect to any of the shares of common stock issuable under the Options unless and until such shares of common stock have been purchased by the Executive in accordance with the terms and conditions of this Stock Option Agreement. 8. REPRESENTATION AS TO INVESTMENT. The Executive represents and warrants to NATCO that all shares purchased under this Stock Option Agreement shall be acquired for the Executive's own account and not with a view to distribution. The Executive acknowledges that the Executive may not sell, assign, transfer or otherwise dispose of any shares purchased under this Stock Option Agreement, or of any of his right, title or interest therein, in the absence of either a registration statement under the Securities Act of 1933, as amended (the "Act") or an exemption from the registration provisions of the Act, and agrees that certificates representing the shares may contain a legend to such effect. The exercise of these Options and the delivery of shares hereunder is contingent upon NATCO being furnished by the Executive with a statement in writing at the time of such exercise confirming the accuracy of the foregoing representation and warranty. 9. NOTICE. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive, to him at: Nathaniel A. Gregory Frost Road Greenwich, Connecticut 06830 If to NATCO, to it at: Cummings Point Industries 30 East Elm Street Greenwich, Connecticut 06830 Attention: President With a copy to: O'Melveny & Myers Citicorp Center 153 East 53rd Street New York, New York 10022-4611 Attention: Drake Tempest, Esq. 5 6 With a further copy to: Vinson & Elkins (to be provided) or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications hereunder (including without limitation, notice of the Executive's election to purchase the Options) shall be effective when actually received by the addressee. 10. Amendment. This Stock Option Agreement may only be modified, supplemented or amended by a written instrument executed by the party against whom which enforcement of such modification, supplement or amendment is sought. 11. Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Stock Option Agreement. 12. Governing Law. This Stock Option Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflict of laws. In witness whereof, the parties hereto have executed this Agreement as of the date first above written. CUMMINGS POINT INDUSTRIES NATHANIEL A. GREGORY By /s/ Herbert S. Winokur /s/ Nathaniel A. Gregory ---------------------------- ---------------------------------- Title: ------------------------ 6 7 AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT This AMENDMENT NO. 1 (this "Amendment") to that certain STOCK OPTION AGREEMENT (the "Stock Option Agreement") dated as of July 31, 1997 by and between Cummings Point Industries, Inc. (now NATCO Group Inc.), a Delaware corporation ("NATCO") and Nathaniel A. Gregory (the "Executive") is itself dated as of May __, 1998 by and between NATCO and the Executive. RECITALS: As of July 31, 1997, NATCO and the Executive entered into an Employment Agreement (the "Employment Agreement") that amended and restated a prior employment agreement between NATCO and the Executive dated as of July 31, 1996. In connection with the execution and delivery of the Employment Agreement, NATCO and the Executive entered into the Stock Option Agreement which amended and restated a prior stock option agreement between NATCO and the Executive dated as of July 31, 1996. NATCO is currently planning to effect an initial public offering of its common stock, par value $0.01 per share (the "Common Stock") and NATCO and the Executive have determined that certain provisions of the Stock Option Agreement, while appropriate in the context of a privately owned company, are inconsistent with the Executive's responsibilities as the chief executive officer of a publicly owned company. Accordingly, the Executive is voluntarily agreeing to delete those provisions from the Stock Option Agreement effective as of the Effective Date (as hereinafter defined). NOW, THEREFORE, the parties hereto, for and in consideration of the premises, the mutual covenants and agreements hereinafter set forth and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, agree as follows: 1. Amendments. Effective as of the Effective Date, the Stock Option Agreement shall be amended in the following respects: (a) The first sentence of subsection (c) of Section 1 of the Stock Option Agreement is hereby amended so as to be and read, in its entirety, as follows: 8 "Subject to the terms and upon the conditions contained herein, the Executive shall have the additional right, privilege and option to purchase 123,272 shares of common stock of NATCO at a purchase price of $6.71 per share (the "Third Option", and, together with the First and Second Options, the "Options")." (b) Subsection (d) of Section 1 of the Stock Option Agreement is hereby deleted in its entirety from the Stock Option Agreement and such provision shall, from and after the Effective Date, be null and void and of no further force or effect. 2. Definitions. (a) "Commission" shall mean the United States Securities and Exchange Commission. (b) "Effective Date" shall mean the effective date, as ordered by the Commission, of that certain Registration Statement on Form S-1 filed by NATCO with the Commission with respect to the offering, sale and delivery of the Common Stock to be sold in the Initial Public Offering. 3. Confirmation of Other Provisions. The parties hereto confirm that each provision of the Stock Option Agreement, other than those expressly amended hereby, is hereby ratified and shall remain in full force and effect. 4. Headings. The headings contained herein are for the sole purpose of convenience of reference and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Amendment. In Witness Whereof, the parties hereto have executed this Amendment as of the date first above written. NATCO GROUP INC. (formerly Cummings Point Industries, Inc.) By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- ------------------------------------------ Nathaniel A. Gregory 9 STOCK OPTION AGREEMENT AMENDMENT 1 THIS AMENDMENT is to that certain Stock Option Agreement, dated the 31st day of July 1997, by and between NATCO Group Inc. f/k/a Cummings Point Industries ("NATCO") and Nathaniel A. Gregory ("Executive"). NATCO and Executive may individually be referred to as "party" and collectively referred to as "parties". 1. The following language is added as an additional sentence at the end of Section 1(d) to the Stock Option Agreement: In no event shall the number of options contemplated by this Section 1(d) exceed 25,000 and any unexercised right to these options shall expire on December 31, 1999. 2. Section 1(f) is deleted in its entirety. 3. A new section 1(g) shall be included in the Stock Option Agreement, as follows: (g) The Executive may put up to 75,000 options upon execution of this Amendment. For each option put by the Executive and purchased by NATCO, NATCO shall issue to the Executive a fully-vested, new option with a strike price of $8.81; in no event, however, shall NATCO issue more than 50,000 new options to the Executive under this Section 1(g). 4. All other terms and conditions of the Stock Option Agreement remain in full force and effect without change. In witness whereof, the parties have executed this Agreement as of the 12th day of July 1999. NATCO Gregory /s/ HERBERT S. WINOKUR, JR. /s/ NATHANIEL A. GREGORY - ---------------------------- ----------------------------- Herbert S. Winokur, Jr. Nathaniel A. Gregory 10 SINGLE INSTALLMENT NOTE In consideration of value received, I, Nathaniel A. Gregory, agree to pay to NATCO Group Inc. f/k/a Cummings Point Industries the principal amount of $1,205,489.92 on which interest shall accrue at the annual rate of 6%. Payment of the principal balance and all accrued interest shall be due (i) seven years from July 12, 1999, (ii) upon successful sale of NATCO, or (iii) after a successful initial public offering (or sale of NATCO where the consideration received is stock of the acquiring party), whichever occurs first. Notwithstanding the foregoing, in the event (iii) occurs and any stock bought with the principal (or shares of stock received in exchange for any stock bought with the principal in a sale of NATCO) are deemed "restricted securities" within the meaning of Rule 144 of the Securities Act of 1933 or are subject to "lock-up" provisions with underwriters of an initial public offering, Gregory shall not be required to repay that portion of the loan equal to the estimated local, state, federal, and FICA taxes due on the bonus referred to in Section 3(h) of Gregory's Employment Agreement ("Agreement"), until the expiration of both impediments. For purposes of this note, a successful sale will have occurred in the event of a sale, merger, reorganization, or other transaction involving NATCO that results in a Change of Control as defined in Section 14(b) of the Agreement, and in which stockholders of NATCO shall receive any combination of cash, debt, preferred stock, common stock of any unaffiliated party, or similar securities in exchange for no less than 50% of the common stock ownership in NATCO as of July 12, 1999. For purposes of this note, an initial public offering will have occurred upon registration and public offering under the Securities Act of NATCO common shares as contemplated in the Stockholder's Agreement attached to the Agreement as Exhibit B. Failure to make payment when due shall be considered default. Should default exist for more than a grace period of sixty days, Gregory agrees to pay NATCO all reasonable costs and expenses incurred during collection proceedings including, but not limited to, attorney's fees. /s/ NATHANIEL A. GREGORY - ---------------------------- Nathaniel A. Gregory State of Texas ( County of Harris ( SWORN TO AND SUBSCRIBED TO before me on this the 20th day of July 1999, by Nathaniel A. Gregory, a person known to me. /s/ PATRICIA G. SIMTH ------------------------------------------- Notary Public in and for the State of Texas [SEAL] EX-10.19 9 STOCKHOLDER'S AGREEMENT - DATED 11/18/1998 1 EXHIBIT 10.19 STOCKHOLDERS' AGREEMENT This Stockholders' Agreement (this "Agreement") is made as of the 18th day of November, 1998 by and among Capricorn Investors, L.P., a Delaware limited partnership ("Cap I"), Capricorn Investors II, L.P., a Delaware limited partnership ("Cap II"), NATCO Group Inc., a Delaware corporation ("Natco") and each of the Designated Stockholders (as hereinafter defined). R E C I T A L S: Natco is the owner of all the outstanding capital stock of National Tank Company, a Delaware corporation ("National Tank"), and Natco, through National Tank, is engaged in the business of designing, fabricating and servicing oil and gas process equipment and systems. On November 18, 1998, the Certificate of Incorporation of Natco was amended to authorize two classes of common stock, par value $0.01 per share ("Common Stock"), to wit: 45,000,000 shares of Class A Common Stock ("Class A Common Stock") and 5,000,000 shares of Class B Common Stock ("Class B Common Stock"), and to convert each of the then outstanding shares of common stock of Natco into one share of Class A Common Stock (the "Charter Amendment"). As a result of the Charter Amendment, Cap I and Cap II, as the owners of record and beneficially of all then outstanding Common Stock, acquired and now own 5,563,667 shares and 2,582,259 shares of Class A Common Stock, respectively. Natco, National Tank, The Cynara Company, a Delaware corporation ("Cynara"), and Natco Acquisition Company, a Delaware corporation and a wholly owned subsidiary of Natco ("Newco") are parties to an Amended and Restated Agreement and Plan of Merger dated November 17, 1998 but effective as of March 26, 1998 (the "Merger Agreement") that, among other things, provides that Cynara will merge, upon the terms and subject to the conditions of the Merger Agreement and in accordance with the General Corporation Law of Delaware, with and into National Tank and National Tank will be the Surviving Corporation (the "Merger"). On November 18, 1998, Natco and Cap II consummated the transaction contemplated by that certain Investment Agreement dated November 17, 1998, pursuant to which Natco issued and sold, and Cap II purchased, a non-negotiable promissory note in the principal amount of $5,300,000 for a like amount of cash, such note being automatically convertible into 504,762 shares of Class A Common Stock of Natco upon expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. It is a condition to the obligations of Cynara under the Merger Agreement that Cap I and Cap II and each of the Designated Stockholders shall have entered into a Stockholders' Agreement substantially similar in form and substance to this Agreement. 2 NOW, THEREFORE, in consideration of the premises, the mutual covenants hereinafter expressed and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 under the Exchange Act. "Agreement", "hereof", "hereunder", and words of similar import shall refer to this Stockholders' Agreement, as it may be amended from time to time. "Associate" shall have the meaning ascribed thereto in Rule 405 of the General Rules and Regulations under the Securities Act of 1933, as amended. "Cap I" shall mean Capricorn Investors, L.P., a Delaware limited partnership. "Cap II" shall mean Capricorn Investors II, L.P., a Delaware limited partnership. "Capricorn Registration Rights Agreement" shall mean that certain Registration Rights Agreement dated as of November 18, 1998 among Natco, Cap I and Cap II. "Charter Amendment" shall have the meaning ascribed to such term in the second recital to this Agreement. "Class A Common Stock" shall have the meaning ascribed to such term in the second recital to this Agreement. "Class B Common Stock" shall have the meaning ascribed to such term in the second recital to this Agreement. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Common Stock" shall have the meaning ascribed to such term in the second recital to this Agreement. "Cynara" shall mean The Cynara Company, a Delaware corporation. "Designated Stockholder" shall mean each of the holders of record and beneficially of common stock of Cynara immediately prior to the effective date of the Merger (assuming the exercise of all outstanding Cynara warrants). "Drag-Along Notice" shall have the meaning ascribed to such term in Section 2(f)(i) herein. 3 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Merger" shall have the meaning ascribed to such term in the fourth recital to this Agreement. "Merger Agreement" shall have the meaning ascribed to such term in the fourth recital to this Agreement. "Natco" shall mean NATCO Group Inc., a Delaware corporation. "National Tank" shall mean National Tank Company, a Delaware corporation and a wholly owned subsidiary of Natco. "Overallotment Shares" shall have the meaning ascribed to such term in Section 2(e)(ii) herein. "Person" means and includes natural persons, corporations, limited partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks and other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "Principal Stockholder" shall mean either Cap I or Cap II so long as it owns of record and beneficially 1% or more of the outstanding Common Stock. "Public Sale" shall mean a Sale of Common Stock pursuant to an effective registration statement under the Securities Act. "Purchase Offer" shall have the meaning ascribed to such term in Section 2(f) herein. "Purchaser" shall have the meaning ascribed to such term in Section 2(f) herein. "Remaining Stockholders" shall have the meaning ascribed to such term in Section 2(f)(i) herein. "Sale" shall mean any offer, offer to sell, offer for sale, sale, assignment, contract of sale, disposition of an interest in or transfer, grant of a participation in, pledge or other disposal of any Common Stock (or any solicitation of any offers to buy or otherwise acquire, or take a pledge of, any Common Stock). "Sale Notice" shall have the meaning ascribed to such term in Section 2(e)(i) herein. "Securities Act" shall mean the Securities Act of 1933, as amended. "Selling Principal Stockholder" shall have the meaning ascribed to such term in Section 2(f) herein. 4 "Stockholder" shall mean, for so long as such Person owns of record any shares of Common Stock, Cap I, Cap II, each Designated Stockholder and any assignee thereof (or any other Person who shall acquire and hold of record shares of Common Stock) who shall have agreed to be bound by the terms of this Agreement. 2. Restrictions on Certain Sales. (a) General Restrictions. The provisions of this Agreement, including this Section 2, apply to all the holdings of Common Stock of each Stockholder, whether held on the date of this Agreement or hereafter acquired, including without limitation the shares of Class A Common Stock to be acquired by Cap II upon conversion of the promissory note issued by Natco pursuant to the Investment Agreement. Each Stockholder agrees that it will not, directly or indirectly, effect a Sale of any Common Stock, except in compliance with the Securities Act and this Agreement. No Stockholder shall effect a Sale other than a Sale to Natco or another Stockholder, or a Public Sale, unless the Stockholder first obtains a written opinion of counsel (which opinion and counsel, who may be counsel for Natco, shall be reasonably satisfactory to Natco), to the effect that the proposed Sale is exempt from registration under the Securities Act and all applicable state securities laws. (b) Legend. Each certificate evidencing outstanding Common Stock issued to any Stockholder shall bear a legend in substantially the following form: THE OFFERING, SALE AND DELIVERY OF THE SHARES REPRESENTED BY THIS CERTIFICATE WERE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THUS NEITHER SUCH SHARES NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSACTION IS REGISTERED UNDER THAT ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS PROVIDED TO THE COMPANY PRIOR TO THE PROPOSED TRANSACTION THAT REGISTRATION UNDER SUCH ACT IS NOT REQUIRED. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF A STOCKHOLDERS AGREEMENT DATED AS OF NOVEMBER 18, 1998, AS THE SAME MAY BE AMENDED (A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY), AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS SUCH TRANSFER, SALE OR HYPOTHECATION COMPLIES WITH THE TERMS OF SUCH AGREEMENT. (c) Distributions of Common Stock. Each of Cap I and Cap II may distribute, whether in liquidation or otherwise, all or part of the Common Stock owned by it to any of its general or limited partners if each such general or limited partner agrees in writing in connection 5 with such distribution to be bound by all of the provisions of this Agreement applicable by their terms to a Stockholder (other than a Principal Stockholder). (d) Specific Restrictions. Each Stockholder further agrees that it will not effect any Sale, other than a Sale to Natco or another Stockholder, a Public Sale or a Sale to a Purchaser pursuant to Section 2(f) herein, unless the Person to whom such Sale is made shall have agreed in writing to be bound by all of the provisions of this Agreement applicable by their terms to a Stockholder (other than a Principal Stockholder). Any such transferee shall have all the rights and benefits, and be subject to all the obligations, of this Agreement applicable by its terms to a Stockholder. Any purported Sale that would contravene the provisions of this Section 2(d) shall be null and void. (e) Right of First Refusal. Each Stockholder, other than either Principal Stockholder, agrees not to effect a Sale, other than a Sale permitted by clause (iv) of this subsection 2(e), unless, in any such case, prior to such Sale: (i) Such Stockholder shall have given to Natco and to each Principal Stockholder that then holds Common Stock written notice (a "Sale Notice") of such Stockholder's intention to effect the Sale. The Sale Notice shall include (x) the number of shares of Common Stock that the Stockholder proposing the Sale desires to sell, (y) the principal terms of the Sale, including the price at which such shares of Common Stock are intended to be sold and such other information with respect to such Sale as Natco or either Principal Stockholder shall reasonably request in writing and (z) an offer to sell to Natco or either Principal Stockholder, on terms and conditions substantially identical to those contained in the Sale Notice, a number of shares of Common Stock determined in accordance with Section 2(e)(ii) hereof. (ii) (A) Natco shall first have the right to purchase any number of shares of Common Stock up to the aggregate number of such shares of Common Stock that the selling Stockholder intends to sell in the Sale, and Natco shall promptly, but in any event within 10 days after receipt of the Sale Notice, advise the Selling Stockholder and each Principal Stockholder in writing of its determination in that regard. (B) Each Principal Stockholder shall then have the right to purchase a number of shares of Common Stock included in the Sale equal to (x) the total number of shares of Common Stock included in the Sale less (y) the number of shares of Common Stock purchased by Natco pursuant to clause (A) above which result shall be (z) multiplied by a fraction, the numerator of which is the aggregate number of shares of Common Stock then held by such Principal Stockholder and the denominator of which is the aggregate number of shares of Common Stock then held by the Principal Stockholders who accept the offer made in the Sale Notice. If either Principal Stockholder under this clause (B) elects to purchase fewer than the maximum number of shares of Common Stock to which such Principal Stockholder is entitled pursuant to the preceding sentence, the other Principal Stockholder shall then be entitled to purchase the remaining number of shares of Common Stock (the "Overallotment Shares") to be included in the Sale. Each Principal Stockholder 6 shall advise the other, if any, in writing promptly, but in any event within 15 days after receipt of the Sale Notice, as to any Overallotment Shares available to the other for purchase. (iii) Within 20 days after receiving the Sale Notice, each Principal Stockholder desiring to accept the offer made therein shall so notify the selling Stockholder in writing, specifying the maximum number of shares of Common Stock that such Principal Stockholder wishes to purchase. If Natco or either Principal Stockholder does not, within the appropriate time period specified in subsection (e)(ii) or (e)(iii), so signify its intention to participate in the Sale, Natco or such Principal Stockholder as the case may be shall be deemed to have waived all of its rights under this Section 2(e) with respect to such Sale. If the aggregate of the number of shares of Common Stock that Natco and the Principal Stockholders have agreed to purchase pursuant to the allocation provisions of paragraph (ii) of this Section 2(e) shall be less than the number of shares of Common Stock included in the Sale Notice, Natco and the Principal Stockholders shall be deemed to have waived their rights under this Section 2(e) with respect to such Sale. If Natco and each Principal Stockholder waive their rights with respect to such Sale, the selling Stockholder shall thereafter be free, for a period of 90 days, to consummate such Sale for the number of shares of Common Stock set forth in the Sale Notice at a price not less than the price set forth in the Sale Notice and on terms otherwise no more favorable to the purchasers than as set forth therein. (iv) Anything to the contrary herein notwithstanding, the provisions of this subsection (e) shall not apply to a Sale to Natco or another Stockholder, a Public Sale or a Sale to a Purchaser pursuant to subsection 2(f) herein. In addition, the provisions of this subsection (e) shall not apply to (A), subject to compliance with the provisions of subsection 2(d) herein, a Sale by any Stockholder to any Affiliate of such Stockholder or (B), subject to compliance with the provisions of subsection 2(c) herein, to a distribution, whether in liquidation or otherwise, by Cap I or Cap II to the limited and general partners thereof or (C), subject to compliance with the provisions of subsection 2(d) herein, in the case of a Stockholder who is an individual, to any transfer by operation of law, by death pursuant to a will or the laws of descent and distribution, by transfer to a member of the immediate family of such Stockholder or a trust for the benefit of any such family member or by transfer to a commercial bank or other lending institution in accordance with the terms of a bona fide pledge (including without limitation a pledge of Common Stock by Winokur (as such term is defined in the Capricorn Registration Rights Agreement) contemplated by Section 4 of the Capricorn Registration Rights Agreement) or (D), subject to compliance with the provisions of subsection 2(d) herein, in the case of a Stockholder that is a legal entity, by such entity to a successor of such entity or to the purchaser of all or substantially all of that entity's assets, each of which exceptions described in clauses (C) and (D) shall be permitted if the transferor or transferee shall give notice of such assignment, together with such information as may be reasonably necessary to evidence qualification of the transferee to be an assignee thereof, to Natco. (f) Rights to Compel Sale or to Offer Opportunity to Sell; Drag-Along Rights; Tag-Along Rights. If a Principal Stockholder owning at least 10% of the outstanding Common 7 Stock (the "Selling Principal Stockholder") proposes to effect a Sale of all shares of Common Stock held by it to a third party that is not an Affiliate or Associate of Natco or either Principal Stockholder (the "Purchaser") for cash, cash equivalents or readily marketable securities (the "Purchase Offer"), such Selling Principal Stockholder shall consult with the other Principal Stockholder, if any, and, after any such consultation, either (x), if the other Principal Stockholder, if any, has agreed to sell all its shares of Common Stock to the Purchaser on the same terms and conditions, require each and every other Stockholder to sell or (y), if the other Principal Stockholder, if any, has not agreed to sell all its shares of Common Stock to the Purchaser on the same terms and conditions, offer each and every other Stockholder, including the other Principal Stockholder, if any, the opportunity to sell, any and all shares of Common Stock held by such Stockholders to the Purchaser, in each case, for the same consideration per share and otherwise on the same terms and conditions upon which the Selling Principal Stockholder proposes to sell its shares. If, at the time a Selling Principal Stockholder proposes to effect a Sale pursuant to this subsection (f), there is no other Principal Stockholder, the Selling Principal Stockholder may, at its option, proceed in accordance with clause (x) or (y) of this subsection (f). (i) Exercise of Right. The Selling Principal Stockholder shall cause the Purchase Offer to be reduced to writing and shall provide a written notice (the "Drag-Along Notice") in which it complies with the provisions of clauses (x) or (y) of this subsection (f) to each other Stockholder, including the other Principal Stockholder, if any (the other Stockholders, excluding the other Principal Stockholder, if any, being herein called the "Remaining Stockholders"). The Drag-Along Notice shall include information concerning the nature and amount of the consideration per share to be paid by the Purchaser and the other terms and conditions of the Purchase Offer. Any Sale pursuant to clause (x) of this subsection 2(f) shall entail all the outstanding shares of Common Stock owned by the Selling Principal Stockholder and the other Principal Stockholder, if any, and the Remaining Stockholders, but any Sale pursuant to clause (y) of this subsection 2(f) shall entail only those shares of Common Stock owned by the Selling Principal Stockholder and those owned by the Remaining Stockholders and the other Principal Stockholder, if any, to the extent that such Remaining Stockholders and the other Principal Stockholder, if any, have elected to participate in such Sale. No later than five business days before the closing date of the Sale set forth in either the Drag-Along Notice or in a subsequent notice from the Selling Principal Stockholder, each other Stockholder participating in the Sale pursuant to the provisions of clause (x) or (y) of this subsection (f) (a "Participating Stockholder") shall deliver to a representative of the Selling Principal Stockholder designated in the Drag-Along Notice or such subsequent notice certificates representing all the shares of Common Stock held by such Participating Stockholder to be sold in such Sale, duly endorsed in blank for transfer, with signatures guaranteed, together with all other documents required to be executed in connection with such Purchase Offer or, if such delivery is not permitted by applicable law, an unconditional agreement to deliver such shares of Common Stock pursuant to this subsection (f) at the closing of such Sale against delivery to such Participating Stockholder of the consideration therefor. If any Participating Stockholder shall fail to deliver such certificates to the Selling Principal Stockholder, Natco shall cause its books and records to show that such shares of Common Stock are bound by the provisions of this subsection (f) 8 and that such shares of Common Stock shall be transferred only to the Purchaser upon surrender thereof for transfer by the Participating Stockholder. (ii) Return of Stock. If, for any reason the Selling Principal Stockholder determines that it cannot complete the sale of all the shares of Common Stock, the Selling Principal Stockholder shall return to each Participating Stockholder all certificates representing shares of Common Stock that such Participating Stockholder delivered for sale pursuant hereto, together with all other documents delivered pursuant hereto by such Participating Stockholder, and all the restrictions on sale or other disposition contained in this Agreement with respect to such shares of Common Stock shall continue in effect. (iii) Remittance of Consideration. At the closing of the sale of all shares of Common Stock pursuant to this subsection 2(f), the consideration with respect to the shares of Common Stock of any Participating Stockholders sold pursuant hereto shall be paid directly to each such Participating Stockholder pursuant to written instructions of such Participating Stockholder. The Selling Principal Stockholder shall furnish such other evidence of the completion and time of completion of such Sale and the terms thereof as may be reasonably requested by such Participating Stockholders. (iv) No Liability. Notwithstanding anything contained in this subsection 2(f), there shall be no liability on the part of the Selling Principal Stockholder to any Participating Stockholder if the Sale of shares of Common Stock pursuant to this subsection 2(f) is not consummated for whatever reason and, in such circumstances, the Selling Principal Stockholder's only obligation shall be to return the shares of Common Stock and other documents to the Participating Stockholders as contemplated by clause (ii) of this subsection 2(f). Whether to effect a sale of shares of Common Stock pursuant to this subsection 2(f) shall be in the sole and absolute discretion of the Selling Principal Stockholder. (v) Costs. All costs and expenses incurred by any seller in connection with a Sale pursuant to this subsection 2(f), including without limitation all attorneys' fees, costs and disbursements and any finders' fees or brokerage commissions, shall be allocated pro rata among the sellers, with each bearing that portion of such costs and expenses equal to a fraction, the numerator of which shall be the amount of the gross proceeds received by such seller from such Sale, and the denominator of which shall be the total amount of the gross proceeds received by all sellers from such Sale. (g) Inapplicability and Termination of Certain Provisions. The provisions contained in subsections (c), (d), (e) and (f) of this Section 2, including without limitation all restrictions on the ability of any Stockholder to effect a Sale as set forth in subsection (d) or (e) of this Section 2, shall be inapplicable to the sale of Class A Common Stock or Common Stock by Natco and any Stockholder in the initial public offering thereof and shall terminate and be of no further force or effect at such time as Natco is required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. 9 3. Related Party Transactions. So long as either Principal Stockholder continues to own more than 10% of the outstanding Common Stock and except as contemplated hereby or as the other Stockholders shall consent thereto in writing, such Principal Stockholder shall not engage in any financial transaction with Natco unless each other Stockholder has been offered the right to participate in such transaction proportionately in accordance with such Stockholder's ownership of Common Stock; provided, however, that this Section 3 shall not apply to the conversion of the Promissory Note (as such term is defined in that certain Investment Agreement dated as of November 17, 1998 between Natco and Capricorn Investors II, L.P.). 4. Specific Performance. The parties hereto each acknowledge and agree that, in the event of any breach of this Agreement, each non-breaching party would be irreparably harmed and could not be made whole by monetary damages. It is accordingly agreed that such parties, in addition to any other remedy to which they may be entitled at law or in equity, shall be entitled to compel specific performance of this Agreement in any action instituted in the United States District Court for the Southern District of New York, or, in the event such court would not have jurisdiction for such action, in any court of the United States or any state having subject matter jurisdiction. The parties hereto each consent to personal jurisdiction in any such action brought in the United States District Court for the Southern District of New York. 5. Entire Agreement; Amendments. This Agreement supercedes all prior agreements and understandings among the parties with respect to its subject matter, including without limitation that certain Stockholders' Agreement dated as of June 30, 1997 among Cummings Point Industries, Inc., a Delaware corporation (now NATCO Group, Inc.), Cap I and Cap II which is hereby terminated and rendered of no further force or effect. This Agreement contains the entire understanding of the parties with respect to the subject matter of this Agreement. There are no restrictions, agreements, promises, warranties, covenants, or undertakings other than those expressly set forth herein or therein. This Agreement may not be amended except by an instrument in writing signed on behalf of all of the parties hereto. Any agreement on the part of a party hereto to any extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. 6. Interpretation. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever reference is made herein to specific numbers of shares of stock (as opposed to percentages, proportions and like ratable computations) such numbers shall, in the event of any stock split, stock dividend, reclassification or similar event, be appropriately adjusted to reflect the impact of such event upon such number of shares. 10 7. Notice. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, or by facsimile copy, receipt of which has been acknowledged, addressed as follows: To Natco: NATCO Group Inc. Brookhollow Central III 2950 North Loop West Houston, Texas 77092 Attention: Nathaniel A. Gregory Chairman of the Board and Chief Executive Officer Telecopy No.: 713/683-7841 To Cap I: Capricorn Investors, L.P. c/o Winokur Holdings, Inc. 30 East Elm Street Greenwich, Connecticut 06830 Attention: Herbert S. Winokur, Jr. President Telecopy No.: 203/861-6671 To Cap II: Capricorn Investors II, L.P. c/o Capricorn Holdings, LLC 30 East Elm Street Greenwich, Connecticut 06830 Attention: Herbert S. Winokur, Jr. Manager Telecopy No.: 203/861-6671 To the Designated c/o George K. Hickox, Jr. Stockholders: Heller, Hickox, Dimeling, Schreiber & Park 1629 Locust Street Philadelphia, Pennsylvania 19103 Telecopier No.: 215/546-1041 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications hereunder shall be effective when actually received by the addressee. 8. Termination. This Agreement shall terminate in its entirety on the earlier of the tenth anniversary of the date hereof and the date on which less than fifty percent (50%) of the outstanding Common Stock shall be held of record, in the aggregate, by Cap I, Cap II, each Person who is as of the date of this Agreement or prior to the liquidation and dissolution, if any, of Cap I or Cap II, was a general 11 or limited partner of Cap I and Cap II, the Designated Stockholders, Nathaniel A. Gregory and their affiliates. 9. Governing Law. This Agreement shall be governed by and construed in all respects in accordance with the laws of the State of New York, without regard to the principles of conflicts of laws thereof which might refer such interpretation to the laws of a different state or jurisdiction. 10. Counterparts. This Agreement may be executed simultaneously in one or more counterparts, any of which may have been transmitted and received by facsimile transmission and each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. (The remainder of this page intentionally left blank.) 12 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as of the date first above written. NATCO GROUP INC. By: /s/ NATHANIEL A. GREGORY --------------------------------------- Name: Nathaniel A. Gregory ------------------------------------- Title: Chairman of the Board and Chief ------------------------------------ Executive Officer ------------------------------------ CAPRICORN INVESTORS, L.P. By: Capricorn Holdings, G.P., its general partner By: Winokur Holdings, Inc., its general partner By: /s/ HERBERT S. WINOKUR, JR. --------------------------------- Herbert S. Winokur, Jr. President CAPRICORN INVESTORS II, L.P. By: Capricorn Holdings, LLC, its general partner By: /s/ HERBERT S. WINOKUR, JR. --------------------------------- Herbert S. Winokur, Jr. Manager DESIGNATED STOCKHOLDERS /s/ WILLIAM R. DIMELING ------------------------------------------ William R. Dimeling /s/ ROBERT J. HAMAKER ------------------------------------------ Robert J. Hamaker /s/ DOUGLAS P. HELLER ------------------------------------------ Douglas P. Heller 13 /s/ GEORGE K. HICKOX, JR. ------------------------------------------ George K. Hickox, Jr. /s/ RALPH M. KELLY ------------------------------------------ Ralph M. Kelly /s/ STEVEN G. PARK ------------------------------------------ Steven G. Park /s/ RICHARD R. SCHREIBER ------------------------------------------ Richard R. Schreiber /s/ JOHN C. TUTEN, JR. ------------------------------------------ John C. Tuten, Jr. THE 1998 TRUST FOR JODY SMITH HAMAKER By: /s/ JODY SMITH HAMAKER --------------------------------------- Name: Jody Smith Hamaker Title: Trustee BOCP II, L.L.C. By: /s/ EARLE J. BENSING --------------------------------------- Name: Earle J. Bensing Title: Authorized Signer EX-10.20 10 CHANGE OF CONTROL POLICY 1 [NATCOGROUP LETTERHEAD] Interoffice Correspondence - -------------------------------------------------------------------------------- TO: William E. Joor III (V&E-Houston DATE: September 28, 1999 FROM: Daniel R. Carter Chief Legal Officer and Secretary SUBJECT: Change in Control Policy - -------------------------------------------------------------------------------- At a special meeting of the NATCO Group Inc. Board of Directors held Monday, September 27, 1999, the subject item was discussed and resolutely approved, as follows: The listed senior executive office positions of NATCO Group Inc. and its subsidiaries are participants in NGI's change of control policy: President of NGI Chief Financial Officer & Senior Vice President of NGI Senior Vice President - Technology & Product Development of NGI Senior Vice President - Marketing of NGI President of NATCO U.S. President of NATCO Canada, Limited President of Total Engineering Services Team, Inc. President of Cynara In the event of a change of control of NGI, NGI will pay the holder of the listed senior executive office 150% of base annual salary (200% in the sole case of the President of NGI) plus all accrued bonuses calculated on a pro rata basis to the score defined in the Management Bonus Program. A change of control means the acquisition of 50% or more of (i) NGI's outstanding common stock, (ii) any securities that may be converted to NGI common stock, or (iii) the assets of NGI by a party unrelated to Capricorn I or Capricorn II. A change of control will not be deemed to have occurred, if any surviving corporation in the case of merger or any purchasing corporation in the case of a sale of all of NGI's assets agrees to employ the holder of the listed senior executive office on terms substantially similar to the terms of office in force immediately prior to the change of control. The resolution regarding the change of control policy will be included in the minutes of the meeting, when finalized, and the minutes will reflect that the following vote was recorded: Allan Yes Bull Yes Gregory Yes Hickox Yes McCarthy Abstained Staley Yes Winokur Absent IN WITNESS WHEREOF, I subscribe my name and on this 28th day of September 1999. /s/ DANIEL R. CARTER --------------------- Daniel R. Carter EX-10.21 11 SEVERANCE PLAN 1 EXHIBIT 10.21 [NATCOGROUP LOGO] HUMAN RESOURCES MANUAL Policy No: II-4 Issued: June 1999 (R) Supercedes July 1997 (R) Subject: Severance Pay Summary Plan Description Effective: January 1, 1987 Page No: 1 of 8 Approved by: /s/ PATRICK M. McCARTHY Name: Patrick M. McCarthy Title: President - -------------------------------------------------------------------------------- 1.0 PURPOSE To provide severance benefits to certain employees of the NATCO Group's domestic locations that involuntarily loses their positions with the Company under severance qualifying conditions. 2.0 ELIGIBILITY An employee may be eligible for benefits under the Company's Severance Pay Plan (Plan) if he or she is: a. Employed at one of the Company's domestic (U.S.) facilities; and b. A regular full-time employee; and c. His or her employment is involuntarily terminated; and d. His or her termination of employment is due to a change in operations, a facility relocation or closing, or a reduction for other economic reasons, and the employee does not refuse or otherwise fail to accept another position that may be available with the facility/Company; or e. His or her termination of employment is the result of a sale or merger of all or part of the Company's business or assets, merger acquisition or other form of corporate reorganization and the employee is not offered a position by the acquiring or resulting company. f. If an employee resigns, abandons his or her job, fails to return from an approved leave of absence, initiates termination on any similar basis, or does not satisfy the criteria set forth in sections 2a-2d of this policy, the employee will be ineligible for severance pay. In addition, employees will be ineligible for benefits if they are terminated for misconduct, unsatisfactory performance, or otherwise for cause which shall be determined solely at the Company's discretion. 2 [NATCOGROUP LOGO] HUMAN RESOURCES MANUAL Policy II-4 Severance Page 2 of 8 To be eligible for benefits under this Plan, employees may be required to sign a waiver and release agreement in a form prepared by the Company at the time of termination. 3.0 Schedule of Benefits The amount of the benefits an employee receives will depend on the employee's length of service as determined by their most recent hire (anniversary) date as shown in the Schedule of Severance Payment in Section 3.5 of this policy. Benefits will be based on the base salary, exclusive of overtime, shift differentials, bonus, commissions, etc. of the employee at the time of termination notification. Any performance or merit reviews that are pending or in process shall not affect the amount of any employee's severance benefits. In addition, the benefits paid under this plan shall be inclusive of any termination notice pay an employee may be eligible to receive under the federal Workers Adjustment Retraining and Notification Act or any applicable state or local plant closing laws. 3.1 Regular Full-Time Employees All regular full-time employees who have completed a minimum of six (6) months employment from their most recent date of hire (anniversary) will be entitled to compensation as defined by the Schedule of Severance Payments with a maximum of sixteen (16) weeks. If the Company rehires an employee, his or her initial service time will not be counted in computation of severance if the employee is subsequently terminated again. 3.2 Part-Time and Temporary Employees No severance payments will be granted to regular part-time or temporary employees. 3.3 Executive and Senior Managers Benefits will be granted as determined by the Chief Executive Officer, Group President and or Board of Directors. 3 [NATCOGROUP LOGO] Policy II-4 Severance Page 3 of 8 3.4 Benefit Offset An employees benefits under this plan may be reduced, at the discretion of the Plan Administrator, by any amounts the employee may owe the Company (e.g. salary advances, vacation advances, unreconciled expenses, etc.) 3.5 Schedule of Severance Payments
================================================================================ YEARS OF SERVICE FORMULA FACTOR(FF) YEARS OF SERVICE FORMULA FACTOR(FF) ================================================================================ 30 Years 16.00 14 Years 10.50 - -------------------------------------------------------------------------------- 29 Years 16.00 13 Years 9.75 - -------------------------------------------------------------------------------- 28 Years 16.00 12 Years 9.00 - -------------------------------------------------------------------------------- 27 Years 16.00 11 Years 8.25 - -------------------------------------------------------------------------------- 26 Years 16.00 10 Years 7.50 - -------------------------------------------------------------------------------- 25 Years 16.00 9 Years 6.75 - -------------------------------------------------------------------------------- 24 Years 16.00 8 Years 6.00 - -------------------------------------------------------------------------------- 23 Years 16.00 7 Years 5.25 - -------------------------------------------------------------------------------- 22 Years 16.00 6 Years 4.50 - -------------------------------------------------------------------------------- 21 Years 15.75 5 Years 3.75 - -------------------------------------------------------------------------------- 20 Years 15.00 4 Years 3.00 - -------------------------------------------------------------------------------- 19 Years 14.25 3 Years 2.25 - -------------------------------------------------------------------------------- 18 Years 13.50 2 Years 1.50 - -------------------------------------------------------------------------------- 17 Years 12.75 1 Years 1.00 - -------------------------------------------------------------------------------- 16 Years 12.00 6 mos to 1 Year 1.00 - -------------------------------------------------------------------------------- 15 Years 11.25 Less than 6 mos -0- ================================================================================
4 [NATCOGROUP LOGO] HUMAN RESOURCES MANUAL Policy II-4 Severance Page 4 of 8 4.0 VACATION PAYMENT Employees entitled to vacation will be compensated under the terms of Vacation Policy IV-1. 5.0 NOTICE PAY As much notice of termination as is consistent with business conditions will be provided to each terminating employee. Employee's will be entitled to up to week's notice or pay in lieu of notice as appropriate and determined by business conditions and the Plan Administrator. 6.0 METHOD OF PAYMENT The Company will make the determination as to how benefits will be paid in its sole discretion. Employees will receive their benefits in either one lump sum payment or in installments coincident with the Company's current payroll cycle concluding with the month following, the month in which the termination transpired. Employees enrolled in the Company's various benefit plans will be entitled to coverage as described within each Plan's document. Medical coverage may be continued through the month following the month in which termination transpired, with deductions made from either the lump sum or payroll cycle. This period of group health insurance continuation will be applied against an employee's entitlements under the Consolidated Omnibus Budget Reconciliation Act (COBRA). (Corporate Benefits may be contacted for details.) 7.0 SOURCE OF BENEFITS The Company will pay all benefits under this Plan from its general assets. 8.0 REVIEW OF DENIAL OF BENEFITS In the event an employee does not receive benefits to which he or she believes he or she is entitled, the employee may file a claim, in writing, for those benefits. If the claim is denied, in whole or in part, the employee will be notified in writing. The notice will indicate why the claim was denied and either describe any additional information necessary to grant a claim or instruct the employee on how to appeal the denial. To appeal, an employee must file a form prescribed by the Company 5 [NATCOGROUP LOGO] HUMAN RESOURCES MANUAL Policy II-4 Severance Page 5 of 8 setting forth the facts and benefits claimed. The administration of the Plan will rule on all such claims within 60 days of receipt of any appeal. A copy of the ruling and a statement supporting the decision will be provided the employee. 9.0 AMENDMENT OR TERMINATION OF THE PLAN The Company reserves the right to amend or terminate the Plan at any time in its sole discretion, with or without advance notice. 10.0 YOUR RIGHTS UNDER ERISA As a participant in this Plan, and employee is entitled to certain rights and protection under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all Plan participants shall be entitled to: a. Examine, free of charge, at the administrative office in their geographic area, all Plan documents and copies of all documents filed by the Plan with the U.S. Department of Labor. b. Obtain copies of all Plan documents and other Plan information upon written request to the plan administrator. The administrator of the Plan may make a reasonable charge for the copies. In addition to creating rights for Plan participants, ERISA imposes obligations upon the individuals responsible for the operation of the Plan. The people who operate the Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of all Plan participants and beneficiaries. No one, including the Company or any other person, may discriminate against employees to prevent them from obtaining a benefit or from exercising their rights under ERISA. If a claim for a benefit is denied in whole or in part, an employee must receive a written explanation of the reason for the denial. Employees also have the right to have the administrator of the Plan review and reconsider any claim. Under ERISA, there are steps employees can take to enforce their ERISA-protected rights. For instance, if a participant in the Pan requests materials from the administrator of the Plan and does not receive them within 30 days, the participant may file suit in a federal court. In such a case, the court may require the administrator of the Plan to provide the materials and pay up to $100 a day until the participant receives the materials, unless the materials were not sent because of reasons beyond the control of the administrator of the Plan. If a claim 6 [NATCOGROUP LOGO] Human Resources Manual Policy II-4 Severance Page 6 of 8 for benefits is denied or ignored, in whole or in part, the participant may file suit in a state or federal court. If any employee is discriminated against for asserting his or her rights, assistance may be sought from the U.S. Department of Labor, or the participant may file suit in a federal court. The court will decide who shall pay court costs and legal fees. If the Plan participant is successful, the court may order the person sued to pay these costs and fees. If the participant loses, the court may order him or her to pay these costs and fees, for example, if it finds a claim is frivolous. If a participant has any questions about the Plan, he or she should contact Human Resources. If a participant has any questions about this statement or about his or her rights under ERISA, the nearest area office of the Labor-Management Services Administration, U.S. Department of Labor should be contacted. 11.0 General Information 11.1 The Plan is sponsored by the NATCO Group, 2950 North Loop West, Ste. 700, Houston, TX 77092 (713) 683-9292. 11.2 Plan Administrator The vice president of Human Resources is the administrator of the Plan who is appointed by the president of the Company. The administrator of the Plan makes the rules and regulations necessary to administer the Plan. The administrator of the Plan shall have the responsibility and discretionary authority to interpret the terms of this Plan, to determine eligibility for benefits, and to determine the amount of such benefits. The interpretations and determinations of the administrator of the Plan shall be final and binding, unless determined by a court of competent jurisdiction to be arbitrary and capricious. 11.3 Type of Plan The Plan is a severance pay Plan. 7 [NATCOGROUP LOGO] HUMAN RESOURCES MANUAL Policy II-4 Severance Page 7 of 8 11.4 Agent for Legal Process The NATCO Group's Chief Legal Officer, is the agent for service of legal process. Any communications should be sent to: Chief Legal Officer The NATCO Group 2950 N. Loop West Ste. 700 Houston, Texas 77092 Legal process may also be served on the administration of the Plan at: Vice President Human Resources Severance Plan Administration The NATCO Group 2950 N. Loop West Suite 700 Houston, Texas 77092 11.5 Plan Year The records of the Plan are kept on a calendar year basis. 11.6 Identification Number Employees who have a need to discuss the Plan with a federal government agency, may need the following numbers: Plan Number 501 Employer ID# 22-2906892 12.0 TERMINATION OF POLICY The company believes wholeheartedly in the plan, policies and procedures described herein, and considers them conditions of employment. NATCO Group Inc. reserves the right to modify, revoke, suspend, terminate or change any or all such plans, policies or procedures, in whole or in part, at any time with or without notice. 8 [NATCOGROUP LOGO] HUMAN RESOURCES MANUAL Policy II-4 Severance Page 8 of 8 13.0 RIGHTS RESERVED All rights reserved, this policy has been prepared for the exclusive use of NATCO Group Inc. No part of this document may be reproduced in any form by any means without the prior written consent of NGI. EX-10.22 12 US AND CANADIAN CREDIT FACILITY 1 EXHIBIT 10.22 LOAN AGREEMENT ($22,000,000 U.S. REVOLVING LOAN FACILITY, $10,000,000 CANADIAN REVOLVING LOAN FACILITY AND $32,500,000 TERM LOAN FACILITY) DATED AS OF NOVEMBER 20, 1998 AMONG NATIONAL TANK COMPANY, AS U.S. BORROWER, NATCO CANADA, LTD., AS CANADIAN BORROWER, CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, AS U.S. AGENT AND AS A U.S. LENDER, THE BANK OF NOVA SCOTIA, AS CANADIAN AGENT AND AS A CANADIAN LENDER AND THE OTHER LENDERS NOW OR HEREAFTER PARTIES HERETO AND JOINED IN BY NATCO GROUP INC. 2 TABLE OF CONTENTS
Page ---- 1. Definitions..............................................................................................1 1.1 Certain Defined Terms.........................................................................1 1.2 Miscellaneous................................................................................30 2. Commitments; Loans; BA's and Letters of Credit..........................................................30 2.1 Loans and BA's...............................................................................30 2.2 Letters of Credit............................................................................31 2.3 Certain Provisions Relating to Bankers' Acceptances..........................................36 2.4 Terminations, Reductions or Reallocations of Commitments....................................39 2.5 Commitment Fees..............................................................................40 2.6 Several Obligations..........................................................................41 2.7 Notes........................................................................................41 2.8 Use of Proceeds..............................................................................42 2.9 Currency Fluctuations........................................................................42 3. Borrowings, Prepayments and Interest Options............................................................43 3.1 Borrowings...................................................................................43 3.2 Prepayments..................................................................................43 3.3 Interest Options.............................................................................46 4. Payments; Pro Rata Treatment; Computations, Etc.........................................................51 4.1 Payments.....................................................................................51 4.2 Pro Rata Treatment...........................................................................53 4.3 Certain Actions, Notices, Etc................................................................53 4.4 Non-Receipt of Funds by Any Agent............................................................54 4.5 Sharing of Payments, Etc.....................................................................55 5. Conditions Precedent....................................................................................55 5.1 Initial Loans, Letters of Credit and Bankers' Acceptances....................................55 5.2 All Loans, Letters of Credit and Bankers' Acceptances........................................58 6. Representations and Warranties..........................................................................58 6.1 Organization.................................................................................58 6.2 Financial Statements.........................................................................58 6.3 Enforceable Obligations; Authorization.......................................................59 6.4 Other Debt...................................................................................59 6.5 Litigation...................................................................................59 6.6 Title........................................................................................60
3 6.7 Taxes........................................................................................60 6.8 Regulations U and X..........................................................................60 6.9 Subsidiaries.................................................................................60 6.10 No Untrue or Misleading Statements...........................................................60 6.11 ERISA........................................................................................60 6.12 Investment Company Act.......................................................................60 6.13 Public Utility Holding Company Act...........................................................60 6.14 Solvency.....................................................................................61 6.15 Fiscal Year..................................................................................61 6.16 Compliance...................................................................................61 6.17 Environmental Matters........................................................................61 6.18 Collateral Covered...........................................................................61 7. Affirmative Covenants...................................................................................62 7.1 Taxes, Existence, Regulations, Property, Etc.................................................62 7.2 Financial Statements and Information.........................................................62 7.3 Financial Tests..............................................................................63 7.4 Inspection...................................................................................64 7.5 Further Assurances...........................................................................64 7.6 Books and Records............................................................................64 7.7 Insurance....................................................................................64 7.8 Notice of Certain Matters....................................................................64 7.9 Capital Adequacy.............................................................................65 7.10 ERISA Information and Compliance.............................................................66 7.11 Additional Security Documents................................................................66 7.12 Year 2000....................................................................................67 8. Negative Covenants......................................................................................67 8.1 Borrowed Money Indebtedness..................................................................67 8.2 Liens........................................................................................68 8.3 Contingent Liabilities.......................................................................68 8.4 Mergers, Consolidations and Dispositions of Assets...........................................68 8.5 Redemption, Dividends and Distributions......................................................69 8.6 Nature of Business...........................................................................70 8.7 Transactions with Related Parties............................................................70 8.8 Loans and Investments........................................................................70 8.9 Subsidiaries.................................................................................70 8.10 Key Agreements...............................................................................71 8.11 Organizational Documents.....................................................................71 8.12 Unfunded Liabilities.........................................................................71 8.13 Operating Lease Expenses.....................................................................71 8.14 Sale/Leasebacks..............................................................................71
ii 4 8.15 Subordinated Indebtedness....................................................................71 8.16 Acquisitions.................................................................................71 8.17 Negative Pledges.............................................................................71 9. Defaults................................................................................................72 9.1 Events of Default............................................................................72 9.2 Right of Setoff..............................................................................75 9.3 Collateral Account...........................................................................75 9.4 Preservation of Security for Letter of Credit Liabilities....................................76 9.5 Currency Conversion After Maturity...........................................................76 9.6 Remedies Cumulative..........................................................................77 10. Agents..................................................................................................77 10.1 Appointment, Powers and Immunities...........................................................77 10.2 Reliance.....................................................................................78 10.3 Defaults.....................................................................................78 10.4 Material Written Notices.....................................................................79 10.5 Rights as a Lender...........................................................................79 10.6 Indemnification..............................................................................79 10.7 Non-Reliance on Agents and Other Lenders.....................................................80 10.8 Failure to Act...............................................................................80 10.9 Resignation or Removal of Agent..............................................................80 10.10 No Partnership...............................................................................81 10.11 Authority of Agent...........................................................................81 11. Miscellaneous...........................................................................................81 11.1 Waiver.......................................................................................81 11.2 Notices......................................................................................82 11.3 Expenses, Etc................................................................................82 11.4 Indemnification..............................................................................83 11.5 Amendments, Etc..............................................................................83 11.6 Successors and Assigns.......................................................................84 11.7 Limitation of Interest.......................................................................87 11.8 Survival.....................................................................................88 11.9 Captions.....................................................................................88 11.10 Counterparts.................................................................................88 11.11 Governing Law................................................................................88 11.12 Severability.................................................................................88 11.13 Tax Forms; Net Payments......................................................................88 11.14 Interest Act (Canada)........................................................................89 11.15 Judgment Currency............................................................................89 11.16 Conflicts Between This Agreement and the Other Loan Documents................................89
iii 5 11.17 Limitation on Charges; Substitute Lenders; Non-Discrimination................................89 11.18 Confidentiality..............................................................................90 11.19 Amendment and Restatement....................................................................90
EXHIBITS A-1 -- Request for Extension of Credit (U.S. Borrower) A-2 -- Request for Extension of Credit (Canadian Borrower) B -- Rate Designation Notice C -- Canadian Revolving Note D -- U.S. Revolving Note E -- Assignment and Acceptance F -- Compliance Certificate G -- Bankers' Acceptance Notice H -- Canadian Dollar Revolving Note I -- Borrowing Base Certificate J -- Term Note K -- Permitted Sales L -- Subsidiaries iv 6 LOAN AGREEMENT THIS LOAN AGREEMENT is made and entered into as of November 20, 1998 (the "Effective Date"), by and among NATIONAL TANK COMPANY, a Delaware corporation (the "U.S. Borrower"); NATCO CANADA, LTD., a corporation formed under the laws of the Province of Ontario (the "Canadian Borrower"); each of the lenders which is or may from time to time become a party hereto (individually, a "Lender" and, collectively, the "Lenders", which terms shall include U.S. Lenders and Canadian Lenders); CHASE BANK OF TEXAS, NATIONAL ASSOCIATION ("Chase Texas"), a national banking association, as agent for the U.S. Lenders (in such capacity, together with its successors in such capacity, the "U.S. Agent"), and THE BANK OF NOVA SCOTIA ("BNS"), as agent for the Canadian Lenders (in such capacity, together with its successors in such capacity, the "Canadian Agent"). The parties hereto agree as follows: 1. Definitions. 1.1 Certain Defined Terms. In this Agreement, terms defined above shall have the meanings ascribed to them above. Unless a particular term, word or phrase is otherwise defined or the context otherwise requires, capitalized terms, words and phrases used herein or in the Loan Documents (as hereinafter defined) have the following meanings (all definitions that are defined in this Agreement or in the Loan Documents in the singular have the same meanings when used in the plural and vice versa): Acceptance Fee means the fee payable in Canadian Dollars to each Canadian Lender in respect of the Bankers' Acceptances accepted by such Canadian Lender computed in accordance with Section 2.3(c). Accounts, Equipment, General Intangibles and Inventory shall have the respective meanings assigned to them in the Uniform Commercial Code enacted in the State of Texas as Sections 1 through 11 of the Texas Business and Commerce Code, in force on the Effective Date. Additional Collateral shall have the meaning ascribed to such term in Section 7.8 hereof. Additional Collateral Event shall have the meaning ascribed to such term in Section 7.8 hereof. Additional Interest means the aggregate of all amounts accrued or paid pursuant to the Notes or any of the other Loan Documents (other than interest on the Notes at the Stated Rate and any Acceptance Fee) which, under applicable laws, are or may be deemed to constitute interest on the indebtedness evidenced by the Notes or any other amounts owing under any Loan Document. 7 Adjusted LIBOR means, with respect to each Interest Period applicable to a LIBOR Borrowing, a rate per annum equal to the quotient, expressed as a percentage, of (a) LIBOR with respect to such Interest Period divided by (b) 1.0000 minus the Eurodollar Reserve Requirement in effect on the first day of such Interest Period. Affiliate means any Person controlling, controlled by or under common control with any other Person. For purposes of this definition, "control" (including "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 such Person, whether through the ownership of voting securities or otherwise. Agents means U.S. Agent and Canadian Agent, collectively. Agreement means this Loan Agreement, as it may from time to time be amended, modified, restated or supplemented. Annual Financial Statements means the annual financial statements of a Person, including all notes thereto, which statements shall include a balance sheet as of the end of the fiscal year relating thereto and an income statement and a statement of cash flows for such fiscal year, all setting forth in comparative form the corresponding figures from the previous fiscal year, all prepared in conformity with GAAP in all material respects, and accompanied by the opinion of independent certified public accountants of recognized national standing, which shall state that such financial statements present fairly in all material respects the financial position of such Person and, if such Person has any Subsidiaries, its consolidated Subsidiaries as of the date thereof and the results of its operations for the period covered thereby in conformity with GAAP. As to Borrowers only, Annual Financial Statements shall also include unaudited consolidating financial statements for the applicable Borrower and unaudited consolidated financial statements for the applicable Borrower and its Subsidiaries, each in Proper Form, certified in each case by the chief financial officer or other authorized officer of the applicable Borrower as presenting fairly in all material respects the consolidating or consolidated, as the case may be, financial position of the applicable Person. Annual Financial Statements for Canadian Borrower may be adjusted to conform with generally accepted Canadian accounting principles, consistently applied. Applicable BA Discount Rate means, as applicable to a Bankers' Acceptance being purchased by any Canadian Lender on any day, the percentage discount rate (expressed to two decimal places and rounded upward, if necessary, to the nearest 1/100th of 1%) quoted by the Canadian Agent as that at which the Canadian Agent would, in accordance with normal practice, at or about 12:00 noon (Toronto, Ontario time), on such day, be prepared to purchase Bankers' Acceptances in an amount and having a maturity date comparable to the amount and maturity date of such Bankers' Acceptances. Applicable Canadian Pension Legislation means, at any time, any federal or provincial pension legislation then applicable to the Canadian Borrower, including the Employment Pension 2 8 Plans Act (Alberta), the Pension Benefits Act (Ontario) and the Income Tax Act (Canada), including all regulations made thereunder, and all rules, regulations, rulings and interpretations made or issued by any Governmental Authority having or asserting jurisdiction in respect thereof. Applications means all applications and agreements for Letters of Credit, or similar instruments or agreements, in Proper Form, now or hereafter executed by any Person in connection with any Letter of Credit now or hereafter issued or to be issued under the terms hereof at the request of any Person. Assignment and Acceptance shall have the meaning ascribed to such term in Section 11.6(b). Availability Period means, for each Lender, the period from and including the Effective Date to (but not including) the Termination Date. BA Discount Proceeds means in respect of any Bankers' Acceptance being purchased by a Canadian Lender on any day under Section 2.3, an amount (rounded to the nearest whole Canadian cent, and with one-half of one Canadian cent being rounded up) calculated on such day by multiplying: (A) the face amount of such Bankers' Acceptance; by (B) the quotient equal to one divided by the sum of one plus the product of: (i) the Applicable BA Discount Rate (expressed as a decimal) applicable to such Bankers' Acceptance; and (ii) a fraction, the numerator of which is the number of days remaining in the term of such Bankers' Acceptance and the denominator of which is 365; with such quotient being rounded up or down to the nearest fifth decimal place and .000005 being rounded up. Bankers' Acceptance or BA means a bill of exchange denominated in Canadian Dollars drawn by the Canadian Borrower on and accepted by a Canadian Lender pursuant to Section 2.3 hereof. Bankers' Acceptance Liabilities means, at any time and in respect of any Bankers' Acceptance, the face amount thereof if still outstanding and unpaid or, following maturity and payment thereof, the aggregate unpaid amount of all Reimbursement Obligations at that time due and payable in respect of the payment of such Bankers' Acceptance upon maturity. Bankers' Acceptance Notice has the meaning specified in Section 2.3(a). 3 9 Bankruptcy Code means (i) the United States Bankruptcy Code, (ii) the Bankruptcy and Insolvency Act (Canada) and (iii) the Companies' Creditors Arrangement Act (Canada), as the same may be amended and together with any successor statutes. Base Rate means, for any day, a rate per annum equal to the lesser of (a) the then applicable Margin Percentage from time to time in effect plus the greater of (1) the applicable Prime Rate for that day and (2) the Federal Funds Rate for that day plus 1/2 of 1% or (b) the Ceiling Rate. If for any reason any applicable Agent shall have determined (which determination shall be conclusive and binding, absent manifest error) that it is unable to ascertain the Federal Funds Rate for any reason, including, without limitation, the inability or failure of Agent to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall, until the circumstances giving rise to such inability no longer exist, be the lesser of (a) the applicable Prime Rate plus the then applicable Margin Percentage from time to time in effect or (b) the Ceiling Rate. Base Rate Borrowing means that portion of the principal balance of the Loans at any time bearing interest at the Base Rate. Borrowed Money Indebtedness means, with respect to any Person, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments evidencing borrowed money, (iii) all obligations of such Person under conditional sale or other title retention agreements relating to Property purchased by such Person, (iv) all obligations of such Person issued or assumed as the deferred purchase price of Property or services (excluding obligations of such Person to creditors for raw materials, inventory, services and supplies and deferred payments for services to employees and former employees incurred in the ordinary course of such Person's business), (v) all lease obligations of such Person which have been capitalized on the balance sheet of such Person in accordance with GAAP, (vi) all obligations of others secured by any Lien on Property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, equal to the lesser of the amount of such obligation or the fair market value of such Property, (vii) Interest Rate Risk Indebtedness of such Person, (viii) all obligations of such Person in respect of outstanding letters of credit issued for the account of such Person or bankers' acceptances drawn by such Person and (ix) all guarantees of such Person. Borrowers means U.S. Borrower and Canadian Borrower, collectively. Borrowing Base Certificate shall mean a certificate, duly executed by the chief executive officer, chief financial officer, treasurer or controller of Borrowers, appropriately completed and in substantially the form of Exhibit I hereto. Each Borrowing Base Certificate shall be effective only as accepted by Agents (and with such revisions, if any, as Agents may reasonably require as a condition to such acceptance). Business Day means any day other than a day on which commercial banks are authorized or required to close in Houston, Texas or Toronto, Ontario. 4 10 Calculation Date means the last Business Day of each month. Canadian Borrowing Base means, as at any date, the amount of the Canadian Borrowing Base shown on the Borrowing Base Certificate then most recently delivered pursuant to Section 7.2(b) hereof, determined by calculating the amount equal to: (i) 80% of the aggregate amount of all Eligible Accounts of the Canadian Subsidiaries at said date, plus (ii) the sum of (x) 20% of that portion of Eligible Inventory of the Canadian Subsidiaries at said date (determined at the lower of cost or market on a consistent basis) which consists of used finished goods, (y) 25% of that portion of Eligible Inventory of the Canadian Subsidiaries at said date (determined at the lower of cost or market on a consistent basis) which consists of work-in-process relating to projects for customers that are not account debtors with respect to any Accounts owing to the Canadian Subsidiaries which are not Eligible Accounts and (z) 50% of the aggregate amount of all other Eligible Inventory of the Canadian Subsidiaries at said date (determined at the lower of cost or market on a consistent basis); provided that the amount calculated pursuant to this clause (ii) shall not -------- ----------- exceed 50% of the Canadian Borrowing Base. In the absence of a current Borrowing Base Certificate, Canadian Agent shall determine the Canadian Borrowing Base from time to time in its reasonable discretion, taking into account all information reasonably available to it, and the Canadian Borrowing Base from time to time so determined shall be the Borrowing Base for all purposes of this Agreement until a current Borrowing Base Certificate, in Proper Form, is furnished to and accepted by Canadian Agent. For purposes of calculating the Canadian Borrowing Base, all amounts or values expressed in Canadian Dollars shall be converted into Dollars at the Exchange Rate in effect as of the date of the applicable Borrowing Base Certificate. Canadian Commitment means, as to any Canadian Lender, the obligation, if any, of such Canadian Lender to make Canadian Revolving Loans, incur or participate in Letter of Credit Liabilities relating to Canadian Letters of Credit and accept and purchase Bankers' Acceptances in an aggregate principal amount at any one time outstanding up to (but not exceeding) the amount, if any, set forth opposite such Canadian Lender's name on the signature pages hereof under the caption "Canadian Commitment", or otherwise provided for in an Assignment and Acceptance Agreement (as the same may be increased or reduced from time to time pursuant to Section 2.4 hereof). Canadian Dollars or C$ means lawful money of Canada. Canadian Dollar Revolving Notes means the Notes of Canadian Borrower evidencing the Canadian Revolving Loans denominated in Canadian Dollars, in the form of Exhibit H hereto. 5 11 Canadian Lender means each lender party hereto with any Canadian Commitment or any outstanding Canadian Obligations. Canadian Letters of Credit has the meaning assigned to such term in Section 2.2 hereof. Canadian Obligations means, as at any date of determination thereof, the sum of the following (determined without duplication): (i) the aggregate principal amount of Canadian Revolving Loans outstanding hereunder on such date, plus (ii) the aggregate amount of the Bankers' Acceptance Liabilities outstanding on such date, plus (iii) the aggregate amount of Letter of Credit Liabilities outstanding on such date relating to Canadian Letters of Credit. For purposes of calculating the aggregate amount of Canadian Obligations, all amounts or values expressed in Canadian Dollars shall be converted into Dollars at the Exchange Rate in effect as of the date of determination. Canadian Prime Loans means Canadian Revolving Loans made pursuant to Section 2.1(b) hereof which are denominated in Canadian Dollars. Canadian Prime Rate means, on any day, as to Loans denominated in Canadian Dollars made to Canadian Borrower, the greater of (a) the annual rate of interest announced from time to time by BNS as its prime rate then in effect at its Principal Office, being the reference rate used by BNS for determining interest rates on commercial loans denominated in Canadian Dollars to borrowers in Canada, and (b) an annual rate of interest equal to the sum of (i) the CDOR Rate and (ii) 1.00% per annum. The Canadian Prime Rate is a reference rate and does not necessarily represent the lowest or best rate or a favored rate, and Chase Texas, BNS, each Agent and each Lender disclaims any statement, representation or warranty to the contrary. Chase Texas, BNS, any Agent or any Lender may make commercial loans or other loans at rates of interest at, above or below the Canadian Prime Rate. Canadian Revolving Loan means any revolving credit loan made pursuant to Section 2.1(b) hereof. Canadian Revolving Notes means the Notes of Canadian Borrower evidencing the Canadian Revolving Loans denominated in Dollars, in the form of Exhibit C hereto. Canadian Subsidiaries means Subsidiaries which are organized under the laws of the Dominion of Canada, a Province of the Dominion of Canada or any political subdivision thereof. Capital Expenditures means, with respect to any Person for any period, expenditures in respect of fixed or capital assets by such Person, including capital lease obligations incurred during such period (to the extent not already included), which would be reflected as additions to Property, plant or equipment on a balance sheet of such Person and its consolidated Subsidiaries, if any, prepared in accordance with GAAP; but excluding expenditures during such period for the repair or replacement of any fixed or capital asset which was destroyed, damaged or taken, in whole or in 6 12 part, to the extent financed by the proceeds of an insurance policy maintained by such Person or the proceeds of a condemnation award. CDOR Rate means, on any day, an annual rate of interest equal to the average 30 day rate applicable to Canadian bankers' acceptances appearing on the "Reuters Screen CDOR Page" on such day, or if such day is not a Business Day, then on the immediately preceding Business Day; provided, however, if such rate does not appear on the Reuters Screen CDOR Page as contemplated, then the CDOR Rate on any day shall be calculated as the arithmetic mean of the 30 day rates applicable to Canadian bankers' acceptances quoted by the Canadian Lenders which are listed in Schedule I to the Bank Act (Canada) as of 12:00 noon (Toronto, Ontario time) on such day, or if such day is not a Business Day, then on the immediately preceding Business Day. Ceiling Rate means, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable United States federal or Texas laws or, in the case of advances made in Canada by Canadian Lenders to Canadian Borrower, whichever of applicable Canada federal or Ontario laws (or the laws of any other jurisdiction whose usury laws are deemed to apply to the Notes or any other Loan Documents despite the intention and desire of the express choice of law provisions set forth herein) permits the higher interest rate, stated as a rate per annum. On each day, if any, that Chapter 1D establishes the Ceiling Rate, the Ceiling Rate shall be the "weekly ceiling" (as defined in Section 303 of the Texas Finance Code) for that day. U.S. Agent may from time to time, as to current and future balances, implement any other ceiling under the Texas Finance Code or Chapter 1D by notice to Borrowers, if and to the extent permitted by the Texas Finance Code or Chapter 1D. Without notice to Borrowers or any other Person, the Ceiling Rate shall automatically fluctuate upward and downward as and in the amount by which such maximum nonusurious rate of interest permitted by applicable law fluctuates. Chapter 1D means Chapter 1D of Title 79, Texas Rev. Civ. Stats. 1925, as amended. Code means the Internal Revenue Code of 1986, as amended, as now or hereafter in effect, together with all regulations, rulings and interpretations thereof or thereunder by the Internal Revenue Service. Collateral means all Property, tangible or intangible, real, personal or mixed, now or hereafter subject to the Liens created pursuant to any of the Security Documents. Commitment Fee Percentage means (i) on any day prior to October 1, 1998, 0.50% per annum and (ii) on and after October 1, 1998, the applicable per annum percentage set forth at the appropriate intersection in the table shown below, based on the Debt to Capitalization Ratio as of the last day of the most recently ended fiscal quarter of U.S. Borrower calculated by U.S. Agent as soon as practicable after receipt by U.S. Agent of all financial reports required under this Agreement with respect to such fiscal quarter (including a Compliance Certificate) (provided, however, that if the Commitment Fee Percentage is increased as a result of the reported Debt to Capitalization Ratio, such increase shall be retroactive to the date that U.S. Borrower was obligated to deliver such 7 13 financial reports to U.S. Agent pursuant to the terms of this Agreement and provided further, however, that if the Commitment Fee Percentage is decreased as a result of the reported Debt to Capitalization Ratio, and such financial reports are delivered to U.S. Agent not more than ten (10) calendar days after the date required to be delivered pursuant to the terms of this Agreement, such decrease shall be retroactive to the date that U.S. Borrower was obligated to deliver such financial reports to U.S. Agent pursuant to the terms of this Agreement):
Debt to Commitment Capitalization Ratio Fee Percentage -------------------- -------------- Greater than or equal to 50% 0.50 Greater than or equal to 40% but less than 50% 0.40 Greater than or equal to 30% but less than 40% 0.30 Less than 30% 0.25
Commitment Percentage means, as to any Lender, the percentage equivalent of a fraction the numerator of which is the amount of such Lender's U.S. Commitment or Canadian Commitment, as the case may be, and the denominator of which is the aggregate amount of the U.S. Commitments or Canadian Commitments, as the case may be, of all Lenders. Compliance Certificate shall have the meaning given to it in Section 7.2(c) hereof. Contribution Agreements means those certain Contribution Agreements dated concurrently herewith executed by and among, respectively, (i) U.S. Borrower and the Guarantors in respect of the U.S. Obligations and (ii) Canadian Borrower and the Guarantors in respect of the Canadian Obligations, as they may from time to time be amended, modified, restated or supplemented. Controlled Group means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with any Borrower, are treated as a single employer under Section 414 of the Code or under Applicable Canadian Pension Legislation. Corporation means any corporation, limited liability company, partnership, joint venture, joint stock association, business trust and other business entity. Cover for Letter of Credit Liabilities or any Bankers' Acceptance Liabilities shall be effected by paying to U.S. Agent or Canadian Agent, as the case may be, immediately available funds, to be held by U.S. Agent or Canadian Agent, as the case may be, in a collateral account maintained by 8 14 U.S. Agent or Canadian Agent, as the case may be, at its Principal Office and collaterally assigned to U.S. Agent or Canadian Agent, as the case may be, as security for the applicable Obligations using documentation reasonably satisfactory to U.S. Agent or Canadian Agent, as the case may be, in the amount required by any applicable provision hereof. Such amount shall be retained by U.S. Agent or Canadian Agent, as the case may be, in such collateral account until such time as the applicable Letter of Credit shall have expired and the Reimbursement Obligations, if any, with respect thereto shall have been fully satisfied or the applicable Bankers' Acceptance shall have matured and the related Bankers' Acceptance Liabilities shall have been fully satisfied; provided, however, that at such time if a Default or Event of Default has occurred and is continuing, U.S. Agent or Canadian Agent, as the case may be, shall not be required to release such amount in such collateral account from the time of such collateral assignment until such Default or Event of Default shall have been cured or waived. Currency Exchange Risk Indebtedness means all obligations and indebtedness of U.S. Borrower with respect to the program for the hedging of currency exchange risk provided for in any program entered into by U.S. Borrower for the purpose of reducing U.S. Borrower's and its Subsidiaries' exposure to currency exchange fluctuations and not for speculative purposes, approved in writing by U.S. Agent (such approval not to be unreasonably withheld), as it may from time to time be amended, modified, restated or supplemented. Debt Service means, with respect to any Person for any period, the sum of (i) Interest Expense for such period and (ii) scheduled principal payments on obligations included within Borrowed Money Indebtedness for such period. Debt to Capitalization Ratio means, as of any day, the ratio, expressed as a percentage, of (a) Borrowed Money Indebtedness of U.S. Borrower and its Subsidiaries, on a consolidated basis, as of such date (exclusive of the categories of Borrowed Money Indebtedness, other than obligations in respect of bankers' acceptances, described in clauses (vii), (viii) and (ix) of the definition of "Borrowed Money Indebtedness" set forth in this Section 1.1) to (b) Total Capitalization as of such date. Default means an Event of Default or an event which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. Dollars, US$ and $ means lawful money of the United States of America. Dual Lender means any Lender which has both a U.S. Commitment and a Canadian Commitment. EBITDA means, without duplication, for any period the consolidated net earnings (excluding any extraordinary gains or losses) of U.S. Borrower and its Subsidiaries, on a consolidated basis, plus, to the extent deducted in calculating consolidated net income, depreciation, amortization, other non-cash items, Interest Expense, federal, state and provincial income tax expense and non-operating 9 15 and medical retiree expenses of U.S. Borrower and minus, to the extent added in calculating consolidated net income, any non-cash items. Eligible Accounts shall mean, as at any date of determination thereof, each Account of a Person which is subject to a Lien created by any Security Document and on which U.S. Agent (as to U.S. Borrower or any of its Subsidiaries (other than Canadian Subsidiaries)) or Canadian Agent (as to any Canadian Subsidiary) shall have a first-priority perfected Lien (subject only to Permitted Liens) which is at said date payable to such Person and which complies with the following requirements: (a) (i) the subject goods have been sold to an account debtor on an absolute sale basis on open account and not on consignment, on approval or on a "sale or return" basis or subject to any other repurchase or return agreement and no material part of the subject goods has been returned, rejected, lost or damaged (provided that the foregoing shall not disqualify accounts arising from goods sold with usual and customary sales warranties or having warranty claims which are not material), (ii) the Account is stated to be payable in Dollars (as to any Eligible Accounts owned by U.S. Borrower or any of its Subsidiaries (other than Canadian Subsidiaries)) or Canadian Dollars (as to any Canadian Subsidiary) and is not evidenced by chattel paper or an instrument of any kind (unless the applicable Agent has a perfected first priority Lien (subject only to Permitted Liens) on such chattel paper or instrument) and said account debtor is not insolvent or the subject of any bankruptcy or insolvency proceedings of any kind unless the applicable Person has received a letter of credit, bond or other financial guarantee in an amount equal to or greater than such Account issued by a Qualified Institution and otherwise in form and substance satisfactory to Agents; (b) the account debtor must be located in the United States (as to any Eligible Accounts owned by U.S. Borrower or any of its Subsidiaries (other than Canadian Subsidiaries)) or in the United States or Canada (as to any Canadian Subsidiary), except for (x) Accounts as to which the applicable Person has received a letter of credit, bond or other financial guarantee in an amount equal to or greater than such Account issued by a Qualified Institution and otherwise in form and substance satisfactory to Agents and (y) other Accounts approved in writing by Agents; (c) it is a valid obligation of the account debtor thereunder and is not subject to any offset or other defense on the part of such account debtor or to any claim on the part of such account debtor denying liability thereunder (provided that the foregoing shall not disqualify accounts arising from goods sold with usual and customary sales warranties or having warranty claims which are not material); (d) it is subject to no Lien whatsoever, except for the Liens created or permitted pursuant to the Loan Documents; (e) it is evidenced by an invoice submitted to the account debtor in timely fashion and in the normal course of business; (f) it has not remained unpaid beyond 90 days after the date of the invoice (provided, however, that the limitation set forth in this clause shall not apply to UPRC Receivables); (g) it does not arise out of transactions with an employee, officer, agent, director or stockholder of the applicable Person or any Affiliate of such Person; (h) not more than 20% (or such higher percentage as Agents may approve in writing for any particular account debtor) of the other Accounts of the applicable account debtor or any of its Affiliates fail to satisfy all of the requirements of an "Eligible Account"; (i) inclusion of the applicable Account does not cause the total Eligible Accounts with respect to the applicable account debtor and its Affiliates, in the aggregate, to exceed 10% of the total Eligible Accounts (provided, however, that the limitation set forth in this clause shall not apply to Investment Grade Account Debtors or to UPRC Receivables), and (j) each of the representations and warranties set 10 16 forth in the Security Documents executed by the applicable Person with respect thereto is true and correct in all material respects on such date. In the event of any dispute under the foregoing criteria, about whether an Account is or has ceased to be an Eligible Account, the decision of Agents, made in good faith, shall be conclusive and binding, absent manifest error. Eligible Inventory shall mean, as at any date of determination thereof, Inventory of a Person which is subject to a Lien created by any Security Documents and on which U.S. Agent (as to U.S. Borrower or any of its Subsidiaries (other than Canadian Subsidiaries)) or Canadian Agent (as to any Canadian Subsidiary) shall have a first-priority perfected Lien (subject only to Permitted Liens) and which complies with the following requirements: (a) such Inventory shall be valued in accordance with GAAP and consist of (i) eligible raw materials, (ii) work-in-process and (iii) finished goods, provided that all such Inventory shall be within the United States of America (as to U.S. Borrower or any of its Subsidiaries (other than Canadian Subsidiaries)) or in the United States of America or Canada (as to any Canadian Subsidiary); (b) it is in good condition, meets all standards imposed by any Governmental Authority having regulatory authority over it, its use and/or sale and is either currently usable or currently salable in the normal course of business of the applicable Person; (c) it is not in the possession or control of any warehouseman, bailee, or any agent or processor for or customer of the applicable Person or, if it is, (i) the applicable Person shall have notified, in a manner that effectively under applicable law creates a valid and first priority Lien in favor of the applicable Agent in such Inventory, such warehouseman, bailee, agent, processor or customer of the applicable Agent's Lien and (ii) such warehouseman, bailee, agent, processor or customer has subordinated any Lien it may claim therein and agreed to hold all such Inventory during the continuance of an Event of Default for the applicable Agent's account subject to the applicable Agent's instructions, and (d) each of the representations and warranties set forth in the Security Documents executed by the applicable Person with respect thereto is true and correct in all material respects on such date. In the event of any dispute under the foregoing criteria, about whether a portion of Inventory is or has ceased to be Eligible Inventory, the decision of Agents, made in good faith, shall be conclusive and binding, absent manifest error. Environmental Claim means any third party (including Governmental Authorities and employees) action, lawsuit, claim or proceeding (including claims or proceedings at common law or under the Occupational Safety and Health Act or similar laws relating to safety of employees) which seeks to impose liability for (i) noise; (ii) pollution, contamination, protection or clean-up of the air, surface water, ground water or land; (iii) solid, gaseous or liquid waste generation, handling, treatment, storage, disposal or transportation; (iv) exposure to Hazardous Substances; (v) the safety or health of employees or (vi) the manufacture, processing, distribution in commerce, use, discharge or storage of Hazardous Substances. An "Environmental Claim" includes, but is not limited to, a common law action, as well as a proceeding to issue, modify or terminate an Environmental Permit to the extent that such a proceeding attempts to redress violations of an applicable permit, license, or regulation as alleged by any Governmental Authority. Environmental Liabilities means all liabilities arising from any Environmental Claim, Environmental Permit or Requirements of Environmental Law under any theory of recovery, at law 11 17 or in equity, and whether based on negligence, strict liability or otherwise, including but not limited to remedial, removal, response, abatement, investigative, monitoring, personal injury and damage to Property or injuries to persons, and any other related costs, expenses, losses, damages, penalties, fines, liabilities and obligations, and all costs and expenses necessary to cause the issuance, reissuance or renewal of any Environmental Permit including reasonable attorneys' fees and court costs. Environmental Permit means any permit, license, approval or other authorization under any applicable Legal Requirement relating to pollution or protection of health or the environment, including laws, regulations or other requirements relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous substances or toxic materials or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants or Hazardous Substances. ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, and all rules, regulations, rulings and interpretations adopted by the Internal Revenue Service or the U.S. Department of Labor thereunder and, as the context may require, Applicable Canadian Pension Legislation. Eurodollar Rate means for any day during an Interest Period for a LIBOR Borrowing a rate per annum equal to the lesser of (a) the sum of (1) the Adjusted LIBOR in effect on the first day of such Interest Period plus (2) the applicable Margin Percentage from time to time in effect and (b) the Ceiling Rate. Each Eurodollar Rate is subject to adjustments for reserves, insurance assessments and other matters as provided for in Sections 3.3 and 11.17 hereof. Eurodollar Reserve Requirement means, on any day, that percentage (expressed as a decimal fraction and rounded, if necessary, to the next highest one ten thousandth [.0001]) which is in effect on such day for determining all reserve requirements (including, without limitation, basic, supplemental, marginal and emergency reserves) applicable to "Eurocurrency liabilities," as currently defined in Regulation D. Each determination of the Eurodollar Reserve Requirement by any Agent shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. Event of Default shall have the meaning assigned to it in Section 9.1 hereof. Excess Cash Flow means, without duplication, for any period, (i) EBITDA for such period less (ii) the sum of the principal component of all Debt Service of U.S. Borrower and its Subsidiaries (other than mandatory prepayments of the Term Loans calculated on the basis of Excess Cash Flow), cash Interest Expense of U.S. Borrower and its Subsidiaries, voluntary prepayments of all Borrowed Money Indebtedness of U.S. Borrower and its Subsidiaries, federal, state and provincial income taxes allocated to U.S. Borrower and its Subsidiaries, Permitted Dividends (exclusive of dividends 12 18 described in clause (iii)(5) of the definition of "Permitted Dividends") and Capital Expenditures of U.S. Borrower and its Subsidiaries for such period. Excess Cash Flow Percentage means (i) 75% at all such times as the aggregate payments made pursuant to Section 3.2(b)(2) hereof is less than or equal to the aggregate amount of the dividends made pursuant to clause (iii)(2) of the definition of "Permitted Dividends" set forth in this Section 1 and (ii) 50% at all other times. Exchange Rate means, on any day, (a) with respect to Canadian Dollars in relation to Dollars, the spot rate as quoted by the Bank of Canada as its noon spot rate at which Dollars are offered on such day for Canadian Dollars, and (b) with respect to Dollars in relation to Canadian Dollars, the spot rate as quoted by The Bank of Canada as its noon spot rate at which Canadian Dollars are offered on such day for Dollars. EXIM Facility means that certain International Revolving Loan Agreement dated June 30, 1997 executed by and between U.S. Borrower and Chase Texas and the other security documents contemplated thereby (as the foregoing may be amended from time to time). Federal Funds Rate means, for any day, a fluctuating interest rate per annum equal for such day to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any such day which is a Business Day, the average of the quotations for such day on such transactions received by U.S. Agent from three Federal funds brokers of recognized standing selected by U.S. Agent in its sole and absolute discretion. Financing Statements means all such Uniform Commercial Code or Canadian provincial personal Property security financing statements as any Agent shall reasonably require, in Proper Form, duly executed by the applicable Borrower (or any other applicable Obligor) to give notice of and to perfect or continue perfection of the applicable Agent's Liens in any applicable Collateral, as any of the foregoing may from time to time be amended, modified, supplemented or restated. Fixed Charge Coverage Ratio means, as of any day, the ratio, expressed as a percentage, of (a) Pro Forma EBITDA for the 12 months ending on such day less the current portion of federal, state and provincial income tax expense recognized during such 12-month period to (b) the sum of (1) the principal component of Debt Service for such 12-month period plus (2) cash Interest Expense for such 12-month period paid by U.S. Borrower and its Subsidiaries for such 12-month period plus (3) Permitted Dividends by U.S. Borrower or by any Subsidiary of U.S. Borrower to any Person other than U.S. Borrower (or a wholly-owned Subsidiary of U.S. Borrower) for such 12-month period plus (4) actual Capital Expenditures paid by U.S. Borrower and its Subsidiaries for such 12- month period plus (5) for any day during the fiscal year 1999 and only if Borrower shall have paid Permitted Dividends pursuant to clause (2) of the definition of "Permitted Dividends", the amount by which $3,000,000 exceeds actual Capital Expenditures paid by U.S. Borrower and its Subsidiaries 13 19 for such 12-month period plus (6) for any day after the fiscal year 1999 and only if Borrower shall have paid Permitted Dividends pursuant to clause (2) of the definition of "Permitted Dividends", the amount by which $1,000,000 exceeds actual Capital Expenditures paid by U.S. Borrower and its Subsidiaries for such 12-month period. Foreign Subsidiaries means Subsidiaries which are organized under the laws of a jurisdiction other than the United States of America, any State of the United States or any political subdivision thereof. Funding Loss means, with respect to (a) any Borrower's payment of principal of a LIBOR Borrowing on a day other than the last day of the applicable Interest Period; (b) any Borrower's failure to borrow a LIBOR Borrowing or to borrow funds by way of Bankers' Acceptances on the date specified by such Borrower; (c) any Borrower's failure to make any prepayment of the Loans (other than Base Rate Borrowings and Canadian Prime Loans) on the date specified by such Borrower, or (d) any cessation of a Eurodollar Rate to apply to the Loans or any part thereof pursuant to Section 3.3, in each case whether voluntary or involuntary, any loss, expense, penalty, premium or liability actually incurred by any Lender (including but not limited to any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain a Loan). GAAP means, as to a particular Person, such United States accounting practice as, in the opinion of independent certified public accountants of recognized national standing regularly retained by such Person, conforms at the time to generally accepted accounting principles, consistently applied for all periods after the Effective Date so as to present fairly the financial condition, and results of operations and cash flows, of such Person. If any change in any accounting principle or practice is required by the Financial Accounting Standards Board, all reports and financial statements required hereunder may be prepared in accordance with such change so long as the applicable Person provides to Agents such disclosures of the impact of such change as any Agent may reasonably require. No such change in any accounting principle or practice shall, in itself, cause a Default or Event of Default hereunder (but Borrowers, Agents and Lenders shall negotiate in good faith to replace any financial covenants hereunder to the extent such financial covenants are affected by such change in accounting principle or practice). Governmental Authority means any governmental authority of the United States of America, Canada, any State of the United States, any Province of Canada, or of any other foreign jurisdiction and any political subdivision of any of the foregoing, and any central bank, agency, department, commission, board, bureau, court or other tribunal having or asserting jurisdiction over any Agent, any Lender, any Obligor or their respective Property. Group means NATCO Group Inc., a Delaware corporation. Guaranties means, collectively, (i) the Guaranties dated concurrently herewith executed by Group and each Subsidiary of U.S. Borrower (other than Foreign Subsidiaries) in favor of U.S. 14 20 Agent, for the benefit of U.S. Lenders, (ii) the Guaranties dated concurrently herewith executed by U.S. Borrower, Group and each Subsidiary of U.S. Borrower (other than Foreign Subsidiaries) in favor of Canadian Agent, for the benefit of Canadian Lenders and (iii) any and all other guaranties hereafter executed in favor of any Agent, for the benefit of U.S. Lenders or Canadian Lenders, relating to the Obligations, as any of them may from time to time be amended, modified, restated or supplemented. Hazardous Substance means petroleum products, and any hazardous or toxic waste or substance defined or regulated as such from time to time by any law, rule, regulation or order described in the definition of "Requirements of Environmental Law". Interest Expense means, for any period, total interest expense accruing on Borrowed Money Indebtedness of U.S. Borrower and its Subsidiaries during such period (including interest expense attributable to capitalized leases and net costs under interest rate swap, collar, cap or similar agreements providing interest rate protection), determined in accordance with GAAP. Interest Options means the Base Rate, each Eurodollar Rate and, as to the Canadian Dollar Revolving Notes only, the Canadian Prime Rate, and "Interest Option" means any of them. Interest Payment Dates means (a) for Base Rate Borrowings and for Canadian Prime Loans, September 30, 1998 and the last day of each March, June, September and December thereafter prior to the Revolving Loan Maturity Date or the Term Loan Maturity Date, as the case may be, and the Revolving Loan Maturity Date or the Term Loan Maturity Date, as the case may be; and (b) for LIBOR Borrowings, the end of the applicable Interest Period (and if such Interest Period exceeds three months' duration, quarterly, commencing on the first quarterly anniversary of the first day of such Interest Period) and the Revolving Loan Maturity Date or the Term Loan Maturity Date, as the case may be. Interest Period means, for each LIBOR Borrowing, a period commencing on the date such LIBOR Borrowing began and ending on the numerically corresponding day which is, subject to availability as set forth in Section 3.3(c)(iii), 1, 2, 3 or 6 months thereafter, as any Borrower shall elect in accordance herewith; provided, (1) unless Agents shall otherwise consent, no Interest Period with respect to a LIBOR Borrowing shall commence on a date earlier than three (3) Business Days after this Agreement shall have been fully executed; (2) any Interest Period with respect to a LIBOR Borrowing which would otherwise end on a day which is not a LIBOR Business Day shall be extended to the next succeeding LIBOR Business Day, unless such LIBOR Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding LIBOR Business Day; (3) any Interest Period with respect to a LIBOR Borrowing which begins on the last LIBOR Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last LIBOR Business Day of the appropriate calendar month; (4) no Interest Period for a Revolving Loan shall ever extend beyond the Revolving Loan Maturity Date and no Interest Period for an Term Loan shall ever extend beyond the Term Loan Maturity Date, and (5) Interest Periods shall be selected by 15 21 each Borrower in such a manner that the Interest Period with respect to any portion of the Loans which shall become due shall not extend beyond such due date. Interest Rate Risk Agreement means an interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or similar arrangement entered into by U.S. Borrower for the purpose of reducing U.S. Borrower's and its Subsidiaries' exposure to interest rate fluctuations and not for speculative purposes, approved in writing by U.S. Agent (such approval not to be unreasonably withheld), as it may from time to time be amended, modified, restated or supplemented. Interest Rate Risk Indebtedness means all obligations and indebtedness of U.S. Borrower with respect to the program for the hedging of interest rate risk provided for in any Interest Rate Risk Agreement. Investment means the purchase or other acquisition of any securities or indebtedness of, or the making of any loan, advance, transfer of Property (other than transfers in the ordinary course of business) or capital contribution to, or the incurring of any liability (other than trade accounts payable arising in the ordinary course of business), contingently or otherwise, in respect of the indebtedness of, any Person. Issuer means the issuer (or, where applicable, each issuer) of a Letter of Credit under this Agreement. Investment Grade Account Debtors means account debtors which are rated A- or better by Standard & Poor's Ratings Services and A-3 or better by Moody's Investors Service, Inc. Key Agreements means the Purchase Agreement, the EXIM Facility and any document or paper evidencing, securing or otherwise relating to any Subordinated Indebtedness. Legal Requirement means any law, statute, ordinance, decree, requirement, order, judgment, rule, or regulation (or interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, whether presently existing or arising in the future. Letter of Credit Fee Percentage means (x) with respect to commercial Letters of Credit, the Margin Percentage from time to time applicable with respect to LIBOR Borrowings and (y) with respect to standby Letters of Credit (i) on any day prior to October 1, 1998, 1.75% and (ii) on and after October 1, 1998, the applicable per annum percentage set forth at the appropriate intersection in the table shown below, based on the Debt to Capitalization Ratio as of the last day of the most recently ended fiscal quarter of U.S. Borrower calculated by U.S. Agent as soon as practicable after receipt by U.S. Agent of all financial reports required under this Agreement with respect to such fiscal quarter (including a Compliance Certificate) (provided, however, that if the Letter of Credit Fee Percentage is increased as a result of the reported Debt to Capitalization Ratio, such increase shall be retroactive to the date that U.S. Borrower was obligated to deliver such financial reports to 16 22 U.S. Agent pursuant to the terms of this Agreement and provided further, however, that if the Letter of Credit Fee Percentage is decreased as a result of the reported Debt to Capitalization Ratio, and such financial reports are delivered to U.S. Agent not more than ten (10) calendar days after the date required to be delivered pursuant to the terms of this Agreement, such decrease shall be retroactive to the date that U.S. Borrower was obligated to deliver such financial reports to U.S. Agent pursuant to the terms of this Agreement):
Debt to Letter of Credit Capitalization Ratio Fee Percentage -------------------- ---------------- Greater than or equal to 40% 1.75 Greater than or equal to 30% but less than 40% 1.50 Greater than or equal to 20% but less than 30% 1.25 Less than 20% 1.00
Letter of Credit Liabilities means, at any time and in respect of any Letter of Credit, the sum of (i) the amount available for drawings under such Letter of Credit plus (ii) the aggregate unpaid amount of all Reimbursement Obligations at the time due and payable in respect of previous drawings made under such Letter of Credit. For the purpose of determining at any time the amount described in clause (i), in the case of any Letter of Credit payable in a currency other than Dollars or Canadian Dollars, such amount shall be converted by Agent to Dollars by any reasonable method, and such converted amount shall be conclusive and binding, absent manifest error. For purposes of calculating the aggregate amount of Letter of Credit Liabilities, all amounts or values expressed in Canadian Dollars shall be converted into Dollars at the Exchange Rate in effect as of the date of calculation. Letters of Credit means the U.S. Letters of Credit and the Canadian Letters of Credit. LIBOR means, for each Interest Period for any LIBOR Borrowing, the rate per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) equal to the average of the offered quotations appearing on Telerate Page 3750 (or if such Telerate Page shall not be available, any successor or similar service as may be selected by Agents and Borrowers) as of 11:00 a.m., Houston, Texas time (in respect of a LIBOR Borrowing relating to the U.S. Loans) or 12:00 noon, Toronto, Ontario time (in respect of a LIBOR Borrowing relating to the Canadian Revolving Loans) (or, in either case, as soon thereafter as practicable) on the day two LIBOR Business Days prior to the first day of such Interest Period for deposits in Dollars having a term comparable to such Interest Period and in an amount comparable to the principal amount of the LIBOR Borrowing to which such Interest Period relates. If none of such Telerate Page 3750 nor any successor or similar service is 17 23 available, then "LIBOR" shall mean, with respect to any Interest Period for any applicable LIBOR Borrowing, the rate of interest per annum, rounded upwards, if necessary, to the nearest 1/16th of 1%, quoted by U.S. Agent at or before 11:00 a.m., Houston, Texas time (in respect of a LIBOR Borrowing relating to the U.S. Loans) or 12:00 noon, Toronto, Ontario time (in respect of a LIBOR Borrowing relating to the Canadian Revolving Loans) (or, in either case, as soon thereafter as practicable), on the date two LIBOR Business Days before the first day of such Interest Period, to be the arithmetic average of the prevailing rates per annum at the time of determination and in accordance with the then existing practice in the applicable market, for the offering to U.S. Agent or Canadian Agent, as the case may be, by one or more prime banks selected by such Agent in its sole discretion, in the London interbank market, of deposits in Dollars for delivery on the first day of such Interest Period and having a maturity equal (or as nearly equal as may be) to the length of such Interest Period and in an amount equal (or as nearly equal as may be) to the LIBOR Borrowing to which such Interest Period relates. Each determination by any Agent of LIBOR shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. LIBOR Borrowing means each portion of the principal balance of the Loans at any time bearing interest at a Eurodollar Rate. LIBOR Business Day means a Business Day on which transactions in Dollar deposits between lenders may be carried on in the London interbank market. Lien means any mortgage, pledge, charge, encumbrance, security interest, collateral assignment or other lien or restriction of any kind, whether based on common law, constitutional provision, statute or contract, and shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions and other title exceptions. Loans means the U.S. Revolving Loans, the Canadian Revolving Loans and the Term Loans provided for by Section 2.1 hereof. Loan Documents means, collectively, this Agreement, the Notes, the Bankers' Acceptances, the Bankers' Acceptance Notices, the Guaranties, the Contribution Agreements, all Applications, the Security Documents, the Notice of Entire Agreement, all instruments, certificates and agreements now or hereafter executed or delivered by any Obligor to any Agent or any Lender pursuant to any of the foregoing or in connection with the Obligations or any commitment regarding the Obligations, and all amendments, modifications, renewals, extensions, increases and rearrangements of, and substitutions for, any of the foregoing. Majority Lenders means, at any time while no Obligations are outstanding, Lenders having greater than 66-2/3% of the aggregate amount of U.S. Commitments and the Canadian Commitments, and at any time while Obligations are outstanding, Lenders having greater than 66-2/3% of the sum of outstanding Term Loans plus U.S. Commitments plus Canadian Commitments; provided that if all U.S. Commitments and Canadian Commitments have terminated, the Majority 18 24 Lenders shall be Lenders having greater than 66-2/3% of the aggregate amount of all Obligations outstanding. Margin Percentage means (i) on any day prior to October 1, 1998, 1.00% per annum with respect to Base Rate Borrowings and Canadian Prime Loans and 2.50% per annum with respect to LIBOR Borrowings and (ii) on and after October 1, 1998, the applicable per annum percentage set forth at the appropriate intersection in the table shown below, based on the Debt to Capitalization Ratio as of the last day of the then most recently ended fiscal quarter of U.S. Borrower calculated by U.S. Agent as soon as practicable after receipt by U.S. Agent of all financial reports required under this Agreement with respect to such fiscal quarter (including a Compliance Certificate) (provided, however, that if the Margin Percentage is increased as a result of the reported Debt to Capitalization Ratio, such increase shall be retroactive to the date that U.S. Borrower was obligated to deliver such financial reports to U.S. Agent pursuant to the terms of this Agreement and provided further, however, that if the Margin Percentage is decreased as a result of the reported Debt to Capitalization Ratio, and such financial reports are delivered to U.S. Agent not more than ten (10) calendar days after the date required to be delivered pursuant to the terms of this Agreement, such decrease shall be retroactive to the date that U.S. Borrower was obligated to deliver such financial reports to U.S. Agent pursuant to the terms of this Agreement):
Canadian Prime Loans/ Debt to LIBOR Borrowings Base Rate Borrowings Capitalization Ratio Margin Percentage Margin Percentage -------------------- ----------------- ----------------- Greater than or equal to 50% 2.50 1.00 Greater than or equal to 40% but less than 50% 2.00 0.50 Greater than or equal to 30% but less than 40% 1.50 0.0 Greater than or equal to 20% but less than 30% 1.25 0.0 Less than 20% 1.00 0.0
Material Adverse Effect means any material and adverse effect on the ability of an Obligor to perform its obligations under any Loan Document to which it is a party or on the business, condition (financial or otherwise), results of operations, assets, liabilities or prospects of (i) U.S. Borrower and its Subsidiaries on a consolidated basis, or (ii) Group. Maximum Canadian Available Amount means, at any date, an amount equal to the lesser of (i) $10,000,000 or (ii) the then effective Canadian Borrowing Base. In connection with the 19 25 application of any provision hereof using the term "Maximum Canadian Available Amount", any amounts denominated in Canadian Dollars shall be converted to Dollars using the then current Exchange Rate. The Maximum Canadian Available Amount is subject to change pursuant to Section 2.4(c) hereof. Maximum U.S. Available Amount means, at any date, an amount equal to the lesser of (i) $22,000,000 or (ii) the then effective U.S. Borrowing Base. The Maximum U.S. Available Amount is subject to change pursuant to Section 2.4(c) hereof. Net Equity Proceeds means, for any period, (i) the net proceeds realized from the issuance of any equity securities by U.S. Borrower during such period minus (ii) the aggregate amount of any dividends paid by U.S. Borrower pursuant to clause (iii)(3) of the definition of "Permitted Dividends" during such period. Net Worth means, with respect to U.S. Borrower and its Subsidiaries, the sum of preferred stock (if any), par value of common stock, capital in excess of par value of common stock, retained earnings and Subordinated Indebtedness. Notes shall have the meaning assigned to such term in Section 2.7 hereof. Notice of Entire Agreement means a notice of entire agreement, in Proper Form, executed by Borrowers, each other Obligor and Agents, as the same may from time to time be amended, modified, supplemented or restated. Obligations means, as at any date of determination thereof, the sum of the following: (i) the aggregate principal amount of Loans outstanding hereunder on such date, plus (ii) the aggregate amount of the outstanding Letter of Credit Liabilities on such date, plus (iii) the aggregate amount of outstanding Bankers' Acceptance Liabilities on such date, plus (iv) all other outstanding liabilities, obligations and indebtedness of any Obligor under any Loan Document on such date. For purposes of calculating the aggregate amount of Obligations, all amounts or values expressed in Canadian Dollars shall be converted into Dollars at the Exchange Rate in effect as of the date of determination. Obligors means each Borrower, Group and each Person now or hereafter executing a Guaranty and/or a Security Agreement. Organizational Documents means, with respect to a United States corporation, the certificate of incorporation, articles of incorporation and bylaws of such corporation; with respect to a partnership, the partnership agreement establishing such partnership; with respect to a trust, the instrument establishing such trust and with respect to any other Person, the agreements or instruments pursuant to which such Person was formed and by which such Person is governed; in each case including any and all modifications thereof as of the date of the Loan Document referring to such Organizational Document and any and all future modifications thereof. 20 26 Past Due Rate means, on any day, a rate per annum equal to the lesser of (i) the Ceiling Rate for that day or (ii) the applicable Base Rate or Canadian Prime Rate, as the case may be, plus the Margin Percentage for Base Rate Borrowings then in effect plus three percent (3%). PBGC means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA and any pension commission or similar body or fund constituted under any Applicable Canadian Pension Legislation. Permitted Dividends means (i) dividends or distributions by a Subsidiary of U.S. Borrower to U.S. Borrower or any other Subsidiary (other than a Foreign Subsidiary) of U.S. Borrower and dividends or distributions by any Foreign Subsidiary of U.S. Borrower to any other Foreign Subsidiary of U.S. Borrower, (ii) stock dividends, (iii) so long as no Default or Event of Default shall have occurred and be continuing (or would result therefrom), (1) dividends paid by U.S. Borrower to its shareholders, to be applied to corporate expenses of Group and Group's cash portion of retiree medical expenses, in aggregate amounts not to exceed $1,500,000 for the fiscal year ending December 31, 1998, $2,000,000 for the fiscal year 1999, and $2,200,000 for the fiscal year 2000 and each fiscal year thereafter, (2) dividends paid by U.S. Borrower to its shareholders, to be applied to that portion of the purchase price payable in connection with the Puts, provided that dividends paid under this clause 2 shall not exceed (x) $9,500,000 in the aggregate from and after June 30, 2000 through and including December 31, 2000 or (y) $8,500,000 in the aggregate from and after January 1, 2001 through and including December 31, 2001, (3) dividends paid by U.S. Borrower to its shareholders, to be applied to the purchase price payable in connection with the Puts, in an aggregate amount not to exceed the lesser of (x) aggregate purchase costs payable in connection with the Puts and (y) Net Equity Proceeds received by U.S. Borrower after the Effective Date, (4) dividends paid by U.S. Borrower to its shareholders, to be applied to the purchase of shares of Group pursuant to the Winokur Option, so long as the Winokur Option shall have been assigned by U.S. Borrower to its shareholders and the proceeds paid in connection with such purchase are concurrently applied to the payment of the Winokur Note Receivable, and (5) so long as the payment required under Section 3.2(b)(2) hereof for such fiscal year (based on Excess Cash Flow for the preceding fiscal year) shall have been paid, dividends paid by U.S. Borrower to its shareholders for the fiscal year 2001 and in each fiscal year thereafter in an aggregate amount not to exceed fifty percent (50%) of Excess Cash Flow for the preceding fiscal year. Dividends permitted under any of clauses (iii)(1), (2). (3), (4) and (5) above are each cumulative of dividends permitted under any other of such clauses. Permitted Investments means: (a) readily marketable securities issued or fully guaranteed by the full faith and credit of the United States of America or of Canada with maturities of not more than one year; (b) commercial paper rated "Prime 1" by Moody's Investors Service, Inc. or "A-1" by Standard and Poor's Ratings Services or the equivalent thereof by Dominion Bond Rating Service Limited with maturities of not more than 180 days; (c) certificates of deposit or repurchase obligations issued by any U.S. or Canadian domestic bank having capital surplus of at least $100,000,000 or by any other financial institution acceptable to Agents, all of the foregoing not having a maturity of more than one year from the date of issuance thereof, and (d) the purchase of 21 27 shares of Group pursuant to the Winokur Option so long as the proceeds paid in connection with such purchase are concurrently applied to the payment of the Winokur Note Receivable. Permitted Liens means each of the following: (a) artisans' or mechanics' Liens arising in the ordinary course of business, and Liens for taxes, but only to the extent that payment thereof shall not at the time be due or if due, the payment thereof is being diligently contested in good faith and adequate reserves computed in accordance with GAAP have been set aside therefor; (b) Liens in effect on the Effective Date and disclosed to the Lenders in the financial statements delivered on or prior to the Effective Date pursuant to Section 6.2 hereof or in a schedule hereto; (c) normal reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions and encumbrances which do not secure Borrowed Money Indebtedness and which do not have a material adverse effect on the value or utility of the applicable Property; (d) Liens in favor of any Agent or any Lender under the Loan Documents, including without limitation, Liens securing Interest Rate Risk Indebtedness or Currency Exchange Risk Indebtedness owed to one or more of the U.S. Lenders (but not to any Person which is not, at such time, a U.S. Lender); (e) Liens incurred or deposits made in the ordinary course of business (1) in connection with workmen's compensation, unemployment insurance, social security and other like laws, or (2) to secure insurance in the ordinary course of business, the performance of bids, tenders, contracts, leases, licenses, statutory obligations, surety, appeal and performance bonds and other similar obligations incurred in the ordinary course of business, not, in any of the cases specified in this clause (2), incurred in connection with the borrowing of money, the obtaining of advances or the payment of the deferred purchase price of Property; (f) attachments, judgments and other similar Liens arising in connection with court proceedings, provided that the execution and enforcement of such Liens are effectively stayed and the claims secured thereby are being actively contested in good faith with adequate reserves made therefor in accordance with GAAP; (g) Liens imposed by law, such as landlords', carriers', warehousemen's, mechanics', materialmen's and vendors' liens, incurred in good faith in the ordinary course of business and securing obligations which are not yet due or which are being contested in good faith by appropriate proceedings if adequate reserves with respect thereto are maintained in accordance with GAAP; (h) zoning restrictions, easements, licenses, reservations, provisions, covenants, conditions, waivers, and restrictions on the use of Property, and which do not in any case singly or in the aggregate materially impair the present value or utility of the applicable Property; (i) Liens securing purchase money Indebtedness permitted under Section 8.1 hereof and covering the Property so purchased; (j) capital leases and sale/leaseback transactions permitted under the other provisions of this Agreement, and (k) extensions, renewals and replacements of Liens referred to in clauses (a) through (j) of this definition; provided that any such extension, renewal or replacement Lien shall be limited to the Property or assets covered by the Lien extended, renewed or replaced and that the Borrowed Money Indebtedness secured by any such extension, renewal or replacement Lien shall be in an amount not greater than the amount of the Indebtedness secured by the Lien extended, renewed or replaced. Person means any individual, Corporation, trust, unincorporated organization, Governmental Authority or any other form of entity. 22 28 Plan means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code or any Applicable Canadian Pension Legislation and is either (a) maintained by, or contributed to by, any Borrower or any member of the Controlled Group for employees of any Borrower or any member of the Controlled Group or (b) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which any Borrower or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. Prime Rate means, on any day, (a) as to Loans made to U.S. Borrower, the prime rate for that day as determined from time to time by Chase Texas and (b) as to Loans denominated in Dollars made to Canadian Borrower, the base rate for that day for Loans denominated in Dollars quoted by BNS. The Prime Rate is, in each case, a reference rate and does not necessarily represent the lowest or best rate or a favored rate, and Chase Texas, BNS, each Agent and each Lender disclaims any statement, representation or warranty to the contrary. Chase Texas, BNS, any Agent or any Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. Principal Office means (a) as to Obligations of U.S. Borrower, the principal office of U.S. Agent, presently located at 712 Main Street, Houston, Harris County, Texas 77002 and (b) as to Obligations of Canadian Borrower, the principal office of Canadian Agent, presently located at Calgary Commercial Banking Centre, 240-8 Ave. S.W., Calgary, Alberta T2P 2N7. Pro Forma EBITDA means, for any period for which the amount thereof is to be determined, EBITDA of U.S. Borrower and its Subsidiaries plus (or minus), without duplication, on a pro forma basis for such period, EBITDA of any Person becoming a Subsidiary of U.S. Borrower during such period (calculated as if such Person had been a Subsidiary of U.S. Borrower for all of such period) and with respect to which Agent and Lenders have been provided with Annual Financial Statements for the most recently ended fiscal year of such Person (provided, however, that unaudited annual financial statements for any applicable Person for the most recently ended fiscal year of such Person shall be acceptable so long as (i) such financial statements otherwise conform to the definition of "Annual Financial Statements", (ii) such financial statements are certified by the chief financial officer or other authorized officer of such Person as fairly presenting, in all material respects, the financial position of such person as of the applicable date or dates, and (iii) unaudited Consolidated EBITDA does not comprise more than 20% of Pro Forma EBITDA). Borrower shall furnish to Agent supporting calculations for Pro Forma EBITDA and such other information as Agent may reasonably request to determine the accuracy of such calculation. Proper Form means in form and substance reasonably satisfactory to Agents. Property means any interest in any kind of property or asset, whether real, personal or mixed, tangible or intangible. 23 29 Purchase Agreement means that certain Amended and Restated Agreement and Plan of Merger dated as of March 26, 1998 executed by and among Group, U.S. Borrower and The Cynara Company, a Delaware corporation, as the same may from time to time be amended, modified, restated or supplemented. Puts shall have the meaning ascribed to such term in the Purchase Agreement. Qualified Institution means (a) any bank or trust company which is organized under the laws of any country which is a member of the Organization for Economic Cooperation and Development or any political subdivision of any such country; and having capital, surplus and undivided profits aggregating at least $100,000,000.00 (or its equivalent in another currency) as of the date of such Person's most recent financial reports, and (b) any other Person approved in writing by Agents. Quarterly Dates means the last day of each March, June, September and December, provided that if any such date is not a Business Day, then the relevant Quarterly Date shall be the next succeeding Business Day. Quarterly Financial Statements means the quarterly financial statements of a Person, which statements shall include a balance sheet as of the end of the applicable fiscal quarter and an income statement and a statement of cash flows for such fiscal quarter and for the fiscal year to date, subject to normal year-end adjustments, all setting forth in comparative form the corresponding figures as of the end of and for the corresponding fiscal quarter of the preceding year, prepared in accordance with GAAP in all material respects except that such statements are condensed and exclude detailed footnote disclosures and certified by the chief financial officer or other authorized officer of such Person as fairly presenting, in all material respects, the financial condition of such person as of such date. As to Borrowers only, Quarterly Financial Statements shall also include unaudited consolidating financial statements for the applicable Borrower and unaudited consolidated financial statements for the applicable Borrower and its Subsidiaries, each in Proper Form, certified in each case by the chief financial officer or other authorized officer of the applicable Borrower as presenting fairly in all material respects the consolidating or consolidated, as the case may be, financial position of the applicable Person. Quarterly Financial Statements for Canadian Borrower may be adjusted to conform with generally accepted Canadian accounting principles, consistently applied. Rate Designation Date means that Business Day which is (a) in the case of Base Rate Borrowings by the U.S. Borrower, 11:00 a.m., Houston, Texas time, and, in the case of Base Rate Borrowings by the Canadian Borrower, 12:00 noon, Toronto, Ontario time, in each case on the date one Business Day preceding the date of such borrowing and (b) in the case of LIBOR Borrowings by the U.S. Borrower, 11:00 a.m., Houston, Texas time, and, in the case of LIBOR Borrowings by the Canadian Borrower, 12:00 noon, Toronto, Ontario time, in each case, on the date three LIBOR Business Days preceding the first day of any proposed Interest Period. Rate Designation Notice means a written notice substantially in the form of Exhibit B. 24 30 Refunding Bankers' Acceptance has the meaning specified in Section 2.3(b). Regulation D means Regulation D of the Board of Governors of the Federal Reserve System from time to time in effect and includes any successor or other regulation relating to reserve requirements applicable to member banks of the Federal Reserve System. Regulatory Change means with respect to any Lender, any change on or after the Effective Date in any Legal Requirement (including, without limitation, Regulation D) or the adoption or making on or after such date of any interpretation, directive or request applying to a class of lenders including such Lender under any Legal Requirements (whether or not having the force of law) by any Governmental Authority. Reimbursement Obligations means, as at any date, (i) the obligations of any Borrower then outstanding, or which may thereafter arise, in respect of Letters of Credit under this Agreement, to reimburse the applicable Issuers for the amount paid by such Issuers in respect of any drawing under such Letters of Credit and (ii) the obligations of the Canadian Borrower then outstanding, or which may thereafter arise, in respect of any Bankers' Acceptance purchased by any Canadian Lender or paid by it on maturity thereof. Except for Canadian Letters of Credit denominated in Canadian Dollars, Reimbursement Obligations in respect of any Letter of Credit shall at all times be payable in Dollars notwithstanding any such Letter of Credit being payable in a currency other than Dollars. Request for Extension of Credit means a request for extension of credit duly executed by any responsible officer, which may include the president, chief executive officer, the chief financial officer, any vice president or the treasurer of U.S. Borrower or Canadian Borrower, as the case may be, or any other Person duly authorized by one of such officers, appropriately completed and substantially in the form of Exhibit A-1 (U.S. Borrower) or Exhibit A-2 (Canadian Borrower) attached hereto, as the case may be. Requirements of Environmental Law means all requirements imposed by any law (including for example and without limitation The Resource Conservation and Recovery Act and The Comprehensive Environmental Response, Compensation, and Liability Act), rule, regulation, or order of any federal, state or local executive, legislative, judicial, regulatory or administrative agency, board or authority in effect at the applicable time which relate to (i) noise; (ii) pollution, protection or clean-up of the air, surface water, ground water or land; (iii) solid, gaseous or liquid waste generation, treatment, storage, disposal or transportation; (iv) exposure to Hazardous Substances; (v) the safety or health of employees or (vi) regulation of the manufacture, processing, distribution in commerce, use, discharge or storage of Hazardous Substances. Reset Date has the meaning specified in Section 2.9(a). Revolving Loan Maturity Date means the maturity of the Revolving Notes and the other U.S. Revolving Loan Obligations and Canadian Obligations, November 30, 2001. 25 31 Revolving Loans means the U.S. Revolving Loans, the Canadian Dollar Notes and the Canadian Revolving Loans. Revolving Notes means the U.S. Revolving Notes and the Canadian Revolving Notes. Secretary's Certificate means a certificate, in Proper Form, of the Secretary or an Assistant Secretary of a corporation (a) that attached thereto are true and correct copies of resolutions of the Board of Directors of such corporation authorizing the execution, delivery and performance of the Loan Documents to be executed by such corporation; (b) the incumbency and signature of the officer of such corporation executing such Loan Documents on behalf of such corporation, and (c) that attached thereto are true and correct copies of the Organizational Documents of such corporation. Security Agreements means (i) security agreements, each in Proper Form, executed or to be executed in favor of U.S. Agent, securing the U.S. Obligations, covering all of the real Property (other than real Property owned as of the Effective Date) upon which a Lien must be granted pursuant to Section 7.11 hereof and material personal Property (other than the equity interests described in clauses (ii) and (iv) of this definition) of U.S. Borrower and its Subsidiaries (other than Foreign Subsidiaries), (ii) security agreements, each in Proper Form, executed or to be executed in favor of U.S. Agent, securing the U.S. Obligations, covering all of the issued and outstanding equity interests in any Subsidiary of U.S. Borrower (other than Foreign Subsidiaries and other than Subsidiaries which are wholly-owned direct Subsidiaries of Foreign Subsidiaries) and 65% of the issued and outstanding equity interests in any Foreign Subsidiary of U.S. Borrower (other than Foreign Subsidiaries which are direct Subsidiaries of other Foreign Subsidiaries), (iii) security agreements, each in Proper Form, executed or to be executed in favor of Canadian Agent, securing the Canadian Obligations, covering all of the real Property (other than real Property owned as of the Effective Date) upon which a Lien must be granted pursuant to Section 7.11 hereof and material personal Property of Canadian Borrower and each Canadian Subsidiary and (iv) security agreements, each in Proper Form, executed in favor of Canadian Agent, securing the Canadian Obligations, covering the remaining 35% of the issued and outstanding equity interests in any Foreign Subsidiary of U.S. Borrower, as the same may from time to time be amended, modified, restated or supplemented. Security Documents means, collectively, the Security Agreements, the Financing Statements and any and all other security documents now or hereafter executed and delivered by any Obligor to secure all or any part of the Obligations, as any of them may from time to time be amended, modified, restated or supplemented. Stated Rate means, with respect to any Lender, the effective weighted per annum rate of interest applicable to the Loans made by such Lender; provided, that if on any day such rate shall exceed the Ceiling Rate for that day, the Stated Rate shall be fixed at the Ceiling Rate on that day and on each day thereafter until the total amount of interest accrued at the Stated Rate on the unpaid principal balances of the Notes plus the Additional Interest equals the total amount of interest which would have accrued if there had been no Ceiling Rate. If the Notes mature (or are prepaid) before 26 32 such equality is achieved, then, in addition to the unpaid principal and accrued interest then owing pursuant to the other provisions of the Loan Documents, the applicable Borrower promises to pay on demand to the order of the holder of the applicable Note interest in an amount equal to the excess (if any) of (a) the lesser of (i) the total interest which would have accrued on such Note if the Stated Rate had been defined as equal to the Ceiling Rate from time to time in effect and (ii) the total interest which would have accrued on such Note if the Stated Rate were not so prohibited from exceeding the Ceiling Rate, over (b) the total interest actually accrued on such Note to such maturity (or prepayment) date. Without notice to any Borrower or any other Person, the Stated Rate shall automatically fluctuate upward and downward in accordance with the provisions of this definition. Subordinated Indebtedness means all Indebtedness of U.S. Borrower and its Subsidiaries which has been subordinated on terms and conditions satisfactory to the Majority Lenders, in their sole discretion, to the Obligations, whether now existing or hereafter incurred. Indebtedness shall not be considered as "Subordinated Indebtedness" unless and until Agents shall have received copies of the documentation evidencing or relating to such Indebtedness, including subordination provisions, in Proper Form, duly executed by the holder or holders of such Indebtedness and evidencing the terms and conditions of subordination required by the Majority Lenders. Subsidiary means, as to a particular parent Corporation, any Corporation of which more than 50% of the indicia of equity rights (whether outstanding capital stock or otherwise) is at the time directly or indirectly owned by, such parent Corporation. Taxes shall have the meaning ascribed to it in Section 4.1(d) hereof. Termination Date means the earlier of (a) the Revolving Loan Maturity Date or (b) the date specified by either Agent in accordance with Section 9.1 hereof. Term Loan means a Loan made pursuant to Section 2.1(d) hereof. Term Loan Lender means each U.S. Lender with any outstanding Term Loans. Term Loan Maturity Date means November 30, 2003. Term Loan Obligations means, as at any date of determination thereof, the aggregate principal amount of Term Loans outstanding hereunder on such date. Term Notes means the Notes of U.S. Borrower evidencing the Term Loans, in substantially the form of Exhibit J hereto. Total Canadian Exposure means, at any time and without duplication, the sum of the aggregate principal amounts of the then outstanding Canadian Revolving Loans, then outstanding Bankers' Acceptance Liabilities and then outstanding Letter of Credit Liabilities in respect of 27 33 Canadian Letters of Credit, in each case expressed in Dollars using, where applicable, the then current Exchange Rate. Total Capitalization means the sum of, without duplication, the Borrowed Money Indebtedness of U.S. Borrower and its Subsidiaries, on a consolidated basis, and preferred stock and the consolidated stockholders' equity (including paid-in capital and retained earnings) of U.S. Borrower and its Subsidiaries, determined in accordance with GAAP. Unfunded Liabilities means, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent actuarial valuation report for such Plan, but only to the extent that such excess represents a potential liability of any member of the Controlled Group to the PBGC or a Plan under Title IV of ERISA and, with respect to any Plan governed by Applicable Canadian Pension Legislation, the amount (if any) by which the solvency liabilities under such Plan (determined in accordance with actuarial assumptions contained in the most recent actuarial valuation report for such Plan) exceed the fair market value of the assets of such Plan. With respect to multi-employer Plans, the term "Unfunded Liabilities" shall also include contingent liability for withdrawal liability under Section 4201 of ERISA or under Applicable Canadian Pension Legislation to all multi-employer Plans to which any Borrower or any member of a Controlled Group for employees of any Borrower contributes in the event of complete withdrawal from such plans. UPRC Receivables means receivables owing to U.S. Borrower by Union Pacific Resources Corporation in an aggregate amount not exceeding $6,000,000 which are payable on or before January 31, 1999. U.S. Borrowing Base means, as at any date, the amount of the U.S. Borrowing Base shown on the Borrowing Base Certificate then most recently delivered pursuant to Section 7.2(b) hereof, determined by calculating the amount equal to: (i) 80% of the aggregate amount of all Eligible Accounts of U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) at said date, plus (ii) the sum of (x) 20% of that portion of Eligible Inventory of U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) at said date (determined at the lower of cost or market on a consistent basis) which consists of used finished goods, (y) 25% of that portion of Eligible Inventory of U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) at said date (determined at the lower of cost or market on a consistent basis) which consists of work-in-process relating to projects for customers that are not account debtors with respect to any Accounts owing to U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) which are not Eligible Accounts and (z) 50% of the aggregate amount of all other Eligible Inventory 28 34 of U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) at said date (determined at the lower of cost or market on a consistent basis); provided that the amount calculated pursuant to this clause (ii) shall not exceed 50% of the U.S. Borrowing Base. In the absence of a current Borrowing Base Certificate, U.S. Agent shall determine the U.S. Borrowing Base from time to time in its reasonable discretion, taking into account all information reasonably available to it, and the U.S. Borrowing Base from time to time so determined shall be the Borrowing Base for all purposes of this Agreement until a current Borrowing Base Certificate, in Proper Form, is furnished to and accepted by U.S. Agent. U.S. Commitment means, as to any U.S. Lender, the obligation, if any, of such U.S. Lender to make U.S. Revolving Loans and incur or participate in Letter of Credit Liabilities relating to U.S. Letters of Credit in an aggregate principal amount at any one time outstanding up to (but not exceeding) the amount, if any, set forth opposite such U.S. Lender's name on the signature pages hereof under the caption "U.S. Commitment", or otherwise provided for in an Assignment and Acceptance Agreement (as the same may be increased or reduced from time to time pursuant to Section 2.4 hereof). U.S. Lender means each lender party hereto with any U.S. Commitment or any outstanding U.S. Obligations. U.S. Letters of Credit shall have the meaning assigned to such term in Section 2.2 hereof. U.S. Loan means a U.S. Revolving Loan or a Term Loan. U.S. Obligations means U.S. Revolving Loan Obligations and Term Loan Obligations. U.S. Revolving Loan means a Loan made pursuant to Section 2.1(a) hereof. U.S. Revolving Loan Obligations means, as at any date of determination thereof, the sum of the following (determined without duplication): (i) the aggregate principal amount of U.S. Revolving Loans outstanding hereunder on such date plus (ii) the aggregate amount of the Letter of Credit Liabilities outstanding on such date relating to U.S. Letters of Credit. U.S. Revolving Notes means the Notes of U.S. Borrower evidencing the U.S. Revolving Loans, in the form of Exhibit D hereto. Winokur Note Receivable means the note receivable evidenced by that certain $1,585,164 unsecured promissory note issued as of March 31, 1998 by Herbert S. Winokur, Jr. payable to the order of U.S. Borrower. 29 35 Winokur Option means that certain Option Agreement dated as of March 31, 1998 executed by and between Herbert S. Winokur, Jr. (as optionor) and U.S. Borrower (as optionee). 1.2 Miscellaneous. The words "hereof," "herein," and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement. 2. Commitments; Loans; BA's and Letters of Credit. 2.1 Loans and BA's. Each Lender severally agrees, subject to all of the terms and conditions of this Agreement (including, without limitation, Sections 5.1 and 5.2 hereof), to make Loans and, in the case of Canadian Lenders, to accept and purchase Bankers' Acceptances, as follows: (a) U.S. Revolving Loans. From time to time on or after the Effective Date and during the Availability Period, each U.S. Lender shall make loans under this Section 2.1(a) to U.S. Borrower in an aggregate principal amount at any one time outstanding (including its Commitment Percentage of all Letter of Credit Liabilities relating to U.S. Letters of Credit at such time) up to but not exceeding such U.S. Lender's Commitment Percentage of the Maximum U.S. Available Amount. Subject to the conditions in this Agreement, any such U.S. Revolving Loan repaid prior to the Termination Date may be reborrowed pursuant to the terms of this Agreement; provided, that any and all such U.S. Revolving Loans shall be due and payable in full on the Termination Date. Loans made under this Section 2.1(a) shall be made and denominated in Dollars. The aggregate of all U.S. Revolving Loans to be made by the U.S. Lenders in connection with a particular borrowing shall be equal to the lesser of (i) the unutilized portion of the U.S. Commitments or (ii) $500,000 or any integral multiple of $100,000 in excess thereof. (b) Canadian Revolving Loans. From time to time on or after the Effective Date and during the Availability Period, each Canadian Lender shall make loans under this Section 2.1(b) to Canadian Borrower in an aggregate principal amount at any one time outstanding (including such Canadian Lender's Commitment Percentage of all Bankers' Acceptance Liabilities and all Letter of Credit Liabilities relating to Canadian Letters of Credit at such time) up to but not exceeding such Canadian Lender's Commitment Percentage of the Maximum Canadian Available Amount. Subject to the conditions in this Agreement, any such Canadian Revolving Loan repaid prior to the Termination Date may be reborrowed pursuant to the terms of this Agreement; provided, that any and all such Canadian Revolving Loans shall be due and payable in full on the Termination Date. Loans made under this Section 2.1(b) may, at the option of Canadian Borrower, be made and denominated either in Dollars or in Canadian Dollars (but all Loans to be made under a particular borrowing must be made and denominated in the same currency). The aggregate of all Canadian Revolving Loans to be made by the Canadian Lenders in connection with a particular borrowing shall be equal to the lesser of (i) the unutilized portion of the Canadian Commitments or (ii) $500,000 or any integral multiple of $100,000 in excess thereof (if the Loans are denominated in 30 36 Dollars) or C$500,000 or any integral multiple of C$100,000 in excess thereof (if the Loans are denominated in Canadian Dollars). (c) Bankers' Acceptances. From time to time on or after the Effective Date and during the Availability Period, each Canadian Lender shall accept and purchase Bankers' Acceptances drawn on it under Section 2.3 hereof by Canadian Borrower in an aggregate principal amount at any one time outstanding (including such Canadian Lender's Commitment Percentage of all Canadian Revolving Loans outstanding at such time and all Letter of Credit Liabilities relating to Canadian Letters of Credit at such time) up to but not exceeding such Canadian Lender's Commitment Percentage of the Maximum Canadian Available Amount. No Bankers' Acceptance may be made or accepted on or after the Termination Date and all outstanding Bankers' Acceptances shall mature no later than the end of the Availability Period. Loans made by way of Bankers' Acceptances shall be made and denominated in Canadian Dollars. (d) Term Loans. On the Effective Date, each Term Loan Lender shall make a loan to U.S. Borrower in the amount set forth opposite such Term Loan Lender's name on the signature pages hereof under the caption "Term Loans". (e) Chapter 346 Not Applicable. Borrowers, Agents and the Lenders agree pursuant to Chapter 346 ("Chapter 346") of the Texas Finance Code, that Chapter 346 (which relates to open-end line of credit revolving loan accounts) shall not apply to this Agreement, the Notes or any Obligation and that neither the Notes nor any Obligation shall be governed by Chapter 346 or subject to its provisions in any manner whatsoever. 2.2 Letters of Credit. (a) Letters of Credit. Subject to the terms and conditions of this Agreement, and on the condition that aggregate Letter of Credit Liabilities relating to U.S. Letters of Credit shall never exceed $15,000,000 and that aggregate Letter of Credit Liabilities relating to Canadian Letters of Credit shall never exceed $5,000,000, (i) U.S. Borrower shall have the right, in addition to U.S. Revolving Loans provided for in Section 2.1(a) hereof, to utilize the U.S. Commitments from time to time during the Availability Period by obtaining the issuance of letters of credit for the account of U.S. Borrower if U.S. Borrower shall so request in the notice referred to in Section 2.2(b)(i) hereof (such letters of credit as any of them may be amended, supplemented, extended or confirmed from time to time, being herein collectively called the "U.S. Letters of Credit") and Canadian Borrower shall have the right, in addition to Canadian Revolving Loans provided for in Section 2.1(b) hereof and Bankers' Acceptances provided for in Section 2.1(c) hereof, to utilize the Canadian Commitments from time to time during the Availability Period by obtaining the issuance of letters of credit for the account of Canadian Borrower if Canadian Borrower shall so request in the notice referred to in Section 2.2(b)(i) hereof (such letters of credit as any of them may be amended, supplemented, extended or confirmed from time to time, being herein collectively called the "Canadian Letters of Credit") and (ii) Chase Texas agrees to issue U.S. Letters of Credit and BNS agrees to issue Canadian Letters of Credit. The Letters of Credit will, at the request of the applicable 31 37 Borrower, be issued in currencies other than those expressly provided for in this Agreement so long as the applicable Agent is reasonably satisfied that such currency is readily available in the required amounts and that such currency selection is not otherwise disadvantageous to any Agent or any Lender. Upon the date of the issuance of a Letter of Credit, the applicable Issuer shall be deemed, without further action by any party hereto, to have sold to each U.S. Lender or Canadian Lender, as the case may be, and each such U.S. Lender or Canadian Lender, as the case may be, shall be deemed, without further action by any party hereto, to have purchased from the applicable Issuer, a par ticipation, to the extent of such Lender's Commitment Percentage, in such Letter of Credit and the related Letter of Credit Liabilities, which participation shall terminate on the earlier of the expiration date of such Letter of Credit or the Termination Date. Any Letter of Credit that shall have an expiration date after the end of the Availability Period shall be subject to Cover or backed by a letter of credit in form and substance, and issued by a Person, acceptable to the applicable Agent in its sole discretion. Chase Texas or, with the prior approval of U.S. Borrower, U.S. Agent and the applicable U.S. Lender, another U.S. Lender shall be the Issuer of each U.S. Letter of Credit; and BNS or, with the prior approval of Canadian Borrower, Canadian Agent and the applicable Canadian Lender, another Canadian Lender shall be the Issuer of each Canadian Letter of Credit. Except as provided above, all U.S. Letters of Credit shall be denominated in Dollars and all Canadian Letters of Credit shall, at the option of Canadian Borrower, be denominated in either Dollars or Canadian Dollars. Fees due in respect of a U.S. Letter of Credit shall be payable in Dollars and fees due in respect of a Canadian Letter of Credit shall be payable (i) in Dollars, if such Letter of Credit is denominated in Dollars and (ii) in Canadian Dollars if such Letter of Credit is denominated in Canadian Dollars or any other currency. Letters of credit previously issued under the provisions of the Loan Agreement dated June 30, 1997 described in Section 11.19 hereof shall constitute "Letters of Credit" hereunder. (b) Additional Provisions. The following additional provisions shall apply to each Letter of Credit: (i) U.S. Borrower or Canadian Borrower, as the case may be, shall give the appropriate Agent notice requesting each issuance of a Letter of Credit hereunder as provided in Section 4.3 hereof and shall furnish such additional information regarding such transaction as such Agent may reasonably request. Upon receipt of such notice, such Agent shall promptly notify each U.S. Lender or Canadian Lender, as the case may be, of the contents thereof and of such Lender's Commitment Percentage of the amount of such proposed Letter of Credit. (ii) No U.S. Letter of Credit may be issued if after giving effect thereto the sum of (A) the aggregate outstanding principal amount of U.S. Revolving Loans plus (B) the aggregate Letter of Credit Liabilities relating to U.S. Letters of Credit would exceed the Maximum U.S. Available Amount. No Canadian Letter of Credit may be issued if after giving effect thereto the sum of (A) the aggregate outstanding principal amount of Canadian Revolving Loans plus (B) the aggregate Letter of Credit Liabilities relating to Canadian Letters of Credit plus (C) the aggregate Bankers' Acceptance Liabilities would exceed the 32 38 Maximum Canadian Available Amount. On each day during the period commencing with the issuance of any Letter of Credit and until such Letter of Credit shall have expired or been terminated, the U. S. Commitment or Canadian Commitment, as the case may be, of each applicable Lender shall be deemed to be utilized for all purposes hereof, including Section 2.5(a), in an amount equal to such Lender's Commitment Percentage of the amount then available for drawings under such Letter of Credit (or any unreimbursed drawings under such Letter of Credit). (iii) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment thereunder, the applicable Issuer shall notify the Agents and thereafter the U.S. Agent or the Canadian Agent, as the case may be, shall promptly notify the applicable Borrower and each applicable Lender as to the amount to be paid as a result of such demand and the payment date therefor. If at any time prior to the earlier of the expiration date of a Letter of Credit or the Termination Date any applicable Issuer shall have made a payment to a beneficiary of a Letter of Credit in respect of a drawing under such Letter of Credit, each applicable Lender will pay to the U.S. Agent or the Canadian Agent, as the case may be, immediately upon demand by such Issuer at any time during the period commencing after such payment until reimbursement thereof in full by the applicable Borrower, an amount equal to such Lender's U.S. Commitment Percentage or Canadian Commitment Percentage, as the case may be, of such payment, together with interest on such amount for each day from the date of demand for such payment (or, if such demand is made after 11:00 a.m. Houston, Texas time (in the case of a U.S. Letter of Credit) or 12:00 noon Toronto, Ontario time (in the case of a Canadian Letter of Credit) on such date, from the next succeeding Business Day) to the date of payment by such Lender of such amount at a rate of interest per annum equal to (i) in respect of U.S. Letters of Credit, the Federal Funds Rate, (ii) in respect of Canadian Letters of Credit which are denominated in Dollars, the Base Rate plus two percent (2%) and (iii) in respect of Canadian Letters of Credit which are denominated in Canadian Dollars, the CDOR Rate. To the extent that it is ultimately determined that the applicable Borrower is relieved of its obligation to reimburse the applicable Issuer because of such Issuer's gross negligence or willful misconduct in determining that documents received under any applicable Letter of Credit comply with the terms thereof, the applicable Issuer shall be obligated to refund to the paying Lenders all amounts paid to such Issuer to reimburse Issuer for the applicable drawing under such Letter of Credit. (iv) U.S. Borrower or the Canadian Borrower, as the case may be, shall be irrevocably and unconditionally obligated forthwith to reimburse the appropriate Agent, on the date on which such Agent notifies U.S. Borrower or the Canadian Borrower, as the case may be, of the date and amount of any payment by the applicable Issuer of any drawing under a Letter of Credit, for the amount paid by such Issuer upon such drawing, without presentment, demand, protest or other formalities of any kind, all of which are hereby waived. Such reimbursement may, subject to satisfaction of the conditions in Sections 5.1 and 5.2 hereof, the limitations on size contained in Section 2.1 and to the Maximum U.S. Available Amount or Maximum Canadian Available Amount, as the case may be (after 33 39 adjustment in the same to reflect the elimination of the corresponding Letter of Credit Liability), be made by the borrowing of Loans or, in the case of the Canadian Borrower, by the issuance, acceptance and purchase of Bankers' Acceptances. The applicable Agent will pay to each Lender such Lender's Commitment Percentage of all amounts received from U.S. Borrower or the Canadian Borrower, as the case may be, for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Lender has made payment to the applicable Agent in respect of such Letter of Credit pursuant to clause (iii) above. (v) U.S. Borrower or the Canadian Borrower, as the case may be, will pay to the appropriate Agent at the Principal Office of such Agent for the account of each applicable Lender a letter of credit fee with respect to each Letter of Credit equal to the greater of (x) $500 or (y) the Letter of Credit Fee Percentage multiplied by the daily average amount available for drawings under each Letter of Credit (and computed on the basis of the actual number of days elapsed in a year composed of 360 days), in each case for the period from and including the date of issuance of such Letter of Credit to and including the date of expiration or termination thereof, such fee to be due and payable quarterly in arrears on each three (3) month anniversary of the issuance of the applicable Letter of Credit and upon expiration or termination of the applicable Letter of Credit. The applicable Agent will pay to each applicable Lender, promptly after receiving any payment in respect of letter of credit fees referred to in this clause (v), an amount equal to the product of such Lender's U.S. Commitment Percentage or Canadian Commitment Percentage, as the case may be, times the amount of such fees. In addition to and cumulative of the above described fees, U.S. Borrower or the Canadian Borrower, as the case may be, shall pay to the appropriate Agent, for the account of the applicable Issuer, in advance on the date of the issuance of the applicable Letter of Credit, a fronting fee in an amount equal to 1/8% of the face amount of the applicable Letter of Credit (such fronting fee to be retained by the applicable Issuer for its own account). (vi) The issuance by the applicable Issuer of each Letter of Credit shall, in addition to the conditions precedent set forth in Section 5 hereof, be subject to the conditions precedent (A) that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to applicable Agent, and (B) that U.S. Borrower or the Canadian Borrower, as the case may be, shall have executed and delivered such Applications and other instruments and agreements relating to such Letter of Credit as the applicable Agent shall have reasonably requested and are not inconsistent with the terms of this Agreement. In the event of a conflict between the terms of this Agreement and the terms of any Application, the terms hereof shall control. (vii) Each Issuer will send to U.S. Borrower or the Canadian Borrower, as the case may be, and each applicable Lender, immediately upon issuance of any Letter of Credit issued by such Issuer or any amendment thereto, a true and correct copy of such Letter of Credit or amendment. 34 40 (c) Indemnification; Release. U.S. Borrower or the Canadian Borrower, as the case may be, hereby indemnifies and holds harmless each Agent, each Lender and each Issuer from and against any and all claims, damages, losses, liabilities, costs or expenses which such Agent, such Lender or such Issuer may incur (or which may be claimed against such Agent, such Lender or such Issuer by any Person whatsoever), REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF ANY OF THE INDEMNIFIED PARTIES, in connection with the execution and delivery of any Letter of Credit or transfer of or payment or failure to pay under any Letter of Credit; provided that U.S. Borrower or the Canadian Borrower, as the case may be, shall not be required to indemnify or hold harmless any party seeking indemnification for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of the party seeking indemnification or exoneration, or (ii) the failure by the party seeking indemnification to pay under any Letter of Credit after the presentation to it of a request required to be paid under applicable law. U.S. Borrower or the Canadian Borrower, as the case may be, hereby releases, waives and discharges each Agent, each Lender and each Issuer from any claims, causes of action, damages, losses, liabilities, reasonable costs or expenses which may now exist or may hereafter arise, REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF ANY OF THE INDEMNIFIED PARTIES, by reason of or in connection with the failure of any Agent, any Issuer or any other Lender to fulfill or comply with its obligations to such Agent, such Lender or such Issuer, as the case may be, hereunder (but nothing herein contained shall affect any rights U.S. Borrower or the Canadian Borrower, as the case may be, may have against such defaulting party or may have in respect of gross negligence or willful misconduct). Nothing in this Section 2.2(c) is intended to limit the obligations of U.S. Borrower or the Canadian Borrower, as the case may be, under any other provision of this Agreement. (d) Additional Costs in Respect of Letters of Credit. Subject to Sections 11.7 and 11.17 hereof, if as a result of any Regulatory Change there shall be imposed, modified or deemed applicable any tax (other than any tax based on or measured by net income), reserve, special deposit or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder or participations in such Letters of Credit, and the result shall be to increase the cost to any Lender of issuing or maintaining any Letter of Credit or any participation therein, or materially reduce any amount receivable by any Lender hereunder in respect of any Letter of Credit or any participation therein (which increase in cost, or reduction in amount receivable, shall be the result of such Lender's reasonable allocation of the aggregate of such increases or reductions resulting from such event), then such Lender shall notify U.S. Borrower or the Canadian Borrower, as the case may be, through the appropriate Agent (which notice shall be accompanied by a statement setting forth in reasonable detail the basis for the determination of the amount due), and within 15 Business Days after demand therefor by such Lender through such Agent, U.S. Borrower or the Canadian Borrower, as the case may be, shall pay to such Lender, from time to time as specified by such Lender, such additional amounts as shall be sufficient to compensate such Lender for such increased costs or reductions in amount. Such statement as to such increased costs or reductions in amount incurred by such Lender, submitted by such Lender to U.S. Borrower or the Canadian Borrower, as the case may be, shall be conclusive as to the amount thereof, absent manifest error, 35 41 and may be computed using any reasonable averaging and attribution method. Each Lender will notify U.S. Borrower or the Canadian Borrower, as the case may be, through the appropriate Agent of any event occurring after the date of this Agreement which will entitle such Lender to compensation pursuant to this Section as promptly as practicable after any executive officer of such Lender obtains knowledge thereof and determines to request such compensation, and (if so requested by U.S. Borrower or the Canadian Borrower, as the case may be, through the appropriate Agent) will designate a different lending office of such Lender for the issuance or maintenance of Letters of Credit by such Lender or will take such other action as U.S. Borrower or the Canadian Borrower, as the case may be, may reasonably request if such designation or action is consistent with the internal policy of such Lender and legal and regulatory restrictions, can be undertaken at no additional cost, will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Lender, be disadvantageous to such Lender (provided that no such U.S. Lender shall have any obligation so to designate a different lending office which is not located in the United States of America and no such Canadian Lender shall have any obligation so to designate a different lending office which is not located in Canada). 2.3 Certain Provisions Relating to Bankers' Acceptances. (a) Subject to the terms and conditions hereof, each Canadian Lender severally agrees to accept and purchase Bankers' Acceptances drawn upon it by the Canadian Borrower denominated in Canadian Dollars. The Canadian Borrower shall notify the Canadian Agent by irrevocable written notice (each a "Bankers' Acceptance Notice") by 12:00 noon (Toronto, Ontario time) two (2) Business Days prior to the proposed date of any borrowing by way of Bankers' Acceptances. Each borrowing by way of Bankers' Acceptances shall be in a minimum aggregate face amount of C$1,000,000.00 and integral multiples of C$100,000.00 in excess thereof. The face amount of each Bankers' Acceptance shall be C$100,000.00 or any integral multiple thereof. Each Bankers' Acceptance Notice shall be in the form of Exhibit G. (1) Bankers' Acceptances shall be issued and shall mature on a Business Day. Each Bankers' Acceptance shall have a term of 30, 60, 90 or, if available, 180 days excluding days of grace and shall mature on or before the Revolving Loan Maturity Date and shall be in form and substance reasonably satisfactory to each Canadian Lender. (2) To facilitate the acceptance of Bankers' Acceptances under this Agreement, the Canadian Borrower shall, upon execution of this Agreement and from time to time as required, provide to the Canadian Agent drafts, in form satisfactory to the Canadian Agent, duly executed and endorsed in blank by the Canadian Borrower in quantities sufficient for each Canadian Lender to fulfill its obligations hereunder. In addition, the Canadian Borrower hereby appoints each Canadian Lender as its attorney to sign and endorse on its behalf, in handwriting or by facsimile or mechanical signature as and when deemed necessary by such Canadian Lender, blank forms of Bankers' Acceptances. The Canadian Borrower recognizes and agrees that all Bankers' Acceptances signed and/or endorsed on its behalf by a Canadian Lender shall bind the Canadian Borrower as fully and effectually as if 36 42 signed in the handwriting of and duly issued by the proper signing officer of the Canadian Borrower. Each Canadian Lender is hereby authorized to issue such Bankers' Acceptances endorsed in blank in such face amounts as may be determined by such Canadian Lender provided that the aggregate amount thereof is equal to the aggregate amount of Bankers' Acceptances required to be accepted by such Canadian Lender. No Canadian Lender shall be responsible or liable for its failure to accept a Bankers' Acceptance if the cause of such failure is, in whole or in part, due to the failure of the Canadian Borrower to provide duly executed and endorsed drafts to the Canadian Agent on a timely basis nor shall any Canadian Lender be liable for any damage, loss or other claim arising by reason of any loss or improper use of any such instrument except loss or improper use arising by reason of the gross negligence or willful misconduct of such Canadian Lender, its officers, employees, agents or representatives. Each Canadian Lender shall maintain a record with respect to Bankers' Acceptances (i) received by it from the Canadian Agent in blank hereunder, (ii) voided by it for any reason, (iii) accepted by it hereunder, (iv) purchased by it hereunder and (v) canceled at their respective maturities. Each Canadian Lender further agrees to retain such records in the manner and for the statutory periods provided in the various Canadian provincial or federal statutes and regulations which apply to such Canadian Lender. (3) Drafts of the Canadian Borrower to be accepted as Bankers' Acceptances hereunder shall be duly executed by a duly authorized officer of the Canadian Borrower or by a Canadian Lender on its behalf as aforesaid. Notwithstanding that any person whose signature appears on any Bankers' Acceptance as a signatory for the Canadian Borrower or for a Canadian Lender as attorney for Canadian Borrower may no longer be an authorized signatory for the Canadian Borrower or such Canadian Lender, as the case may be, at the date of issuance of a Bankers' Acceptance, such signature shall nevertheless be valid and sufficient for all purposes as if such authority had remained in force at the time of such issuance and any such Bankers' Acceptance so signed shall be binding on the Canadian Borrower. (4) Promptly following receipt of a Bankers' Acceptance Notice, the Canadian Agent shall so advise the Canadian Lenders and shall advise each Canadian Lender of the face amount of each Bankers' Acceptance to be accepted by it and the term thereof. The aggregate face amount of Bankers' Acceptances to be accepted by a Canadian Lender shall be determined by the Canadian Agent by reference to the respective Canadian Commitments of the Canadian Lenders, except that, if the face amount of a Bankers' Acceptance, which would otherwise be accepted by a Canadian Lender, would not be C$100,000.00 or an integral multiple thereof, such face amount shall be increased or reduced by the Canadian Agent in its sole and unfettered discretion to the nearest integral multiple of C$100,000.00. (5) Each Bankers' Acceptance to be accepted by a Canadian Lender shall be accepted at such Canadian Lender's office shown on the signature pages hereof or as otherwise designated by such Canadian Lender from time to time. 37 43 (6) On the relevant borrowing date, each Canadian Lender severally agrees to purchase from the Canadian Borrower, at the face amount thereof discounted by the Applicable BA Discount Rate, any Bankers' Acceptance accepted by it and provide to the Canadian Agent, for the account of the Canadian Borrower, the BA Discount Proceeds in respect thereof after deducting therefrom the amount of the Acceptance Fee payable by the Canadian Borrower to such Canadian Lender under Section 2.3(c) in respect of such Bankers' Acceptance. (7) Each Canadian Lender may at any time and from time to time hold, sell, rediscount or otherwise dispose of any or all Bankers' Acceptances accepted and purchased by it. (8) The Canadian Borrower waives presentment for payment and any other defense to payment of any amounts due to a Canadian Lender in respect of a Bankers' Acceptance accepted by it pursuant to this Agreement which might exist solely by reason of such Bankers' Acceptance being held, at the maturity thereof, by such Canadian Lender in its own right and the Canadian Borrower agrees not to claim any days of grace if such Canadian Lender as holder sues the Canadian Borrower on the Bankers' Acceptances for payment of the amount payable by the Canadian Borrower thereunder. (b) With respect to each Bankers' Acceptance, the Canadian Borrower, prior to the occurrence and continuation of a Default, may give irrevocable telephone or written notice (or such other method of notification as may be agreed upon between the Canadian Agent and the Canadian Borrower) to the Canadian Agent at or before 12:00 noon (Toronto, Ontario time) two (2) Business Days prior to the maturity date of such Bankers' Acceptance followed by written confirmation electronically transmitted to the Canadian Agent on the same day, of the Canadian Borrower's intention to issue one or more Bankers' Acceptance on such maturity date (each a "Refunding Bankers' Acceptance") to provide for the payment of such maturing Bankers' Acceptance (it being understood that payments by the Canadian Borrower and fundings by the Canadian Lenders in respect of each maturing Bankers' Acceptance and each related Refunding Bankers' Acceptance shall be made on a net basis reflecting the difference between the face amount of such maturing Bankers' Acceptance and the BA Discount Proceeds (net of the applicable Acceptance Fee) of such Refunding Bankers' Acceptance). Any funding on account of any maturing Bankers' Acceptance must be made at or before 12:00 noon (Toronto, Ontario time) on the maturity date of such Bankers' Acceptance. If the Canadian Borrower fails to give such notice, then subject to satisfaction of the conditions in Section 5 hereof and to the Maximum Canadian Available Amount, the Canadian Borrower shall be irrevocably deemed to have requested and to have been advanced a Canadian Prime Loan in the face amount of such maturing Bankers' Acceptance on the maturity date of such Bankers' Acceptance from the Canadian Lender which accepted such maturing Bankers' Acceptance, which Canadian Prime Loan shall thereafter bear interest as such in accordance with the provisions hereof until paid in full. 38 44 (c) An Acceptance Fee shall be payable by the Canadian Borrower to each Canadian Lender in advance (in the manner specified in Section 2.3(a)(6)) in respect of, and as a condition precedent to the acceptance by such Canadian Lender of, a Bankers' Acceptance to be accepted by such Canadian Lender calculated at the rate per annum equal to the Margin Percentage applicable to LIBOR Borrowings, calculated on the face amount of such Bankers' Acceptance and computed on the basis of the number of days in the term of such Bankers' Acceptance and a year of 365 days. 2.4 Terminations, Reductions or Reallocations of Commitments. (a) Mandatory. On the Termination Date, all U.S. Commitments and Canadian Commitments shall be terminated in their entirety. (b) Optional. U.S. Borrower or Canadian Borrower, as the case may be, shall have the right to terminate or reduce the unused portion of the U.S. Commitments or the Canadian Commitments, as the case may be, at any time or from time to time, provided that (i) U.S. Borrower or Canadian Borrower, as the case may be, shall give notice of each such termination or reduction to the appropriate Agent as provided in Section 4.3 hereof and (ii) each such partial reduction shall be in an integral multiple of $2,000,000. Notwithstanding the foregoing, U.S. Borrower may not reduce the U.S. Commitments below the then outstanding principal balance of the U.S. Revolving Loan Obligations and Canadian Borrower may not reduce the Canadian Commitments below the then outstanding principal balance of the Canadian Obligations. No termination or reduction of the Commitments pursuant to this provision may be reinstated without the prior written approval of Agents and the Lenders. (c) Reallocations. Any Dual Lender may agree with Borrowers to reallocate its existing U.S. Commitment and Canadian Commitment, so long as the sum of such U.S. Commitment and Canadian Commitment remains unchanged. In addition, with the prior written consent of all of the Dual Lenders, any U.S. Lender may agree with Borrowers to convert a portion of its U.S. Commitment into a Canadian Commitment, thereby becoming a Dual Lender, and any Canadian Lender may agree with Borrowers to convert a portion of its Canadian Commitment into a U.S. Commitment, in each case so long as (i) each Lender continues to be a U.S. Lender with a U.S. Commitment of at least $1,000,000 and (ii) the sum of such Lender's U.S. Commitment and Canadian Commitment remains equal to the aggregate amount of such Lender's U.S. Commitment and Canadian Commitment prior to such reallocation. Borrowers shall give written notice to the Agents of any reallocation pursuant to this provision at least ten (10) Business Days prior to the effective date of any such reallocation. No Lender shall be required to agree to any such reallocation, but may do so at its option, in its sole discretion. The following conditions precedent must be satisfied prior to any such reallocation becoming effective: (1) no Default or Event of Default shall have occurred and be continuing; (2) if, as a result of any such reallocation, the aggregate U.S. Revolving Loan Obligations would exceed the aggregate of all of the U.S. Commitments, then the U.S. 39 45 Borrower shall, on the effective date of such reallocation, repay or prepay U.S. Revolving Loans (or provide Cover for Letter of Credit Liabilities relating to U.S. Letters of Credit) in accordance with this Agreement in an aggregate principal amount such that, after giving effect thereto, the aggregate U.S. Revolving Loan Obligations shall not exceed the aggregate of all of the U.S. Commitments; (3) if, as a result of any such reallocation, the Total Canadian Exposure would exceed the aggregate of all of the Canadian Commitments, then the Canadian Borrower shall, on the effective date of such reallocation, repay or prepay Canadian Revolving Loans (or provide Cover for Letter of Credit Liabilities relating to Canadian Letters of Credit or for Bankers' Acceptance Liabilities) in accordance with this Agreement in an aggregate principal amount such that, after giving effect thereto, the Total Canadian Exposure shall not exceed the aggregate of all of the Canadian Commitments; (4) Borrowers shall have paid any amounts (or shall have provided Cover) due under Sections 2.9(c) or (d) hereof on the date of such reallocation; (5) the Maximum Canadian Available Amount shall be adjusted to equal the sum of all of the Canadian Commitments after giving effect to such reallocation and the Maximum U.S. Available Amount shall be adjusted to equal the sum of all of the U.S. Commitments after giving effect to such reallocation; (6) participations by the Lenders in the outstanding Letters of Credit and the Letter of Credit Liabilities and the outstanding Loans of the Lenders shall be adjusted to give effect to such reallocation; provided, however, that in lieu of requiring any prepayment of any Bankers' Acceptances in order to make appropriate adjustments to give effect to such reallocations, Canadian Borrower shall be required to provide additional Cover for any applicable portion of the Bankers' Acceptance Liabilities; (7) each Lender whose U.S. Commitment or Canadian Commitment shall be the subject of any reallocation shall have received from the Borrowers a fee equal to the greater of $3,000.00 or 1/16% of the amount of the increase or decrease, as the case be, in its Canadian Commitment. 2.5 Commitment Fees. (a) U.S. Borrower shall pay to U.S. Agent for the account of each U.S. Lender, and Canadian Borrower shall pay to Canadian Agent for the account of each Canadian Lender, commitment fees for the Availability Period at a rate per annum equal to the Commitment Fee Percentage. Such commitment fees shall be computed (on the basis of the actual number of days elapsed in a year composed of 360 days) on each day and shall be based on the excess of (x) the aggregate amount of each Lender's U.S. Commitment or Canadian Commitment, as the case may be, for such day over (y) the sum of (i) the aggregate unpaid principal balance (in Dollars) of such 40 46 Lender's applicable Note or Notes on such day plus (ii) the aggregate applicable Letter of Credit Liabilities as to such Lender for such day plus, in the case of Canadian Lenders only, (iii) the aggregate Bankers' Acceptance Liabilities outstanding on such day. Accrued commitment fees shall be payable in arrears on the Quarterly Dates prior to the Termination Date and on the Termination Date, with any Canadian Obligations converted to Dollars at the Exchange Rate on each such date for the purposes of each such calculation. (b) All past due fees payable under this Section shall bear interest at the Past Due Rate. 2.6 Several Obligations. The failure of any Lender to make any Loan to be made by it or to accept and purchase any Bankers' Acceptance required to be so accepted and purchased by it on the date specified therefor shall not relieve any other Lender of its obligation to make its Loan or to accept and purchase its Bankers' Acceptance on such date, but neither any Agent nor any Lender shall be responsible or liable for the failure of any other Lender to make a Loan or to accept and purchase any Bankers' Acceptance or to participate in, or co-issue, any Letter of Credit. Notwithstanding anything contained herein to the contrary, (i) if a U.S. Lender fails to make a U.S. Revolving Loan as and when required hereunder, then upon each subsequent event which would otherwise result in payments of principal being made to the defaulting U.S. Lender, the amount which would have been paid to the defaulting U.S. Lender shall be divided among the non-defaulting U.S. Lenders ratably according to their respective Commitment Percentages until the Obligations of each U.S. Lender (including the defaulting U.S. Lender) are equal to such U.S. Lender's Commitment Percentage of the total U.S. Revolving Loan Obligations and (ii) if a Canadian Lender fails to make a Canadian Revolving Loan or accept and purchase any Bankers' Acceptance as and when required hereunder, then upon each subsequent event which would otherwise result in payments of principal being made to the defaulting Canadian Lender, the amount which would have been paid to the defaulting Canadian Lender shall be divided among the non-defaulting Canadian Lenders ratably according to their respective Commitment Percentages until the Obligations of each Canadian Lender (including the defaulting Canadian Lender) are equal to such Canadian Lender's Commitment Percentage of the total Canadian Obligations. 2.7 Notes. The U.S. Revolving Loans made by each U.S. Lender shall be evidenced by a single U.S. Revolving Note of U.S. Borrower in substantially the form of Exhibit D hereto payable to the order of such U.S. Lender in a principal amount equal to the U.S. Commitment of such U.S. Lender, and otherwise duly completed. The Canadian Revolving Loans made by each Canadian Lender which are denominated in Dollars shall be evidenced by a single Canadian Revolving Note of Canadian Borrower in substantially the form of Exhibit C hereto payable to the order of such Canadian Lender in a principal amount equal to the Canadian Commitment of such Canadian Lender, and otherwise duly completed. The Canadian Prime Loans made by each Canadian Lender shall be evidenced by a single Canadian Dollar Revolving Note of Canadian Borrower in substantially the form of Exhibit H hereto payable to the order of such Canadian Lender in a principal amount equal to two times the Canadian Commitment of such Canadian Lender, and otherwise duly completed. The Term Loans made by each Lender shall be evidenced by a single Term Note of U.S. Borrower in substantially the form of Exhibit J hereto payable to the order of such 41 47 Lender in a principal amount equal to the sum of the outstanding principal balance of the Term Loans made by such Lender, and otherwise duly completed. The promissory notes described in this Section are each, together with all renewals, extensions, modifications and replacements thereof and substitutions therefor, called a "Note" and collectively called the "Notes". Each Lender is hereby authorized by each Borrower to endorse on the schedule (or a continuation thereof) that may be attached to each Note of such Lender, to the extent applicable, the date, amount, type of and the applicable period of interest for each Loan made by such Lender to the applicable Borrower hereunder, and the amount of each payment or prepayment of principal of such Loan received by such Lender, provided, that any failure by such Lender to make any such endorsement shall not affect the obligations of any Borrower under such Note or hereunder in respect of such Loan. 2.8 Use of Proceeds. The proceeds of the Loans and of the acceptance and purchase of Bankers' Acceptances shall be used by the Borrowers for acquisitions (including the acquisition and related costs contemplated by the Purchase Agreement) and for other working capital and general corporate purposes. Neither any Agent nor any Lender shall have any responsibility as to the use of any proceeds of the Loans or of the acceptance and purchase of Bankers' Acceptances. 2.9 Currency Fluctuations. (a) Not later than 1:00 p.m. (Houston, Texas time) on each Calculation Date, the U.S. Agent shall determine the Exchange Rate as of such Calculation Date. For purposes of this Section and Section 3.2(b)(4) hereof, the Exchange Rate so determined shall become effective on the first Business Day immediately following the relevant Calculation Date (a "Reset Date"). (b) Not later than 4:00 p.m. (Houston, Texas time) on each Reset Date, the U.S. Agent shall consult with the Canadian Agent and the Agents shall determine the Total Canadian Exposure and the aggregate U.S. Revolving Loan Obligations. (c) If, on any Reset Date or on the date of any reallocation of the U.S. Commitments and the Canadian Commitments pursuant to Section 2.4(c) hereof, the sum of the aggregate U.S. Revolving Loan Obligations and the Total Canadian Exposure exceeds the aggregate of all of the U.S. Commitments and the Canadian Commitments by five percent (5%) or more, then (i) the Agents shall give notice thereof to the Lenders and Borrowers and (ii) the Borrowers shall within two (2) Business Days thereafter, repay or prepay Loans (or provide Cover for Letter of Credit Liabilities or Bankers' Acceptance Liabilities) in accordance with this Agreement in an aggregate principal amount sufficient to reduce the sum of the aggregate U.S. Revolving Loan Obligations and the Total Canadian Exposure to the aggregate of all of the U.S. Commitments and the Canadian Commitments. (d) If, on any day prior to the Termination Date, the Total Canadian Exposure exceeds the aggregate of all of the Canadian Commitments by five percent (5%) or more, then (i) the Canadian Agent shall give notice thereof to the Canadian Borrower and the Canadian Lenders and (ii) within two (2) Business Days thereafter, the Canadian Borrower shall repay or prepay Canadian 42 48 Revolving Loans (or provide Cover for Letter of Credit Liabilities relating to Canadian Letters of Credit or Bankers' Acceptance Liabilities) in accordance with this Agreement in an aggregate principal amount such that, after giving effect thereto, the Total Canadian Exposure shall not exceed the aggregate of all of the Canadian Commitments. 3. Borrowings, Prepayments and Interest Options. 3.1 Borrowings. The applicable Borrower shall give the applicable Agent notice of each borrowing to be made hereunder as provided in Section 4.3 hereof and the applicable Agent shall promptly notify each applicable Lender of such request. Not later than 2:00 p.m. Houston, Texas time (in the case of U.S. Revolving Loans which are same day fundings), 11:00 a.m. Houston, Texas time (in the case of U.S. Revolving Loans which are not same day fundings), 11:00 a.m. Toronto, Ontario time (in the case of Canadian Revolving Loans which are not same day fundings and Bankers' Acceptances) or 1:00 p.m. Toronto, Ontario time (in the case of Canadian Revolving Loans which are same day fundings) on the date specified for each such borrowing hereunder, each applicable Lender shall make available the amount of the Loan, if any, to be made by it on such date and/or the proceeds of the acceptance and purchase of any Bankers' Acceptances, if any, to be so accepted and purchased by it on such date to the applicable Agent at its Principal Office, in immediately available funds, for the account of the applicable Borrower. Such amounts received by the applicable Agent will be held in an account maintained by the applicable Borrower with the applicable Agent. The amounts so received by the applicable Agent shall, subject to the terms and conditions of this Agreement, be made available to the applicable Borrower by wiring or otherwise transferring, in immediately available funds, such amount to an account designated by the applicable Borrower and approved by the applicable Agent. 3.2 Prepayments. (a) Optional Prepayments. Except as provided in Section 3.3 hereof, each Borrower shall have the right to prepay, on any Business Day, in whole or in part, without the payment of any premium, penalty or fee, any of the Obligations (other than Obligations relating to Bankers' Acceptances) at any time or from time to time, provided that the applicable Borrower shall give the applicable Agent notice of each such prepayment as provided in Section 4.3 hereof. Each optional prepayment on a Loan shall be in an amount equal to an integral multiple of $3,000,000 (in respect of Term Loans), $500,000 (in respect of Revolving Loans denominated in Dollars) or C$500,000 (in respect of Revolving Loans denominated in Canadian Dollars). Bankers' Acceptances may not be prepaid. Such optional prepayments of Term Loans shall be applied ratably (based on outstanding principal balances) to all Term Notes and shall be applied to scheduled principal installments in inverse order of their maturities. (b) Mandatory Prepayments and Cover. Except, in each case, as provided in Section 3.3 hereof, 43 49 (1) Insurance Proceeds and Condemnation Awards. (i) Promptly following the receipt thereof by U.S. Borrower or any of its Subsidiaries (other than Foreign Subsidiaries), U.S. Borrower shall deposit or cause to be deposited with U.S. Agent in an interest bearing account (but without any obligation to maximize such interest) all of the net cash proceeds of any payment or award in excess of $500,000 made to any such Person under any policy of Property insurance with respect to any Property owned by such Person or pursuant to any condemnation award with respect to any such Property; provided such amounts have not theretofore been reasonably expended for the restoration or replacement of the asset in respect of which such payment or award was made. Such amounts shall be collaterally assigned to U.S. Agent as security for the U.S. Obligations in a manner reasonably acceptable to U.S. Agent. Upon delivery to U.S. Agent of written certification by U.S. Borrower that the applicable Obligor has reasonably expended amounts or committed in writing to expend amounts for the restoration or replacement of the asset in respect of which such payment or award was made, specifying the amount expended or committed, so long as no Default or Event of Default shall have occurred and be continuing any such amount deposited with U.S. Agent shall be released by U.S. Agent to U.S. Borrower; provided, however, that, in the event that within 180 days of receipt of such payment or award by U.S. Borrower, to the extent U.S. Borrower shall not have actually spent or certified to U.S. Agent its intention to expend a substantially equivalent amount for the restoration or replacement of the asset in respect of which such payment or award was made or to purchase other assets that may be productively used in the business of the U.S. Borrower or the applicable Subsidiary, U.S. Borrower shall make a prepayment on the Term Loans (using any funds deposited with U.S. Agent pursuant to this Section 3.2(b)(1) or other funds) in the amount of the excess of the amount of such payment or award over the amount of such expenditures and/or commitment on such 180th day. Such prepayment shall be applied to the Term Notes secured by the applicable Collateral and shall be applied to scheduled principal installments in inverse order of their maturities. (ii) In cases where the amount of the net cash proceeds of any payment or award is equal to or less than $500,000 and no Default or Event of Default has occurred and is continuing, such proceeds may be paid to any Obligor, and if received by U.S. Agent shall be paid by U.S. Agent to U.S. Borrower, for use in paying for replacements or repairs of or substitutes for the damaged, destroyed or taken assets or in a manner otherwise consistent with this Agreement. (2) Excess Cash Flow. Within fifteen (15) Business Days after the delivery of the Annual Financial Statements pursuant to Section 7.2 hereof with respect to the fiscal year of U.S. Borrower (commencing with the fiscal year ending on March 31, 1999), U.S. Borrower shall make a prepayment on the Term Loans in an amount equal to (i) Excess Cash 44 50 Flow for such fiscal year times the Excess Cash Flow Percentage less (ii) optional prepayments made on the Term Loans during such fiscal year. Such prepayment shall be applied ratably to the Term Notes (based on outstanding principal balances) and shall be applied to scheduled principal installments in inverse order of their maturities. (3) U.S. Borrowing Base. U.S. Borrower shall from time to time on demand by U.S. Agent prepay the U.S. Revolving Loans (or provide Cover for Letter of Credit Liabilities relating to U.S. Letters of Credit) in such amounts as shall be necessary so that at all times the aggregate outstanding amount of all U.S. Revolving Loan Obligations shall be less than or equal to the Maximum U.S. Available Amount. (4) Canadian Borrowing Base. Canadian Borrower shall from time to time on demand by Canadian Agent prepay the Canadian Revolving Loans (or provide Cover for Letter of Credit Liabilities relating to Canadian Letters of Credit) in such amounts as shall be necessary so that at all times the aggregate outstanding amount of all Canadian Obligations shall be less than or equal to the Maximum Canadian Available Amount (provided, however, that for purposes of this clause (4), the Exchange Rate used for conversion of Canadian Dollars into Dollars shall be the Exchange Rate as of the most recently occurring Calculation Date). (5) Sale of Assets. U.S. Borrower shall make the payments required by Section 8.4(c) hereof. (6) Equity Proceeds. An amount equal to fifty percent (50%) of the net proceeds realized from the issuance of any equity securities by Group in connection with any public offering of securities shall be applied as a prepayment on the Term Loans concurrently with the receipt of such proceeds by Group. Such prepayment shall be applied ratably to the Term Notes (based on outstanding principal balances) and shall be applied to scheduled principal installments in inverse order of their maturities. (c) Term Loan Amortization. The principal of the Term Notes shall be due and payable in quarterly installments, each due on a Quarterly Date, beginning on March 31, 1999, equal to $1,160,714.29 (in the aggregate for all Term Notes) and allocated among the Term Loan Lenders pro rata in accordance with the unpaid principal balances of the Term Notes held by the Term Loan Lenders. On the Term Loan Maturity Date, the entire unpaid principal balance of each Term Note and all accrued and unpaid interest on the unpaid principal balance of each Term Note shall be finally due and payable. (d) Interest Payments. Accrued and unpaid interest on the unpaid principal balance of the Loans shall be due and payable on the Interest Payment Dates. 45 51 (e) Payments and Interest on Reimbursement Obligations. Each Borrower will pay to the applicable Agent for the account of each applicable Lender the amount of each Reimbursement Obligation owed by such Borrower. Such payment shall be due on the date on which the applicable Agent notifies the applicable Borrower of the date and amount of the applicable payment by an Issuer of any drawing under a Letter of Credit or on the date of maturity of any Bankers' Acceptance. The amount of any Reimbursement Obligation may, if the applicable conditions precedent specified in Sections 5.1 and 5.2 hereof have been satisfied, be paid with the proceeds of Loans or, in the case of Canadian Obligations, of the acceptance and purchase or Bankers' Acceptances. Subject to Section 11.7 hereof, each Borrower will pay to the applicable Agent for the account of each applicable Lender interest on any Reimbursement Obligation at (i) at the applicable Base Rate (with respect to Reimbursement Obligations denominated in Dollars) or at the Canadian Prime Rate (with respect to Reimbursement Obligations denominated in Canadian Dollars) plus the applicable Margin Percentage from the date such Reimbursement Obligation arises until the date five (5) Business Days thereafter and (ii) at the applicable Past Due Rate thereafter until the same is paid in full. 3.3 Interest Options (a) Options Available. The outstanding principal balance of the Canadian Dollar Revolving Notes shall bear interest at the Canadian Prime Rate and the outstanding principal balance of the other Notes shall bear interest at the applicable Base Rate; provided, that (1) all past due amounts, both principal and accrued interest, shall bear interest at the Past Due Rate, and (2) subject to the provisions hereof, each Borrower shall have the option of having all or any portion of the principal balances of its Notes (other than the Canadian Dollar Revolving Notes) from time to time outstanding bear interest at a Eurodollar Rate. The records of Agents and each of the Lenders with respect to Interest Options, Interest Periods and the amounts of Loans to which they are applicable shall be binding and conclusive, absent manifest error. Interest on the amount of each advance against the Notes shall be computed on the amount of that advance and from the date it is made. Notwithstanding anything in this Agreement to the contrary, for the full term of the Notes the interest rate produced by the aggregate of all sums paid or agreed to be paid to the holders of the Notes for the use, forbearance or detention of the debt evidenced thereby (including all interest on the Notes at the Stated Rate plus the Additional Interest) shall not exceed the Ceiling Rate. (b) Designation and Conversion. Each Borrower shall have the right to designate or convert its Interest Options in accordance with the provisions hereof. Provided no Event of Default has occurred and is continuing and subject to the last sentence of Section 3.3(a) and the provisions of Section 3.3(c), each Borrower may elect to have a Eurodollar Rate apply or continue to apply to all or any portion of the principal balance of its Notes (other than the Canadian Dollar Revolving Notes). Each change in Interest Options shall be a conversion of the rate of interest applicable to the specified portion of the Loans, but such conversion shall not change the respective outstanding principal balances of the applicable Notes. The Interest Options shall be designated or converted in the manner provided below: 46 52 (i) The applicable Borrower shall give the applicable Agent telephonic notice, promptly confirmed by a Rate Designation Notice (and the applicable Agent shall promptly inform each applicable Lender thereof). Each such telephonic and written notice shall specify the amount of the Loan and type (i.e. U.S. Revolving Loan, Canadian Revolving Loan or Term Loan) which is the subject of the designation, if any; the amount of borrowings into which such borrowings are to be converted or for which an Interest Option is designated; the proposed date for the designation or conversion and the Interest Period or Periods, if any, selected by the applicable Borrower. Such telephonic notice shall be irrevocable and shall be given to the applicable Agent no later than the applicable Rate Designation Date. (ii) No more than three (3) LIBOR Borrowings shall be in effect with respect to the U.S. Revolving Loans at any time and no more than three (3) LIBOR Borrowings shall be in effect with respect to the Canadian Revolving Loans at any time. No more than three (3) LIBOR Borrowings shall be in effect with respect to the Term Loans at any time. No single LIBOR Borrowing may include any combination of any two or more of U.S. Revolving Loans, Canadian Revolving Loans and Term Loans. (iii) Each designation or conversion of a LIBOR Borrowing shall occur on a LIBOR Business Day. (iv) Except as provided in Section 3.3(c) hereof, no LIBOR Borrowing may be converted to a Base Rate Borrowing or another LIBOR Borrowing on any day other than the last day of the applicable Interest Period. (v) Each request for a LIBOR Borrowing shall be in the amount equal to $500,000 or an integral multiple of $100,000 in excess thereof. (vi) Each designation of an Interest Option with respect to the U.S. Revolving Notes shall apply to all of the U.S. Revolving Notes ratably in accordance with their respective outstanding principal balances. Each designation of an Interest Option with respect to the Canadian Revolving Notes shall apply to all of the Canadian Revolving Notes ratably in accordance with their respective outstanding principal balances. Each designation of an Interest Option with respect to the Term Notes shall apply to all of the Term Notes ratably in accordance with their respective outstanding principal balances. If any Lender assigns an interest in any of its Notes when any LIBOR Borrowing is outstanding with respect thereto, then such assignee shall have its ratable interest in such LIBOR Borrowing. (vii) The entire outstanding principal balance of the Canadian Dollar Revolving Notes shall bear interest at the Canadian Prime Rate. 47 53 (c) Special Provisions Applicable to LIBOR Borrowings. (i) Options Unlawful. If the adoption of any applicable Legal Requirement after the Effective Date or any change after the Effective Date in any applicable Legal Requirement or in the interpretation or administration thereof by any Governmental Authority or compliance by any Lender with any request or directive (whether or not having the force of law) issued after the Effective Date by any central bank or other Governmental Authority shall at any time make it unlawful or impossible for any Lender to permit the establishment of or to maintain any LIBOR Borrowing, the commitment of such Lender to establish such LIBOR Borrowing shall forthwith be canceled and the applicable Borrower shall forthwith, shall on the last day of the Interest Period relating to any outstanding LIBOR Borrowing (or within such earlier period as may be required by applicable law) (1) convert the LIBOR Borrowing of such Lender with respect to which such demand was made to a Base Rate Borrowing; (2) pay all accrued and unpaid interest to date on the amount so converted; and (3) pay any amounts required to compensate each Lender for any additional cost or expense which any Lender may incur as a result of such adoption of or change in such Legal Requirement or in the interpretation or administration thereof and any Funding Loss which any Lender may incur as a result of such conversion. If, when any Agent so notifies any Borrower, such Borrower has given a Rate Designation Notice specifying a LIBOR Borrowing but the selected Interest Period has not yet begun, as to the applicable Lender such Rate Designation Notice shall be deemed to be of no force and effect, as if never made, and the balance of the Loans made by such Lender specified in such Rate Designation Notice shall bear interest at the Base Rate until a different available Interest Option shall be designated in accordance herewith. (ii) Increased Cost of Borrowings. Subject to Section 11.17, if the adoption after the Effective Date of any applicable Legal Requirement or any change after the Effective Date in any applicable Legal Requirement or in the interpretation or administration thereof by any Governmental Authority or compliance by any Lender with any request or directive (whether or not having the force of law) issued after the Effective Date by any central bank or Governmental Authority shall at any time as a result of any portion of the principal balances of the Notes being maintained on the basis of a Eurodollar Rate: (1) subject any Lender to any Taxes, or any deduction or withholding for any Taxes, on or from any payment due under any LIBOR Borrowing or other amount due hereunder, other than income and franchise taxes of the United States or its political subdivisions or such other jurisdiction in which the applicable Lender has its principal office or applicable lending office; or (2) change the basis of taxation of payments due from any Borrower to any Lender under any LIBOR Borrowing (otherwise than by a change in the rate of taxation of the overall net income of such Lender); or (3) impose, modify, increase or deem applicable any reserve requirement (excluding that portion of any reserve requirement included in the calculation 48 54 of the applicable Eurodollar Rate), special deposit requirement or similar requirement (including, but not limited to, state law requirements) against assets of any Lender, or against deposits with any Lender, or against loans made by any Lender, or against any other funds, obligations or other Property owned or held by any Lender; or (4) impose on any Lender any other condition regarding any LIBOR Borrowing; and the result of any of the foregoing is to increase the cost to any Lender of agreeing to make or of making, renewing or maintaining such LIBOR Borrowing, or reduce the amount of principal or interest received by any Lender, then, within 15 Business Days after demand by any Agent (accompanied by a statement setting forth in reasonable detail the applicable Lender's basis therefor), the applicable Borrower shall pay to the applicable Agent additional amounts which shall compensate each Lender for such increased cost or reduced amount. The determination by any Lender of the amount of any such increased cost, increased reserve requirement or reduced amount shall be conclusive and binding, absent manifest error. Each Borrower shall have the right, if it receives from any Agent any notice referred to in this paragraph, upon three Business Days' notice to the applicable Agent (which shall notify each affected Lender), either (i) to repay in full (but not in part) any borrowing with respect to which such notice was given, together with any accrued interest thereon, or (ii) to convert the LIBOR Borrowing which is the subject of the notice to a Base Rate Borrowing; provided, that any such repayment or conversion shall be accompanied by payment of (x) the amount required to compensate each Lender for the increased cost or reduced amount referred to in the preceding paragraph; (y) all accrued and unpaid interest to date on the amount so repaid or converted, and (z) any Funding Loss which any Lender may incur as a result of such repayment or conversion. Each Lender will notify the applicable Borrower through the applicable Agent of any event occurring after the date of this Agreement which will entitle such Lender to compensation pursuant to this Section as promptly as practicable after it obtains knowledge thereof and determines to request such compensation, and (if so requested by the applicable Borrower through the applicable Agent) will designate a different lending office of such Lender for the applicable LIBOR Borrowing or will take such other action as the applicable Borrower may reasonable request if such designation or action is consistent with the internal policy of such Lender and legal and regulatory restrictions, will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Lender, be disadvantageous to such Lender. (iii) Inadequacy of Pricing and Rate Determination. If, for any reason with respect to any Interest Period, the applicable Agent (or, in the case of clause 3 below, the applicable Lender) shall have determined (which determination shall be conclusive and binding upon the applicable Borrower, absent manifest error) that: (1) such Agent is unable through its customary general practices to determine any applicable Eurodollar Rate, or 49 55 (2) by reason of circumstances affecting the applicable market, generally, such Agent is not being offered deposits in United States dollars in such market, for the applicable Interest Period and in an amount equal to the amount of any applicable LIBOR Borrowing requested by the applicable Borrower, or (3) any applicable Eurodollar Rate will not adequately and fairly reflect the cost to any Lender of making and maintaining such LIBOR Borrowing hereunder for any proposed Interest Period, then the applicable Agent shall give the applicable Borrower notice thereof and thereupon, (A) any Rate Designation Notice previously given by such Borrower designating the applicable LIBOR Borrowing which has not commenced as of the date of such notice from such Agent shall be deemed for all purposes hereof to be of no force and effect, as if never given, and (B) until the applicable Agent shall notify such Borrower that the circumstances giving rise to such notice from such Agent no longer exist, each Rate Designation Notice requesting the applicable Eurodollar Rate shall be deemed a request for a Base Rate Borrowing, and any applicable LIBOR Borrowing then outstanding shall be converted, without any notice to or from the applicable Borrower, upon the termination of the Interest Period then in effect with respect to it, to a Base Rate Borrowing. (iv) Funding Losses. Each Borrower shall indemnify each applicable Lender against and hold each applicable Lender harmless from any Funding Loss relating to Loans to such Borrower or relating to Bankers' Acceptances requested by such Borrower. Subject to Section 11.17, this indemnity shall survive the payment of the Notes. Within 15 Business Days after demand by any Agent (accompanied by a certificate of the applicable Lender setting forth in reasonable detail the amount and calculation of the amount claimed as to any Funding Losses, which shall be conclusive and binding upon the applicable Borrower, absent manifest error), the applicable Borrower shall pay to such Agent, for the account of such Lender, the amount of such Funding Losses. (d) Funding Offices; Adjustments Automatic; Calculation Year. Any Lender may, if it so elects, fulfill its obligation as to any LIBOR Borrowing by causing a branch or affiliate of such Lender to make such Loan and may transfer and carry such Loan at, to or for the account of any branch office or affiliate of such Lender; provided, that in such event for the purposes of this Agreement such Loan shall be deemed to have been made by such Lender and the obligation of the applicable Borrower to repay such Loan shall nevertheless be to such Lender and shall be deemed held by it for the account of such branch or affiliate. Without notice to any Borrower or any other Person, each rate required to be calculated or determined under this Agreement shall automatically fluctuate upward and downward in accordance with the provisions of this Agreement. Interest at the Canadian Prime Rate or any applicable Prime Rate shall be computed on the basis of the actual number of days elapsed in a year consisting of 365 or 366 days, as the case may be. All other interest required to be calculated or determined under this Agreement shall be computed on the basis of the actual number of days elapsed in a year consisting of 360 days, unless the Ceiling Rate would thereby be exceeded, in which event, to the extent necessary to avoid exceeding the Ceiling Rate, 50 56 the applicable interest shall be computed on the basis of the actual number of days elapsed in the applicable calendar year in which accrued. (e) Funding Sources. Notwithstanding any provision of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of all or any part of the Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if each Lender had actually funded and maintained each LIBOR Borrowing during each Interest Period through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the Eurodollar Rate for such Interest Period. 4. Payments; Pro Rata Treatment; Computations, Etc. 4.1 Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest, Reimbursement Obligations and other amounts to be made by any Borrower hereunder, under the Notes and under the other Loan Documents shall be made in (i) with respect to Bankers' Acceptance Liabilities and Canadian Prime Loans, Canadian Dollars and (ii) in all other cases, in Dollars, in immediately available funds, to the applicable Agent at its Principal Office (or in the case of a successor U.S. Agent, at the principal office of such successor U.S. Agent in the United States or in the case of a successor Canadian Agent, at the principal office of such successor Canadian Agent in Canada), not later than 11:00 a.m. Houston, Texas time (in the case of any payment by the U.S. Borrower) or 12:00 noon Toronto, Ontario time (in the case of any payment by the Canadian Borrower) on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) Each Borrower shall, at the time of making each payment hereunder, under any Note or under any other Loan Document, specify to the applicable Agent the Obligations payable by such Borrower hereunder or thereunder to which such payment is to be applied. Each payment received by any Agent hereunder, under any Note or under any other Loan Document for the account of a Lender shall be paid promptly to such Lender, in immediately available funds. If any Agent fails to send to any Lender the applicable amount by the close of business on the date any such payment is received by such Agent if such payment is received prior to 11:00 a.m. Houston, Texas time (in the case of any payment to a U.S. Lender) or 12:00 noon Toronto, Ontario time (in the case of any payment to a Canadian Lender) (or on the next succeeding Business Day with respect to payments which are received after such time), such Agent shall pay to the applicable Lender interest on such amount from such date at a rate of interest per annum equal to (i) in respect of Obligations which are denominated in Dollars, the Federal Funds Rate and (ii) in respect of Canadian Obligations which are denominated in Canadian Dollars, the CDOR Rate. Borrowers, Lenders and Agents acknowledge and agree that this provision and each other provision of this Agreement or any of the other Loan Documents relating to the application of amounts in payment of the Obligations shall be subject to 51 57 the provisions of Section 4.2(d) regarding pro rata application of amounts after an Event of Default shall have occurred and be continuing. (c) If the due date of any payment hereunder or under any other Loan Document falls on a day which is not a Business Day, the due date for such payments (except as otherwise provided in clause (2) of the definition of "Interest Period") shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. (d) All payments by any Borrower hereunder or under any other Loan Document shall be made free and clear of and without deduction for or on account of any present or future income, stamp, or other taxes, fees, duties, withholding or other charges of any nature whatsoever imposed by any taxing authority excluding in the case of each Agent, each Issuer and each Lender taxes imposed on or measured by its net income or franchise taxes imposed by the jurisdiction in which it is organized or through which it acts for purposes of this Agreement (such non-excluded items being hereinafter referred to as "Taxes"). If as a result of any change in law (or the interpretation thereof) after the date that the applicable Agent, the applicable Issuer or the applicable Lender became a party to this Agreement any withholding or deduction from any payment to be made to, or for the account of, such Person by any Borrower hereunder or under any other Loan Document is required in respect of any Taxes pursuant to any applicable law, rule, or regulation, then such Borrower will (i) pay to the relevant authority the full amount required to be so withheld or deducted; (ii) to the extent available, promptly forward to the applicable Agent an official receipt or other documentation reasonably satisfactory to such Agent evidencing such payment to such authority; and (iii) pay to the applicable Agent, for the account of each affected Person, such additional amount or amounts as are necessary to ensure that the net amount actually received by such Person will equal the full amount such Lender would have received had no such withholding or deduction been required. Each such Person shall determine such additional amount or amounts payable to it (which determination shall, in the absence of manifest error, be conclusive and binding on each Borrower). If any Agent, any Issuer or any Lender becomes aware that any such withholding or deduction from any payment to be made by any Borrower hereunder or under any other Loan Document is required, then such Person shall promptly notify the applicable Agent and the applicable Borrower thereof stating the reasons therefor and the additional amount required to be paid under this Section. Each Lender shall execute and deliver to the applicable Agent and the applicable Borrower such forms as it may be required to execute and deliver pursuant to Section 11.13 hereof. To the extent that any such withholding or deduction results from the failure of a Lender to provide a form required by Section 11.13 hereof (unless such failure is due to some prohibition under applicable Legal Requirements), the applicable Borrower shall have no obligation to pay the additional amount required by clause (iii) above. Anything in this Section notwithstanding, if any Lender elects to require payment by any Borrower of any material amount under this Section, the applicable Borrower may, within 60 days after the date of receiving notice thereof and so long as no Default shall have occurred and be continuing, elect to terminate such Lender as a party to this Agreement; provided that, concurrently with such termination the applicable Borrower shall (i) if the Agents and each of the other Lenders shall consent, pay that Lender all principal, interest and fees and other amounts owed to such Lender through such date of termination or (ii) have arranged for another 52 58 financial institution approved by the Agents (such approval not to be unreasonably withheld or delayed) as of such date, to become a substitute Lender for all purposes under this Agreement in the manner provided in Section 11.6; provided further that, prior to substitution for any Lender, the applicable Borrower shall have given written notice to the Agents of such intention and the Lenders shall have the option, but no obligation, for a period of 60 days after receipt of such notice, to increase their U.S. Commitments or Canadian Commitments, as the case may be, in order to replace the affected Lender in lieu of such substitution. 4.2 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each borrowing from the Lenders under Section 2.1 hereof shall be made (x) in the case of Canadian Revolving Loans, ratably from the Canadian Lenders in accordance with their respective Canadian Commitments, (y) in the case of U.S. Revolving Loans, ratably from the U.S. Lenders in accordance with their respective U.S. Commitments and (z) in the case of Term Loans, ratably from the Term Loan Lenders in accordance with the amounts set forth opposite their signature lines hereto under the heading "Term Loans"; (b) each payment of commitment fees shall be made for the account of the Lenders, and each termination or reduction of the U.S. Commitments or Canadian Commitments of the Lenders under Section 2.3 hereof shall be applied, pro rata, according to the Lenders' respective U.S. Commitments or Canadian Commitments, as the case may be; (c) each payment by any Borrower of principal of or interest on the Term Loans, Canadian Revolving Loans, U.S. Revolving Loans or any Bankers' Acceptance, as the case may be, prior to the occurrence of an Event of Default (or after the applicable Event of Default shall have been fully cured or waived) shall be made to the applicable Agent for the account of the applicable Lenders pro rata in accordance with the respective unpaid principal amounts of the Term Loans, Canadian Revolving Loans or U.S. Revolving Loans (as the case may be) held by or Bankers' Acceptances accepted by such Lenders; (d) each payment by any Borrower of principal of or interest on the Term Loans, Canadian Revolving Loans, U.S. Revolving Loans or any Bankers' Acceptance, as the case may be, while an Event of Default shall have occurred and be continuing, shall be made to the applicable Agent for the account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Obligations held by the Lenders (i.e. such payments shall be shared by all of the Lenders and not restricted to the holders of U.S. Revolving Notes, Canadian Revolving Notes, Canadian Dollar Notes or Term Notes, or Lenders having accepted Bankers' Acceptances, as the case may be, regardless of any attempted contrary designation by any Borrower), and (e) the applicable Lenders (other than the applicable Issuer) shall purchase from the applicable Issuer participations in each Letter of Credit to the extent of their respective U.S. Commitment Percentages or Canadian Commitment Percentages, as the case may be. 4.3 Certain Actions, Notices, Etc. Notices to the applicable Agent of any termination or reduction of U.S. Commitments or Canadian Commitments, as the case may be, and of borrowings and optional prepayments of Loans and requests for issuances of Letters of Credit shall be irrevocable and shall be effective only if received by the applicable Agent not later than 10:00 a.m. Houston, Texas time (in the case of U.S. Revolving Loans 53 59 which are same day fundings), 11:00 a.m. Houston, Texas time (in the case of U.S. Revolving Loans which are not same day fundings and U.S. Letters of Credit), 12:00 noon Toronto, Ontario time (in the case of Canadian Revolving Loans which are not same day fundings, Bankers' Acceptances and Canadian Letters of Credit) or 10:00 a.m. Toronto, Ontario time (in the case of Canadian Revolving Loans which are same day fundings) on the number of Business Days prior to the date of the relevant termination, reduction, borrowing and/or prepayment specified below:
Number of Business Days Prior Notice ------------ Section 2.4(c) Reallocations 10 Termination or Reduction of U.S. Commitments or Canadian Commitments 5 U.S. Revolving Loan or Canadian Revolving Loan repayment same day Base Rate Borrowings same day and Canadian Prime Loans Letter of Credit issuance 2 Prepayments required pursuant to Section 3.2(b) same day Optional prepayment of Term Loan 5 Selection of a Eurodollar Rate 3 LIBOR Business Days Bankers' Acceptances 2
Each such notice of termination or reduction shall specify the amount of the applicable U.S. Commitment or Canadian Commitment to be terminated or reduced. Each such notice of borrowing or prepayment shall specify the amount of the Loans to be borrowed or prepaid and the date of borrowing or prepayment (which shall be a Business Day). The applicable Agent shall promptly notify the affected Lenders of the contents of each such notice. 4.4 Non-Receipt of Funds by Any Agent. Unless the applicable Agent shall have been notified by a Lender or a Borrower (the "Payor") prior to the date on which such Lender is to make payment to such Agent of the proceeds of a Loan (or funding of a drawing under a Letter of Credit or reimbursement with respect to any drawing under a Letter of Credit or funding of a payment under a Bankers' Acceptance or reimbursement with respect to any payment under 54 60 a Bankers' Acceptance) to be made by it hereunder or the applicable Borrower is to make a payment to such Agent for the account of one or more of the Lenders, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to such Agent, the applicable Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to such Agent, the recipient of such payment (or, if such recipient is the beneficiary of a Letter of Credit, the applicable Borrower and, if such Borrower fails to pay the amount thereof to the applicable Agent forthwith upon demand, the applicable Lenders ratably in proportion to their respective Commitment Percentages) shall, on demand, pay to such Agent the amount made available by such Agent, together with interest thereon in respect of the period commencing on the date such amount was so made available by such Agent until the date Agent recovers such amount at a rate per annum for such period equal to (i) in respect of Obligations which are denominated in Dollars, the Federal Funds Rate and (ii) in respect of Canadian Obligations which are denominated in Canadian Dollars, the CDOR Rate. 4.5 Sharing of Payments, Etc. If a Lender shall obtain payment of any principal of or interest on any Loan made by it under this Agreement, on any Reimbursement Obligation or on any other Obligation then due to such Lender hereunder, through the exercise of any right of set-off (including, without limitation, any right of setoff or Lien granted under Section 9.2 hereof), banker's lien, counterclaim or similar right, or otherwise, it shall promptly purchase from the other Lenders participations in the Loans made, or Reimbursement Obligations or other Obligations held, by the other Lenders in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all the Lenders shall share the benefit of such payment (net of any expenses which may be incurred by such Lender in obtaining or preserving such benefit) pro rata in accordance with the unpaid Obligations then due to each of them. To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. Each Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any Lender so purchasing a participation in the Loans made, or Reimbursement Obligations or other Obligations held, by other Lenders may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans, Reimbursement Obligations or other Obligations in the amount of such participation. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of any Borrower. 5. Conditions Precedent. 5.1 Initial Loans, Letters of Credit and Bankers' Acceptances. The obligation of each Lender or each Issuer to make its initial Loans or issue or participate in the initial Letter of Credit hereunder or to accept and purchase its initial Bankers' Acceptance hereunder (whichever shall first 55 61 occur) is subject to the following conditions precedent, each of which shall have been fulfilled or waived to the satisfaction of Agents: (a) Authorization and Status. Agents shall have received (i) copies of the Organizational Documents of each Obligor certified as true and correct by its secretary, assistant secretary or other equivalent officer, (ii) evidence reasonably satisfactory to Agents of all action taken by each Obligor authorizing the execution, delivery and performance of the Loan Documents and all other documents related to this Agreement to which it is a party (including, without limitation, a certificate of the secretary, assistant secretary or other equivalent officer of each such party which is a corporation setting forth the resolutions of its Board of Directors authorizing the transactions contemplated thereby), and (iii) such certificates as may be appropriate to demonstrate the qualification and good standing of each Obligor in the jurisdiction of its organization and in each other jurisdiction where the failure in which to qualify could reasonably be expected to have a Material Adverse Effect. (b) Incumbency. Each Obligor shall have delivered to Agents a certificate in respect of the name and signature of each of the officers (i) who is authorized to sign on its behalf the applicable Loan Documents to which it is a party related to any Loan, the issuance of any Letter of Credit or the acceptance of any Bankers' Acceptance and (ii) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with any Loan, the issuance of any Letter of Credit or the acceptance of any Bankers' Acceptance. Each Agent and each Lender may conclusively rely on such certificates until they receive notice in writing from the applicable Obligor to the contrary. (c) Notes. Agents shall have received the appropriate Notes of Borrowers for each Lender, duly completed and executed. (d) Loan Documents. Each Obligor shall have duly executed and delivered the Loan Documents to which it is a party (in such number of copies as Agents shall have requested). Each such Loan Document shall be in substantially the form furnished to the Lenders prior to their execution of this Agreement, together with such changes therein as Agents may approve. (e) Security Matters. All such action as Agents shall have requested to perfect the Liens created pursuant to the Security Documents which are in effect as of the Effective Date shall have been taken, including, without limitation, where applicable, the filing and recording of the Security Documents with the appropriate Governmental Authorities. Agent shall also have received evidence satisfactory to it that the Liens created by the Security Documents constitute first priority Liens, except for the exceptions expressly provided for herein or therein, including, without limitation, delivery of all applicable stock certificates (with stock powers executed in blank), Uniform Commercial Code search reports and other applicable personal property registry reports, satisfactory title evidence in form and substance acceptable to Agent, and executed releases of any prior Liens (except as permitted by Section 8.2). 56 62 (f) Fees and Expenses. Borrowers shall have paid to Agents all unpaid fees in the amounts previously agreed upon in writing between any Borrower and any Agent. (g) Insurance. Borrowers shall have delivered to Agents certificates of insurance satisfactory to Agents evidencing the existence of all insurance required to be maintained by each Obligor by this Agreement and the Security Documents. (h) Opinions of Counsel. Agents shall have received such opinions of counsel to Obligors as Agents shall reasonably request with respect to Obligors and the Loan Documents. (i) Consents. Agents shall have received evidence satisfactory to the Majority Lenders that all material consents of each Governmental Authority and of each other Person, if any, reasonably required in connection with (a) the Loans, Letters of Credit and Bankers' Acceptances and (b) the execution, delivery and performance of this Agreement and the other Loan Documents have been satisfactorily obtained. (j) Key Agreements. Agents shall have received copies of the Key Agreements, in Proper Form, and, where applicable, shall have received evidence satisfactory to Agents that the transactions contemplated therein have been consummated, subject only to the requested funding hereunder. Upon request of Agents or the Majority Lenders, the copies of any designated Key Agreements shall be certified as true, correct and complete by the applicable Borrower. (k) Payment of Certain Outstanding Indebtedness. Agents shall have received evidence satisfactory to Agents that all existing Indebtedness owing under the credit facility previously provided to Canadian Borrower by BNS shall have been paid in full (or will be paid in full out of the initial advance hereunder) and that all rights to further advances under such facility shall have been terminated. (l) Purchase Agreement. Agents shall have received evidence satisfactory to the Majority Lenders that, concurrently with the initial advance made hereunder, the acquisition contemplated by the Purchase Agreement shall be consummated. (m) Merger of NATCO Holdings. Agents shall have received evidence satisfactory to the Majority Lenders that NATCO Holdings, Inc., a Delaware corporation, shall have been merged into Group. (n) Equity. Borrower shall have received not less than $5,250,000 in net proceeds from the sale of equity interests in Borrower. (o) Other Documents. Agents shall have received such other documents consistent with the terms of this Agreement and relating to the transactions contemplated hereby as Agents may reasonably request. 57 63 5.2 All Loans, Letters of Credit and Bankers' Acceptances. The obligation of each Lender to make any Loan to be made by it hereunder or to issue or participate in any Letter of Credit or to accept and purchase any Bankers' Acceptance is subject to (a) the accuracy, in all material respects, on the date of such Loan or such issuance or such acceptance and purchase of all representations and warranties of each Obligor contained in this Agreement and the other Loan Documents; (b) the applicable Agent shall have received the following, all of which shall be duly executed and in Proper Form: (1) a Request for Extension of Credit as to the Loan, Letter of Credit or Bankers' Acceptance, as the case may be, by the time and on the Business Day specified under Section 4.3 hereof, (2) in the case of a Letter of Credit, an Application, and (3) such other documents as the applicable Agent may reasonably require; (c) prior to the making of such Loan or the issuance of such Letter of Credit or the acceptance and purchase of such Bankers' Acceptance, there shall have occurred no event which could reasonably be expected to have a Material Adverse Effect; (d) no Default or Event of Default shall have occurred and be continuing, and (e) the making of such Loan or the issuance of such Letter of Credit or the acceptance and purchase of such Bankers' Acceptance shall not be illegal or prohibited by any Legal Requirement. The submission by any Borrower of a Request for Extension of Credit shall be deemed to be a representation and warranty that the conditions precedent to the applicable Loan or Letter of Credit or Bankers' Acceptance have been satisfied. 6. Representations and Warranties. To induce Agents, the Issuers and the Lenders to enter into this Agreement and to make the Loans and issue or participate in the Letters of Credit and accept and purchase Bankers' Acceptances, U.S. Borrower and Canadian Borrower each represents and warrants (such representations and warranties to survive any investigation and the making of the Loans and the issuance of any Letters of Credit and the acceptance and purchase of any Bankers' Acceptances) to the Lenders, Issuers and Agents as follows: 6.1 Organization. Each Obligor (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all necessary power and authority to conduct its business as presently conducted, and (c) is duly qualified to do business and in good standing in the jurisdiction of its organization and in all jurisdictions in which the failure to so qualify could reasonably be expected to have a Material Adverse Effect. 6.2 Financial Statements. Borrowers have furnished to Agents (i) audited consolidated financial statements (including a balance sheet) as to U.S. Borrower, Canadian Borrower and Group which fairly present in all material respects, in accordance with GAAP, the consolidated financial condition and the results of operations of such Persons as at the end of the fiscal year ended March 31, 1998, (ii) audited financial statements (including a balance sheet) as to The Cynara Company which, to the best knowledge of Borrowers, fairly present in all material respects, in accordance with GAAP, the consolidated financial condition and the results of operations of The Cynara Company as at the end of the fiscal year ended December 31, 1997, (iii) unaudited consolidating financial statements (including a balance sheet) as to U.S. Borrower and Canadian Borrower which fairly 58 64 present in all material respects, in accordance with GAAP, the consolidating financial condition and the results of operations of such Persons, on a consolidating basis, as at the end of the fiscal year ended March 31, 1998, (iv) unaudited consolidated financial statements (including a balance sheet) as to U.S. Borrower, Canadian Borrower and Group which fairly present in all material respects, in accordance with GAAP, the consolidated financial condition and the results of operations of such Persons as at the end of the fiscal quarter ended June 30, 1998 and (v) unaudited financial statements (including a balance sheet) as to The Cynara Company which, to the best knowledge of Borrowers, fairly present in all material respects, in accordance with GAAP, the consolidated financial condition and the results of operations of The Cynara Company as at the end of the fiscal quarter ended June 30, 1998. No events, conditions or circumstances have occurred from the date that the financial statements were delivered to Agent through the Effective Date which would cause said financial statements to be misleading in any material respect. Except for the Purchase Agreement, this Agreement and the other Loan Documents, there are no material instruments or liabilities which should be reflected in such financial statements provided to Agent which are not so reflected. 6.3 Enforceable Obligations; Authorization. The Loan Documents to which the applicable Obligors are parties are legal, valid and binding obligations of each applicable Obligor, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency and other similar laws and judicial decisions affecting creditors' rights generally and by general equitable principles. The execution, delivery and performance of the Loan Documents by the respective Obligors (a) have all been duly authorized by all necessary action; (b) are within the power and authority of each applicable Obligor; (c) do not and will not contravene or violate any Legal Requirement applicable to any applicable Obligor or the Organizational Documents of any applicable Obligor, the contravention or violation of which could reasonably be expected to have a Material Adverse Effect; (d) do not and will not result in the breach of, or constitute a default under, any material agreement or instrument by which any Obligor or any of its Property may be bound, and (e) do not and will not result in the creation of any Lien upon any Property of any Obligor, except in favor of Agents as expressly contemplated herein or therein. All necessary permits, registrations and consents for such making and performance have been obtained. Except as otherwise expressly stated in the Security Documents, the Liens of the Loan Documents will constitute valid and perfected first and prior Liens on the Property described therein, subject to no other Liens whatsoever except Permitted Liens. 6.4 Other Debt. No Obligor is in default in the payment of any other Indebtedness or under any agreement, mortgage, deed of trust, security agreement or lease to which it is a party and which default could reasonably be expected to have a Material Adverse Effect. 6.5 Litigation. There is no litigation or administrative proceeding, to the knowledge of any executive officer of any Borrower, pending or threatened against, nor any outstanding judgment, order or decree against, any Obligor before or by any Governmental Authority which does or could reasonably be expected to have a Material Adverse Effect. No Obligor is in default with respect to any judgment, order or decree of any Governmental Authority where such default could reasonably be expected to have a Material Adverse Effect. 59 65 6.6 Title. Each Obligor has good and marketable title to the Collateral, if any, pledged (or purported to be pledged) by such Obligor pursuant to the Security Documents, free and clear of all Liens (except Permitted Liens). 6.7 Taxes. Each Obligor has filed all tax returns required to have been filed and paid all taxes shown thereon to be due, except those for which extensions have been obtained and those which are being contested in good faith or where the failure to make required filings or pay required taxes could not reasonably be expected to have a Material Adverse Effect.. 6.8 Regulations U and X. None of the proceeds of any Loan or proceeds from the acceptance and purchase of Bankers' Acceptances will be used for the purpose of purchasing or carrying directly or indirectly any margin stock or for any other purpose that would constitute this transaction a "purpose credit" within the meaning of Regulations U and X of the Board of Governors of the Federal Reserve System, as any of them may be amended from time to time. 6.9 Subsidiaries. As of the Effective Date, U.S. Borrower has no Subsidiaries other than as set forth on Exhibit L hereto. The percentage of the issued and outstanding equity interests in each applicable Subsidiary which is owned by U.S. Borrower or one or more of its Subsidiaries is set forth on Exhibit L hereto. 6.10 No Untrue or Misleading Statements. No document, instrument or other writing furnished to the Lenders by or on behalf of any Obligor in connection with the transactions contemplated in any Loan Document contains any untrue material statement of fact or omits to state any such fact necessary to make the representations, warranties and other statements contained herein or in such other document, instrument or writing not misleading in any material respect. 6.11 ERISA. With respect to each Plan, each Borrower and each member of the Controlled Group have fulfilled their obligations, including obligations under the minimum funding standards of ERISA and the Code and are in compliance in all material respects with the provisions of ERISA and the Code. No event has occurred which could result in a liability of any Borrower or any member of the Controlled Group to the PBGC or a Plan (other than to make contributions in the ordinary course) that could reasonably be expected to have a Material Adverse Effect. There have not been any nor are there now existing any events or conditions that would cause the Lien provided under Section 4068 of ERISA to attach to any Property of any Borrower or any member of the Controlled Group. The aggregate Unfunded Liabilities in respect of all Plans as of the date hereof do not exceed $1,000,000. No "prohibited transaction" has occurred with respect to any Plan. 6.12 Investment Company Act. No Obligor is an investment company within the meaning of the Investment Company Act of 1940, as amended, or, directly or indirectly, controlled by or acting on behalf of any Person which is an investment company, within the meaning of said Act. 6.13 Public Utility Holding Company Act. No Obligor is an "affiliate" or a "subsidiary company" of a "public utility company," or a "holding company," or an "affiliate" or a "subsidiary 60 66 company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 6.14 Solvency. None of U.S. Borrower, Canadian Borrower, any other Obligor, U.S. Borrower and its Subsidiaries, on a consolidated basis, or Canadian Borrower and its Subsidiaries, on a consolidated basis, is "insolvent," as such term is used and defined in (i) the Bankruptcy Code and (ii) the fraudulent conveyance statutes of the State of Texas or of any jurisdiction in which any of the Collateral may be located. 6.15 Fiscal Year. The fiscal year of each Obligor currently ends on March 31, but prior to December 31, 1998, the fiscal year end of each of the Obligors will be changed to December 31. 6.16 Compliance. Each Obligor is in compliance with all Legal Requirements applicable to it, except to the extent that the failure to comply therewith could not reasonably be expected to have a Material Adverse Effect. 6.17 Environmental Matters. Each Obligor has, to the best knowledge of their respective executive officers, obtained and maintained in effect all Environmental Permits (or the applicable Person has initiated the necessary steps to transfer the Environmental Permits into its name or obtain such permits), the failure to obtain which could reasonably be expected to have a Material Adverse Effect. Each Obligor and its Properties, business and operations have been and are, to the best knowledge of their respective executive officers, in compliance with all applicable Requirements of Environmental Law and Environmental Permits the failure to comply with which could reasonably be expected to have a Material Adverse Effect. Each Obligor and its Properties, business and operations are not subject to any (A) Environmental Claims or (B), to the best knowledge of their respective executive officers (after making reasonable inquiry of the personnel and records of their respective Corporations), Environmental Liabilities, in either case direct or contingent, arising from or based upon any act, omission, event, condition or circumstance occurring or existing on or prior to the date hereof which could reasonably be expected to have a Material Adverse Effect. None of the officers of any Obligor has received any notice of any violation or alleged violation of any Requirements of Environmental Law or Environmental Permit or any Environmental Claim in connection with its Properties, liabilities, condition (financial or otherwise), business or operations which could reasonably be expected to have a Material Adverse Effect. Neither U.S. Borrower nor Canadian Borrower knows of any event or condition with respect to currently enacted Requirements of Environmental Laws presently scheduled to become effective in the future with respect to any of the Properties of any Obligor which could reasonably be expected to have a Material Adverse Effect, for which the applicable Obligor has not made good faith provisions in its business plan and projections of financial performance. 6.18 Collateral Covered. As of the Effective Date, the Collateral covered by the Security Documents constitutes substantially all material personal Property owned by U.S. Borrower and its Subsidiaries and all of the issued and outstanding equity interests in all of the Subsidiaries of U.S. 61 67 Borrower owned by U.S. Borrower or any of its Subsidiaries (with the Collateral being allocated between Canadian Obligations and U.S. Obligations as herein provided). 7. Affirmative Covenants. U.S. Borrower and Canadian Borrower each covenants and agrees with Agents and the Lenders that prior to the termination of this Agreement it will do or cause to be done, and cause each other Obligor (unless limited by the language of the applicable provision to less than all of the Obligors) to do or cause to be done, each and all of the following: 7.1 Taxes, Existence, Regulations, Property, Etc. At all times, except where failure or noncompliance could not reasonably be expected to have a Material Adverse Effect: (a) pay when due all taxes and governmental charges of every kind upon it or against its income, profits or Property, unless and only to the extent that the same shall be contested diligently in good faith and adequate reserves in accordance with GAAP have been established therefor; (b) do all things necessary to preserve its existence, qualifications, rights and franchises; (c) comply with all applicable Legal Requirements (including without limitation Requirements of Environmental Law) in respect of the conduct of its business and the ownership of its Property; and (d) cause its Property to be protected, maintained and kept in good repair and make all replacements and additions to such Property as may be reasonably necessary to conduct its business properly and efficiently. 7.2 Financial Statements and Information. Furnish to Agents and each Lender each of the following: (a) as soon as available and in any event within 120 days after the end of each applicable fiscal year, beginning with the fiscal year ending on December 31, 1998, Annual Financial Statements of U.S. Borrower, Canadian Borrower and Group; (b) as soon as available and in any event within 45 days after the end of each fiscal quarter of each applicable fiscal year, Quarterly Financial Statements of U.S. Borrower, Canadian Borrower and Group; (c) concurrently with the financial statements provided for in Subsections 7.2(a) and (b) hereof, such schedules, computations and other information, in reasonable detail, as may be reasonably required by Agents to demonstrate compliance with the covenants set forth herein or reflecting any non-compliance therewith as of the applicable date, all certified and signed by a duly authorized officer of U.S. Borrower as true and correct in all material respects to the best knowledge of such officer and, commencing with the quarterly financial statement prepared as of September 30, 1998, a compliance certificate ("Compliance Certificate") substantially in the form of Exhibit F hereto, duly executed by such authorized officer; (d) by June 30 of each fiscal year, U.S. Borrower's and Canadian Borrower's annual business plans for the next fiscal year (including their proforma balance sheets and income and cash flow projections for such fiscal year); (e) promptly upon their becoming publicly available, each financial statement, report, notice or definitive proxy statements sent by any Obligor to shareholders generally and each regular or periodic report and each registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by any Obligor with, or received by any Obligor in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency; (f) (1) as of the Effective Date and (2) within 20 days after (i) the end of each calendar month or (ii) receipt of a request therefor (which may be 62 68 given from time to time) from any Agent, a U.S. Borrowing Base Certificate and a Canadian Borrowing Base Certificate as at the Effective Date or the last day of such calendar month or the date of such receipt, as the case may be, together with such supporting information as any Agent may reasonably request; (g) within 30 days after (i) the end of each calendar quarter or (ii) receipt of a request therefor (which may be given from time to time) from any Agent, (1) a listing and aging of the Accounts of (x) U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) and (y) the Canadian Subsidiaries as of the end of the most recently ended calendar month, prepared in reasonable detail and containing such other information as any Agent may reasonably request and (2) a summary of the Inventory of (x) U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) and (y) the Canadian Subsidiaries as of the end of the most recently ended calendar month, prepared in reasonable detail and containing such other information as any Agent may reasonably request; (h) from time to time, at any time upon the request of any Agent, but at the cost of the applicable Borrower, a report of an independent collateral field examiner approved by Agents in writing and reasonably acceptable to the applicable Borrower (which may be, or be affiliated with, any Agent or one of the Lenders) with respect to the Accounts and Inventory components included in the U.S. Borrowing Base and the Canadian Borrowing Base (provided, however, that so long as no Event of Default has occurred and is continuing, Agents shall not require such a report more than once per calendar year and during the continuance of an Event of Default, Agents shall not require such a report more than once per calendar quarter), and (i) such other information relating to the condition (financial or otherwise), operations, prospects or business of any Obligor as from time to time may be reasonably requested by any Agent. Each delivery of a financial statement pursuant to this Section 7.2 shall constitute a restatement of the representations contained in the last two sentences of Section 6.2. 7.3 Financial Tests. Have and maintain: (a) Net Worth - Net Worth of not less than (1) at all times during the period commencing on the Effective Date through and including September 30, 1998, an amount equal to $32,500,000 and (2) at all times during each fiscal quarter thereafter, the minimum Net Worth required as of the end of the immediately preceding fiscal quarter plus 50% of the net income of U.S. Borrower and its Subsidiaries, on a consolidated basis (if positive), for the period from June 30, 1998 through the last day of the fiscal quarter ending immediately prior to the date of such calculation plus 100% of the net proceeds realized from the issuance of any equity securities by U.S. Borrower during that period plus 100% of Net Equity Proceeds received during that period. (b) Debt to Capitalization Ratio - a Debt to Capitalization Ratio of not greater than (1) 60% at all times during the period commencing on the Effective Date through and including March 31, 1999; (2) 55% at all times during the period commencing on April 1, 1999 through and including September 30, 1999; (3) 50% at all times during the period commencing on October 1, 1999 through and including March 31, 2000, and (4) 45% at all times thereafter. 63 69 (c) Fixed Charge Coverage Ratio - a Fixed Charge Coverage Ratio of not less than 1.25 to 1.00 at all times. 7.4 Inspection. Permit each Agent and each Lender upon 3 days' prior notice (unless a Default or an Event of Default has occurred which is continuing, in which case no prior notice is required) to inspect its Property in a manner consistent with applicable safety requirements and policies of insurance, to examine its files, books and records, except classified governmental material, and make and take away copies thereof, and to discuss its affairs with its officers and accountants, all during normal business hours and at such intervals and to such extent as any Agent may reasonably desire. 7.5 Further Assurances. Promptly execute and deliver, at the expense of U.S. Borrower or Canadian Borrower, as the case may be, any and all other and further instruments which may be reasonably requested by any Agent to cure any defect in the execution and delivery of any Loan Document in order to effectuate the transactions contemplated by the Loan Documents, and in order to grant, preserve, protect and perfect the validity and priority of the Liens created by the Security Documents. 7.6 Books and Records. Maintain books of record and account which permit financial statements to be prepared in accordance with GAAP. 7.7 Insurance. Maintain insurance on its Property with responsible companies in such amounts, with such deductibles and against such risks as are usually carried by owners of similar businesses and Properties in the same general areas in which the applicable Obligor operates or as any Agent may otherwise reasonably require, and furnish each Agent satisfactory evidence thereof promptly upon request. These insurance provisions are cumulative of the insurance provisions of the Security Documents. Each Agent shall be provided with a certificate showing coverages provided under the policies of insurance and such policies shall be endorsed to the effect that they will not be canceled for nonpayment of premium, reduced or affected in any material manner without thirty (30) days' prior written notice to Agents. 7.8 Notice of Certain Matters. Give Agents written notice of the following promptly after any executive officer of U.S. Borrower or Canadian Borrower shall become aware of the same: (a) the issuance by any court or governmental agency or authority of any injunction, order or other restraint prohibiting, or having the effect of prohibiting, the performance of this Agreement, any other Loan Document, or the making of the Loans or the acceptance and purchase of Bankers' Acceptances or the initiation of any litigation, or any claim or controversy which would reasonably be expected to result in the initiation of any litigation, seeking any such injunction, order or other restraint; 64 70 (b) the filing or commencement of any action, suit or proceeding, whether at law or in equity or by or before any court or any Governmental Authority involving claims in excess of $500,000 or which could reasonably be expected to result in a Default hereunder; and (c) any Event of Default or Default, specifying the nature and extent thereof and the action (if any) which is proposed to be taken with the respect thereto. Borrowers will also notify Agents in writing at least 30 days prior to the date that any Obligor changes its name or the location of its chief executive office or principal place of business or the place where it keeps its books and records. After the Effective Date, Borrowers will notify Agents in writing at least 45 days prior to any Borrower's or any of their Subsidiaries' (other than Foreign Subsidiaries which are not Canadian Subsidiaries) acquisition of any real Property or any material personal Property having aggregate fair market value in excess of $2,500,000, wherever located, other than the Collateral covered by the Security Documents (such acquisition or ownership being herein called an "Additional Collateral Event" and the Property so acquired or owned being herein called "Additional Collateral"). The occurrence of an Event of Default shall constitute an Additional Collateral Event in respect of which the Additional Collateral shall be all real and personal Property of Borrowers and their Subsidiaries which is not already covered by a Security Document. 7.9 Capital Adequacy. If any Lender shall have determined that the adoption after the Effective Date or effectiveness after the Effective Date (whether or not previously announced) of any applicable law, rule, regulation or treaty regarding capital adequacy, or any change therein after the Effective Date, or any change in the interpretation or administration thereof after the Effective Date by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender with any request or directive after the Effective Date regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency has or would have the effect of reducing the rate of return on such Lender's capital as a consequence of its obligations hereunder, under the Letters of Credit, the Notes or other Obligations held by it to a level below that which such Lender could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, upon satisfaction of the conditions precedent set forth in this Section, after demand by such Lender (with a copy to the appropriate Agent) as provided below, pay (subject to Sections 11.7 and 11.17 hereof) to such Lender such additional amount or amounts as will compensate such Lender for such reduction. The certificate of any Lender setting forth such amount or amounts as shall be necessary to compensate it and the basis thereof and reasons therefor shall be delivered as soon as practicable to U.S. Borrower or Canadian Borrower, as the case may be, and shall be conclusive and binding, absent manifest error. U.S. Borrower or Canadian Borrower, as the case may be, shall pay the amount shown as due on any such certificate within fifteen (15) Business Days after the delivery of such certificate. In preparing such certificate, a Lender may employ such assumptions and allocations of costs and expenses as it shall in good faith deem reasonable and may use any reasonable averaging and attribution method. 65 71 7.10 ERISA Information and Compliance. Promptly furnish to Agents: (i) immediately upon receipt, a copy of any notice of complete or partial withdrawal liability under Title IV of ERISA and any notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, (ii) if requested by any Agent, promptly after the filing thereof with the United States Secretary of Labor or the PBGC or the Internal Revenue Service or any Governmental Authority having jurisdiction under Applicable Canadian Pension Legislation, copies of each annual and other report or other information return with respect to each Plan or any trust created thereunder, (iii) immediately upon becoming aware of the occurrence of any "reportable event," as such term is defined in Section 4043 of ERISA, for which the disclosure requirements of Regulation Section 2615.3 promulgated by the PBGC have not been waived, or of any "prohibited transaction," as such term is defined in Section 4975 of the Code, in connection with any Plan or any trust created thereunder, a written notice signed by an authorized officer of the applicable Borrower or the applicable member of the Controlled Group specifying the nature thereof, what action the applicable Borrower or the applicable member of the Controlled Group is taking or proposes to take with respect thereto, and, when known, any action taken by the PBGC, the Internal Revenue Service, the Department of Labor or any other applicable Governmental Authority with respect thereto, (iv) promptly after the filing or receiving thereof by any Borrower or any member of the Controlled Group of any notice of the institution of any proceedings or other actions which may result in the termination of any Plan, in whole or in part, and (v) each request for waiver of the funding standards or extension of the amortization periods required by Sections 303 and 304 of ERISA or Section 412 of the Code promptly after the request is submitted by any Borrower or any member of the Controlled Group to the Secretary of the Treasury, the Department of Labor, the Internal Revenue Service or any other applicable Governmental Authority. To the extent required under applicable statutory funding requirements, each Borrower will fund, or will cause the applicable member of the Controlled Group to fund, all current service pension liabilities as they are incurred under the provisions of all Plans from time to time in effect and, in addition, with respect to Plans governed by Applicable Canadian Pension Legislation, all special payments in connection with solvency deficiencies or going concern Unfunded Liabilities, and comply with all applicable provisions of ERISA, in each case, except to the extent that failure to do the same could not reasonably be expected to have a Material Adverse Effect. Each Borrower covenants that it shall and shall cause each member of the Controlled Group to (1) make contributions to each Plan in a timely manner and in an amount sufficient to comply with the contribution obligations under such Plan and the minimum funding standards requirements of ERISA; (2) prepare and file in a timely manner all notices and reports required under the terms of ERISA including but not limited to annual reports; and (3) pay in a timely manner all required PBGC premiums, in each case, except to the extent that failure to do the same could not reasonably be expected to have a Material Adverse Effect. 7.11 Additional Security Documents. As soon as practicable and in any event within 30 days after an Additional Collateral Event, Borrowers shall (a) execute and deliver or cause to be executed and delivered Security Documents, in Proper Form, in favor of the applicable Agent and duly executed by the applicable Obligor, granting a first-priority Lien (except for Permitted Liens and except for Liens securing the EXIM Facility covering the "International Collateral", as such term is defined in the Security Agreements) upon the applicable Additional Collateral securing all of the 66 72 Canadian Obligations (in the case of Canadian Subsidiaries) or the U.S. Obligations (in the case of U.S. Borrower and its Subsidiaries which are not Foreign Subsidiaries), except as Agents may otherwise agree in order to limit recording taxes or similar charges based upon the amount secured, and such other documents (including, without limitation, all items reasonably required by Agents in connection with the applicable Security Documents previously executed hereunder, all in Proper Form) as may be reasonably required by Agents in connection with the execution and delivery of such Security Documents; (b) deliver or cause to be delivered such other documents or certificates consistent with the terms of this Agreement and relating to the transactions contemplated hereby as Agents may reasonably request, and (c) pay in full all documentary stamps, filing and recording fees, taxes and other fees and charges payable in connection with the filing and recording of any such Security Document. 7.12 Year 2000. Any reprogramming or testing required to permit the proper functioning, in and following the year 2000, of (i) each Obligors's computer systems, to the extent such systems are material to the conduct of any Obligor's business and (ii) equipment owned by any of the Obligors and containing embedded microchips (including systems and equipment supplied by others or with which any Obligor's systems interface), to the extent the proper functioning of such equipment owned by any of the Obligors is material to the conduct of any Obligor's business, will be completed in all material respects by September 30, 1999, to the extent failure to do so would reasonably be expected to have a Material Adverse Effect. The cost to Obligors of such reprogramming and testing and of reasonably foreseeable consequences of year 2000 to Obligors (including, without limitation, reprogramming errors and failure of others' systems or equipment) will not result in an Event of Default and could not reasonably be expected to have a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management systems of Obligors are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit Obligors to conduct their business without a Material Adverse Effect. 8. Negative Covenants. U.S. Borrower and Canadian Borrower each covenants and agrees with Agents and the Lenders that prior to the termination of this Agreement it will not, and will not suffer or permit any of their Subsidiaries to, do any of the following: 8.1 Borrowed Money Indebtedness. Create, incur, suffer or permit to exist, or assume or guarantee, directly or indirectly, or become or remain liable with respect to any Borrowed Money Indebtedness, whether direct, indirect, absolute, contingent or otherwise, except the following: (a) Indebtedness under this Agreement and the other Loan Documents and Indebtedness secured by Liens permitted by Section 8.2 hereof; (b) the liabilities existing on the date of this Agreement and disclosed in the financial statements delivered on or prior to the Effective Date pursuant to Section 6.2 hereof, and subject to Section 8.10 hereof, all renewals, extensions and replacements (but not increases) of any of the foregoing; (c) the Interest Rate Risk Indebtedness; (d) purchase money Indebtedness to acquire Equipment obtained by U.S. Borrower or any of its Subsidiaries in the 67 73 ordinary course of business not exceeding $3,000,000 at any one time outstanding, in the aggregate for all such Indebtedness; (e) Subordinated Indebtedness; (f) Indebtedness of U.S. Borrower and its Subsidiaries under the EXIM Facility; (g) Indebtedness created under leases which, in accordance with GAAP have been recorded or should be recorded as capital leases, in an aggregate amount not to exceed $1,000,000 at any one time outstanding; (h) pre-existing Indebtedness, not to exceed $2,000,000 in the aggregate at any one time outstanding, of Subsidiaries of U.S. Borrower which are acquired after the date hereof (provided, however, that no such Indebtedness was incurred at the instigation of U.S. Borrower in contemplation of the acquisition of such Subsidiary), and (i) without limitation of any other part of this Section, Indebtedness of U.S. Borrower or any of its Subsidiaries created, incurred or assumed after the Effective Date, in an aggregate amount not to exceed $500,000 at any one time outstanding. 8.2 Liens. Create or suffer to exist any Lien upon any of its Property now owned or hereafter acquired, or acquire any Property upon any conditional sale or other title retention device or arrangement or any purchase money security agreement; or in any manner directly or indirectly sell, assign, pledge or otherwise transfer any of its Accounts or General Intangibles; except: (a) Liens created pursuant to any Loan Document; (b) Permitted Liens; (c) Liens upon "International Collateral" (as defined in the EXIM Facility) securing the EXIM Facility, (d) other Liens securing the EXIM Facility which are subordinate and inferior to the Liens created pursuant to the Loan Documents; (e) pre-existing Liens securing pre-existing Indebtedness permitted under Section 8.1(h) hereof covering Property of the applicable Subsidiary of U.S. Borrower acquired after the date hereof (provided, however, that no such Liens were created and no such Indebtedness was incurred at the instigation of U.S. Borrower in contemplation of the acquisition of such Subsidiary); (f) Liens evidenced by capital leases permitted hereunder, and (g) a Lien on cash of Borrower or a Subsidiary of Borrower in an amount not exceeding $300,000 securing an existing $262,000 letter of credit issued by Bank One, Texas, N.A. in respect of which Borrower or a Subsidiary of Borrower is the applicant. 8.3 Contingent Liabilities. Directly or indirectly guarantee the performance or payment of, or purchase or agree to purchase, or assume or contingently agree to become or be secondarily liable in respect of, any obligation or liability of any other Person except for (a) the endorsement of checks or other negotiable instruments in the ordinary course of business; (b) obligations disclosed to Agents in the financial statements delivered on or prior to the Effective Date pursuant to Section 6.2 hereof (and all renewals, extensions and replacements--but not increases--of such obligations after the Effective Date), (c) those liabilities permitted under Sections 8.1 or 8.2 hereof, (d) accounts payable incurred in the ordinary course of business and (e) other contingent liabilities not exceeding $1,000,000 at any one time outstanding. 8.4 Mergers, Consolidations and Dispositions of Assets. In any single transaction or series of transactions, directly or indirectly: (a) liquidate or dissolve; provided that any Subsidiary of U.S. Borrower may liquidate, dissolve or take action to wind-up its operations if (i) U.S. Borrower determines such 68 74 action to be in the best interests of U.S. Borrower and its Subsidiaries, (ii) liquidating dividends are paid to U.S. Borrower or to a wholly-owned Subsidiary of U.S. Borrower, and (iii) U.S. Borrower gives Agents written notice of such action at least thirty (30) days prior to taking such action; (b) be a party to any merger or consolidation unless and so long as (i) no Default or Event of Default has occurred that is then continuing, (ii) immediately thereafter and giving effect thereto, no event will occur and be continuing which constitutes a Default, (iii) an Obligor is the surviving Person; (iv) the surviving Person ratifies and assumes each Loan Document to which any party to such merger was a party, and (v) Agents are given at least 30 days' prior written notice of such merger or consolidation; (c) sell, convey or lease all or any part of its assets, except for (i) sales of Inventory in the ordinary course of business, (ii) sales of other Property in the ordinary course of business, (iii) sales or other dispositions of Property not constituting Inventory or other Collateral in the ordinary course of business; (iv) sales or other dispositions of Property not constituting Collateral outside the ordinary course of business; provided the fair market value of all such Property does not exceed $1,000,000 during any fiscal year; (v) sales or other dispositions of Property (whether or not Collateral) expressly permitted by the other terms of this Agreement or any Loan Document, (vi) the sale or other disposition of the Property described on Exhibit K hereto and (vii) subject to the Borrowers' compliance with Section 3.2(b), dispositions occurring as the result of a casualty event or condemnation; provided, however, that, unless the Majority Lenders shall have otherwise consented in writing, the net proceeds realized from such sales or dispositions permitted under subclauses (iii), (iv), (v) and (vi) of this clause (c) must, within ninety (90) days after the applicable sale or disposition, either (I) be used to make a prepayment on the Term Loans pro rata based on their outstanding principal balances (with such payments to be credited to installments in inverse order of their maturity) or (II) be reinvested in assets that may be productively used in the business of U.S. Borrower or the applicable Subsidiary of U.S. Borrower, or (d) except for Liens in favor of Agents, pledge, transfer or otherwise dispose of any equity interest in any of U.S. Borrower's Subsidiaries or any Indebtedness of any of U.S. Borrower's Subsidiaries or issue or permit any Subsidiary of U.S. Borrower to issue any additional equity interest other than stock dividends subject to a Lien in favor of Agents. 8.5 Redemption, Dividends and Distributions. At any time: (a) redeem, retire or otherwise acquire, directly or indirectly, any equity interest in any Obligor or (b) make any distributions of any Property or cash to the owner of any of the equity interests in any Obligor other than Permitted Dividends and Permitted Investments. 69 75 8.6 Nature of Business. Change the nature of its business or enter into any business which is substantially different from the business in which it is presently engaged. 8.7 Transactions with Related Parties. Enter into any transaction or agreement with any officer, director or holder of any equity interest in any Obligor (or any Affiliate of any such Person) unless the same is upon terms substantially similar to those obtainable from wholly unrelated sources (to the best knowledge of Borrowers, after making reasonable inquiry). 8.8 Loans and Investments. Make any loan, advance, extension of credit or capital contribution to, or make or, except as permitted by Sections 8.4 or 8.9 hereof, have any Investment in, any Person, or make any commitment to make any such extension of credit or Investment, except (a) Permitted Investments; (b) normal and reasonable advances in the ordinary course of business to officers and employees; (c) accounts receivable and accounts payable arising in the ordinary course of business; (d) deposits in money market funds investing exclusively in Permitted Investments; (e) Investments disclosed in the financial statements delivered pursuant to Section 6.1; (f) routine advances by any Obligor to another Obligor (or any Subsidiary of an Obligor) in the ordinary course of business other than Investments, not to exceed $1,000,000 in the aggregate at any time; (g) Investments by any Obligor in any other Obligor which is not a Foreign Subsidiary, and (h) other Investments not to exceed $2,500,000 in the aggregate at any time. 8.9 Subsidiaries. Form, create or acquire any Subsidiary, except that U.S. Borrower (or any of its Subsidiaries) may form, create or acquire a wholly-owned Subsidiary so long as (a) immediately thereafter and giving effect thereto, no event will occur and be continuing which constitutes a Default; (b) if such Subsidiary is not a Foreign Subsidiary, (1) such Subsidiary shall execute and deliver to each Agent a Guaranty in substantially the same form as the Guaranties executed concurrently herewith, (2) such Subsidiary shall execute and deliver to U.S. Agent such Security Documents as U.S. Agent may reasonably require in order to create a valid, perfected, first priority Lien upon all of the real and personal Property of such Subsidiary (subject to exceptions set forth in this Agreement) securing the U.S. Obligations and (3) the applicable owner(s) of the equity interests in such Subsidiary shall execute and deliver to U.S. Agent such Security Documents as U.S. Agent may reasonably require in order to create a valid, perfected, first priority Lien upon all of the issued and outstanding equity interests in such Subsidiary; (c) if such Subsidiary is a Foreign Subsidiary and is not a wholly-owned direct Subsidiary of another Foreign Subsidiary, the applicable owner(s) of the equity interests in such Subsidiary shall execute and deliver to U.S. Agent such Security Documents as U.S. Agent may reasonably require in order to create a valid, perfected, first priority Lien upon 65% of the issued and outstanding equity interests in such Subsidiary and shall execute and deliver to Canadian Agent such Security Documents as Canadian Agent may reasonably require in order to create a valid, perfected, first priority Lien upon the remaining 35% of the issued and outstanding equity interests in such Subsidiary; (d) if such Subsidiary is a Canadian Subsidiary, (1) such Subsidiary shall execute and deliver to Canadian Agent a Guaranty in substantially the same form as the Guaranties executed concurrently herewith in favor of Canadian Agent and (2) such Subsidiary shall execute and deliver to Canadian Agent such Security Documents as Canadian Agent may reasonably require in order to create a valid, perfected, first priority Lien upon all of the real and 70 76 personal Property of such Subsidiary (subject to exceptions set forth in this Agreement) securing the Canadian Obligations, and (e) Agents are given at least 30 days' prior written notice of such formation, creation or acquisition. Notwithstanding the foregoing, no Foreign Subsidiary may form, create or acquire a Subsidiary which is not a Foreign Subsidiary. 8.10 Key Agreements. Terminate or agree to the termination of any Key Agreement or amend, modify or obtain or grant a waiver of any provision of any of the Key Agreements if such action could reasonably be expected to have a Material Adverse Effect (provided that no consent of any Agent or any Bank shall be required with respect to an amendment of the EXIM Facility which has the sole effect of increasing the EXIM Facility to an amount not greater than $10,000,000). 8.11 Organizational Documents. Amend, modify, restate or supplement any of its Organizational Documents if such action could reasonably be expected to have a Material Adverse Effect. 8.12 Unfunded Liabilities. Incur any Unfunded Liabilities after the Effective Date or allow any Unfunded Liabilities in excess of $1,000,000, in the aggregate, to arise or exist. 8.13 Operating Lease Expenses. Aggregate operating lease expenses (excluding lease payments under capital leases) shall not exceed, for U.S. Borrower and its Subsidiaries, in the aggregate in any fiscal year, $5,000,000. 8.14 Sale/Leasebacks. U.S. Borrower will not (and will not permit any of its Subsidiaries to) enter into any sale/leaseback transactions after the date hereof without the prior written consent of the Majority Lenders. Without limiting the foregoing, any leasehold estate acquired pursuant to a permitted sale/leaseback shall constitute Additional Collateral, and the closing of such sale/leaseback transaction shall constitute an Additional Collateral Event, for all purposes hereunder. 8.15 Subordinated Indebtedness. Except as expressly permitted in writing by the Majority Lenders, Borrowers will not amend, modify or obtain or grant a waiver of any provision of any document or instrument evidencing any Subordinated Indebtedness or purchase, redeem, retire or otherwise acquire for value, deposit any monies with any Person with respect to or make any payment or prepayment of the principal of or any other amount owing in respect of, any Subordinated Indebtedness. 8.16 Acquisitions. Acquire any real Property or any material personal Property after the Effective Date with respect to which the aggregate cash consideration (exclusive of consideration paid in equity and net of additional equity contributions made to Group by any of its shareholders which is restricted to be used for the applicable acquisition in a manner satisfactory to Agents) for a single transaction would exceed $10,000,000. 8.17 Negative Pledges. Except for (a) any of the Loan Documents, (b) the EXIM Facility, (c) agreements permitted by Section 8.1(g) but only with respect to the Property subject to the Lien 71 77 permitted thereby; (d) customary provisions in leases, licenses, asset sale agreements and other customary agreements not related to the Borrowed Money Indebtedness and entered into in the ordinary course of business, and (e) restrictions imposed by agreements governing Permitted Liens, enter into any agreement or contract which limits or restricts in any way the granting of Liens by U.S. Borrower or any of its Subsidiaries securing any of the Obligations. 9. Defaults. 9.1 Events of Default. If any one or more of the following events (herein called "Events of Default") shall occur, then either Agent may (and at the direction of the Majority Lenders, shall) do any or all of the following: (1) without notice to U.S. Borrower, Canadian Borrower or any other Person, declare the U.S. Commitments and the Canadian Commitments terminated (whereupon the Commitments shall be terminated) and/or accelerate the Termination Date to a date as early as the date of termination of the U.S. Commitments and the Canadian Commitments; (2) terminate any Letter of Credit allowing for such termination, by sending a notice of termination as provided therein and require the applicable Borrower to provide Cover for outstanding Letters of Credit; (3) declare the principal amount then outstanding of and the unpaid accrued interest on the Loans and Reimbursement Obligations and all fees and all other amounts payable hereunder, under the Notes and under the other Loan Documents to be forthwith due and payable, whereupon such amounts shall be and become immediately due and payable, without notice (including, without limitation, notice of acceleration and notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by U.S. Borrower and Canadian Borrower; provided that in the case of the occurrence of an Event of Default with respect to any Obligor referred to in clause (f), (g) or (h) of this Section 9.1, the U.S. Commitments and the Canadian Commitments shall be automatically terminated and the principal amount then outstanding of and unpaid accrued interest on the Loans and the Reimbursement Obligations and all fees and all other amounts payable hereunder, under the Notes and under the other Loan Documents shall be and become automatically and immediately due and payable, without notice (including, without limitation, notice of acceleration and notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by U.S. Borrower and Canadian Borrower, and (4) exercise any or all other rights and remedies available to any Agent or any Lenders under the Loan Documents, at law or in equity: (a) Payments - (i) any Obligor shall fail to make any payment or required prepayment of any installment of principal on the Loans or any Reimbursement Obligation payable under the Notes, this Agreement or the other Loan Documents when due or (ii) any Obligor fails to make any payment or required payment of interest with respect to the Loans, any Reimbursement Obligation or any other fee or amount under the Notes, this Agreement or the other Loan Documents when due and, in the case of clause (ii) only, such failure to pay continues unremedied for a period of five days; or (b) Other Obligations - any Obligor shall default in the payment when due of any principal of or interest on any Indebtedness having an outstanding principal amount of at 72 78 least $3,000,000 (other than the Loans and Reimbursement Obligations) and such default shall continue beyond any applicable period of grace and shall give rise to a right on the part of the holder of such Indebtedness to accelerate such Indebtedness; or any event or condition shall occur which results in the acceleration of the maturity of any such Indebtedness or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of any such Indebtedness or any Person acting on such holder's behalf to accelerate the maturity thereof and such event or condition shall not be cured within any applicable period of grace; or (c) Representations and Warranties - any representation or warranty made or deemed made by or on behalf of any Obligor in this Agreement or any other Loan Document or in any certificate furnished or made by any Obligor to Agents or the Lenders in connection herewith or therewith shall prove to have been incorrect, false or misleading in any material respect as of the date thereof or as of the date as of which the facts therein set forth were stated or certified or deemed stated or certified; or (d) Affirmative Covenants - (i) default shall be made in the due observance or performance of any of the covenants or agreements contained in Section 7.3 hereof or (ii) default is made in the due observance or performance of any of the other covenants and agreements contained in Section 7 hereof or any other affirmative covenant of any Obligor contained in this Agreement or any other Loan Document and such default continues unremedied for a period of 30 days after (x) notice thereof is given by any Agent to U.S. Borrower or to Canadian Borrower or (y) such default otherwise becomes known to any executive officer of U.S. Borrower or to Canadian Borrower, whichever is earlier; or (e) Negative Covenants - default is made in the due observance or performance by U.S. Borrower or Canadian Borrower of any of the other covenants or agreements contained in Section 8 of this Agreement or of any other negative covenant of any Obligor contained in this Agreement or any other Loan Document; or (f) Involuntary Bankruptcy or Receivership Proceedings - a receiver, receiver-manager, interim receiver, monitor, conservator, liquidator or trustee of any Obligor or of any of its Property is appointed by the order or decree of any court or agency or supervisory authority having jurisdiction, and such decree or order remains in effect for more than 90 days; or any Obligor is adjudicated bankrupt or insolvent; or any of such Person's Property is sequestered by court order and such order remains in effect for more than 90 days; or a petition is filed against any Obligor under any state or federal bankruptcy, reorganization, arrangement, insolvency, readjustment or debt, dissolution, liquidation or receivership law or any jurisdiction, whether now or hereafter in effect, and is not dismissed within 90 days after such filing; or (g) Voluntary Petitions or Consents - any Obligor commences a voluntary case or other proceeding or order seeking liquidation, reorganization, arrangement, insolvency, 73 79 readjustment of debt, dissolution, liquidation or other relief with respect to itself or its debts or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its Property, or consents to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or fails generally to, or cannot, pay its debts generally as they become due or takes any corporate action to authorize or effect any of the foregoing; or (h) Assignments for Benefit of Creditors or Admissions of Insolvency - any Obligor makes an assignment for the benefit of its creditors, or admits in writing its insolvency (including any admission of its inability to pay its debts generally as they become due), or consents to the appointment of a receiver, receiver-manager, interim receiver, monitor, trustee, or liquidator of such Obligor or of all or any substantial part of its Property; or (i) Undischarged Judgments - a final non-appealable judgment or judgments for the payment of money exceeding, in the aggregate, $1,000,000 (exclusive of amounts covered by insurance) is rendered by any court or other governmental body against any Obligor and such Obligor does not discharge the same or provide for its discharge in accordance with its terms, or procure a stay of execution thereof within 30 days from the date of entry thereof; or (j) Security Documents - any Security Document after delivery thereof, shall for any reason, except to the extent permitted by the terms of this Agreement or such Security Document, ceases to create a valid and perfected Lien of the first priority (subject to the Permitted Liens), required thereby on any of the Collateral individually or in the aggregate having a fair market value in excess of $1,000,000 purported to be covered thereby and securing that portion of the Obligations which is therein designated as being secured, or any Obligor (or any other Person who may have granted or purported to grant such Lien) will so state in writing or, after the creation thereof as herein provided, U.S. Agent shall cease to have a valid, perfected, first priority Lien upon all of the issued and outstanding equity interests in and to all Subsidiaries (other than Foreign Subsidiaries) of U.S. Borrower and upon 65% of the issued and outstanding equity interests in and to Foreign Subsidiaries of U.S. Borrower securing the U.S. Obligations or, after the creation thereof as herein provided, Canadian Agent shall cease to have a valid, perfected, first priority Lien upon the remaining 35% of the issued and outstanding equity interests in and to Foreign Subsidiaries of U.S. Borrower securing the Canadian Obligations; or (k) Ownership Change or Encumbrance - (i) any Person other than U.S. Borrower shall own any equity interest in any Subsidiary of U.S. Borrower (other than a 15% equity interest in NATCO Japan Co., Inc. currently owned by Persons other than U.S. Borrower) or any Person other than an Agent shall acquire any Lien on any equity interest in any Subsidiary of U.S. Borrower (other than a subordinate Lien in favor of the holder(s) of the 74 80 EXIM Facility); or (ii) Group shall cease to be the beneficial owner, directly or indirectly, of all of the equity interests in U.S. Borrower; or (iii) The Capricorn Group (Cap I, II and Affiliates) shall cease to be the beneficial owners, directly or indirectly, of at least 20% of the equity interests in Group or any Person shall own, directly or indirectly, more of the equity interests in Group than The Capricorn Group (Cap I, II and Affiliates). (l) Uninsured Loss - any Obligor shall be the subject of any uninsured or unindemnified casualty losses exceeding, in the aggregate, $1,000,000 in any fiscal year. 9.2 Right of Setoff. Upon the occurrence and during the continuance of any Event of Default, each Lender is hereby authorized at any time and from time to time, without notice to any Obligor (any such notice being expressly waived by U.S. Borrower, Canadian Borrower and the other Obligors), to setoff and apply any and all deposits, whether general or special, time or demand, provisional or final (but excluding the funds held in accounts clearly designated as escrow or trust accounts held by U.S. Borrower, Canadian Borrower or any other Obligor for the benefit of Persons which are not Affiliates of any Obligor), whether or not such setoff results in any loss of interest or other penalty, and including without limitation all certificates of deposit, at any time held, and any other funds or Property at any time held, and other Indebtedness at any time owing by such Lender to or for the credit or the account of U.S. Borrower, Canadian Borrower or any other Obligor against any and all of the Obligations irrespective of whether or not such Lender or any Agent will have made any demand under this Agreement, the Notes or any other Loan Document. Should the right of any Lender to realize funds in any manner set forth hereinabove be challenged and any application of such funds be reversed, whether by court order or otherwise, the Lenders shall make restitution or refund to U.S. Borrower or Canadian Borrower or the applicable other Obligor, as the case may be, pro rata in accordance with their U.S. Commitments or Canadian Commitments, as the case may be. Each Lender agrees to promptly notify U.S. Borrower, Canadian Borrower and Agents after any such setoff and application, provided that the failure to give such notice will not affect the validity of such setoff and application. The rights of Agents and the Lenders under this Section are in addition to other rights and remedies (including without limitation other rights of setoff) which Agents or the Lenders may have. This Section is subject to the terms and provisions of Sections 4.5 and 11.7 hereof. Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, any amounts realized under this Section which constitute an asset of any Foreign Subsidiary shall only be applied to the payment of Canadian Obligations. 9.3 Collateral Account. U.S. Borrower hereby agrees, in addition to the provisions of Section 9.1 hereof, that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by any Agent or by the Majority Lenders (through any Agent), pay to U.S. Agent an amount in immediately available funds equal to the then aggregate amount available for drawings under all outstanding U.S. Letters of Credit, which funds shall be held by U.S. Agent as Cover. Canadian Borrower hereby agrees, in addition to the provisions of Section 9.1 hereof, that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by any Agent or by the Majority Lenders (through any Agent), pay to Canadian Agent an amount in immediately available funds equal to the sum of the then aggregate amount available for drawings under all 75 81 outstanding Canadian Letters of Credit plus the unpaid principal balance of all outstanding Bankers' Acceptances, which funds shall be held by Canadian Agent as Cover. 9.4 Preservation of Security for Letter of Credit Liabilities. In the event that, following (i) the occurrence of an Event of Default and the exercise of any rights available to any Agent or any Lender under the Loan Documents, and (ii) payment in full of the principal amount then outstanding of and the accrued interest on the Loans and Reimbursement Obligations and fees and all other amounts payable hereunder and under the Loan Documents and all other amounts secured by the Security Documents, any Letters of Credit or Bankers' Acceptances shall remain outstanding and undrawn upon, the applicable Agent shall be entitled to hold (and each Borrower and each other Obligor hereby grants and conveys to Agent a security interest in and to) all cash or other Property ("Proceeds of Remedies") realized or arising out of the exercise of any rights available under the Loan Documents, at law or in equity, including, without limitation, the proceeds of any foreclosure, as collateral for the payment of any amounts due or to become due under or in respect of such Letters of Credit and/or such Bankers' Acceptances. Such Proceeds of Remedies shall be held for the ratable benefit of the U.S. Lenders or the Canadian Lenders, as the case may be. The rights, titles, benefits, privileges, duties and obligations of the applicable Agent with respect thereto shall be governed by the terms and provisions of this Agreement and, to the extent not inconsistent with this Agreement, the applicable Security Documents. The applicable Agent may, but shall have no obligation to, invest any such Proceeds of Remedies in such manner as such Agent, in the exercise of its sole discretion, deems appropriate. Such Proceeds of Remedies shall be applied to Reimbursement Obligations arising in respect of any such Letters of Credit, the payment of any Lender's obligations under any such Letter of Credit and/or the Obligations relating to any such Bankers' Acceptance when such Letter of Credit is drawn upon or such Bankers' Acceptance matures, as the case may be. Nothing in this Section shall cause or permit an increase in the maximum amount of the Obligations permitted to be outstanding from time to time under this Agreement. Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, any amounts realized under this Section which constitute an asset of any Foreign Subsidiary or which arise out of any voluntary Lien upon equity interests in any Foreign Subsidiary other than the 65% of such equity interests which is pledged as security for the U.S. Obligations shall only be applied to the payment of Canadian Obligations. 9.5 Currency Conversion After Maturity. At any time following the occurrence of an Event of Default and the acceleration of the maturity of the Obligations owed to the Canadian Lenders hereunder, the Canadian Lenders shall be entitled to convert, with two (2) Business Days' prior notice to Canadian Borrower, any and all or any part of the then unpaid and outstanding LIBOR Borrowings and Base Rate Borrowings of the Canadian Borrower to Canadian Prime Loans. Any such conversion shall be calculated so that the resulting Canadian Prime Loans shall be the equivalent on the date of conversion of the amount of Dollars so converted. Any accrued and unpaid interest denominated in Dollars at the time of any such conversion shall be similarly converted to Canadian Dollars, and such Canadian Prime Loans and accrued and unpaid interest thereon shall thereafter bear interest in accordance with the terms hereof. 76 82 9.6 Remedies Cumulative. No remedy, right or power conferred upon any Agent or any Lender is intended to be exclusive of any other remedy, right or power given hereunder or now or hereafter existing at law, in equity, or otherwise, and all such remedies, rights and powers shall be cumulative. 10. Agents. 10.1 Appointment, Powers and Immunities. Each U.S. Lender hereby irrevocably appoints and authorizes U.S. Agent to act as its agent hereunder, under the U.S. Letters of Credit and under the other Loan Documents with such powers as are specifically delegated to U.S. Agent by the terms hereof and thereof, together with such other powers as are reasonably incidental thereto. Each Canadian Lender hereby irrevocably appoints and authorizes Canadian Agent to act as its agent hereunder, under the Canadian Letters of Credit and under the other Loan Documents with such powers as are specifically delegated to Canadian Agent by the terms hereof and thereof, together with such other powers as are reasonably incidental thereto. Any Loan Documents executed in favor of any Agent shall be held by such Agent for the ratable benefit of the applicable Lenders. None of the Agents ("Agents" as used in this Section 10 shall include reference to their Affiliates and their own and their Affiliates' respective officers, shareholders, directors, employees and agents) (a) shall have any duties or responsibilities except those expressly set forth in this Agreement, the Letters of Credit, and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee or fiduciary for any Lender; (b) shall be responsible to any Lender for any recitals, statements, representations or warranties contained in this Agreement, the Letters of Credit or any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, the Letters of Credit or any other Loan Document, or for the value, validity, effectiveness, genuineness, enforceability, execution, filing, registration, collectibility, recording, perfection, existence or sufficiency of this Agreement, the Letters of Credit, or any other Loan Document or any other document referred to or provided for herein or therein or any Property covered thereby or for any failure by any Obligor or any other Person to perform any of its obligations hereunder or thereunder, or shall have any duty to inquire into or pass upon any of the foregoing matters; (c) shall be required to initiate or conduct any litigation or collection proceedings hereunder or under the Letters of Credit or any other Loan Document except to the extent requested and adequately indemnified by the Majority Lenders; (d) shall be responsible for any mistake of law or fact or any action taken or omitted to be taken by it hereunder or under the Letters or Credit or any other Loan Document or any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, including, without limitation, pursuant to its own negligence, except for its own gross negligence or willful misconduct; (e) shall be bound by or obliged to recognize any agreement among or between any Borrower and any Lender to which such Agent is not a party, regardless of whether such Agent has knowledge of the existence of any such agreement or the terms and provisions thereof; (f) shall be charged with notice or knowledge of any fact or information not herein set out or provided to such Agent in accordance with the terms of this Agreement or any other Loan Document; (g) shall be responsible for any delay, error, omission or default of any mail, telegraph, cable or wireless agency or operator, and (h) shall be responsible for the acts or edicts of any Governmental Authority. Any Agent may employ agents 77 83 and attorneys-in-fact and none of the Agents shall be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Without in any way limiting any of the foregoing, each Lender acknowledges that none of the Agents (nor any Issuer) shall have greater responsibility in the operation of the Letters of Credit than is specified in the Uniform Customs and Practice for Documentary Credits (1993 Revision, International Chamber of Commerce Publication No. 500). In any foreclosure proceeding concerning any Collateral, each holder of an Obligation if bidding for its own account or for its own account and the accounts of other Lenders is prohibited from including in the amount of its bid an amount to be applied as a credit against the Obligations held by it or the Obligations held by the other Lenders; instead, such holder must bid in cash only. However, in any such foreclosure proceeding, (i) U.S. Agent may (but shall not be obligated to) submit a bid for all U.S. Lenders (including itself) in the form of a credit against the U.S. Obligations, and U.S. Agent or its designee may (but shall not be obligated to) accept title to such collateral for and on behalf of all U.S. Lenders and (ii) Canadian Agent may (but shall not be obligated to) submit a bid for all Canadian Lenders (including itself) in the form of a credit against the Canadian Obligations, and Canadian Agent or its designee may (but shall not be obligated to) accept title to such collateral for and on behalf of all Canadian Lenders 10.2 Reliance. Each Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (which may be counsel for any Borrower), independent accountants and other experts selected by such Agent. None of the Agents shall be required in any way to determine the identity or authority of any Person delivering or executing the same. As to any matters not expressly provided for by this Agreement, the Letters of Credit, or any other Loan Document, each Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions of the Majority Lenders, and any action taken or failure to act by U.S. Agent pursuant thereto shall be binding on all of the U.S. Lenders and any action taken or failure to act by Canadian Agent pursuant thereto shall be binding on all of the Canadian Lenders. Pursuant to instructions of the Majority Lenders, the Agents shall have the authority to execute releases of the Security Documents on behalf of the Lenders without the joinder of any Lender. If any order, writ, judgment or decree shall be made or entered by any court affecting the rights, duties and obligations of any Agent under this Agreement or any other Loan Document, then and in any of such events such Agent is authorized, in its sole discretion, to rely upon and comply with such order, writ, judgment or decree which it is advised by legal counsel of its own choosing is binding upon it under the terms of this Agreement, the relevant Loan Document or otherwise; and if such Agent complies with any such order, writ, judgment or decree, then it shall not be liable to any Lender or to any other Person by reason of such compliance even though such order, writ, judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated. 10.3 Defaults. None of the Agents shall be deemed to have knowledge of the occurrence of a Default (other than the non-payment of principal of or interest on Loans or Reimbursement Obligations) unless such Agent has received notice from a Lender or a Borrower specifying such Default and stating that such notice is a "Notice of Default." In the event that any Agent receives 78 84 such a Notice of Default, such Agent shall give prompt notice thereof to the Lenders (and shall give each Lender prompt notice of each such non-payment). Each Agent shall (subject to Section 10.7 hereof) take such action with respect to such Notice of Default as shall be directed by the Majority Lenders and within its rights under the Loan Documents and at law or in equity, provided that, unless and until an Agent shall have received such directions, such Agent may (but shall not be obligated to) take such action, or refrain from taking such action, permitted hereby with respect to such Notice of Default as it shall deem advisable in the best interests of the Lenders and within its rights under the Loan Documents, at law or in equity. 10.4 Material Written Notices. In the event that any Agent receives any written notice of a material nature from any Borrower or any Obligor under the Loan Documents, such Agent shall promptly inform each of the Lenders thereof. 10.5 Rights as a Lender. With respect to their U.S. Commitments or Canadian Commitments, as the case may be, and the Obligations, each of Chase Texas and BNS, in its capacity as a Lender hereunder, shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting in its agency capacity, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include each Agent in its individual capacity. Each Agent may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust, letter of credit, agency or other business with any Borrower (and any of their Affiliates) as if it were not acting as an Agent, and each Agent may accept fees and other consideration from any Borrower (in addition to the fees heretofore agreed to between any Borrower and any Agent) for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. 10.6 Indemnification. The Canadian Lenders and the U.S. Lenders, respectively, agree to indemnify Canadian Agent and U.S. Agent, respectively (to the extent not reimbursed under Section 2.2(c), Section 11.3 or Section 11.4 hereof, but without limiting the obligations of any Borrower under said Sections 2.2(c), 11.3 and 11.4), ratably in accordance with the sum of the applicable Lenders' respective U.S. Commitments, Canadian Commitments and Term Loans, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever, REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF ANY INDEMNIFIED PARTIES, which may be imposed on, incurred by or asserted against the applicable Agent in any way relating to or arising out of this Agreement, the Letters of Credit or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses which any Borrower is obligated to pay under Sections 2.2(c), 11.3 and 11.4 hereof, interest, penalties, attorneys' fees and amounts paid in settlement, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents; provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. The obligations of the Lenders under this Section 10.6 shall survive the termination of this Agreement and the repayment of the Obligations. 79 85 10.7 Non-Reliance on Agents and Other Lenders. Each Lender agrees that it has received current financial information with respect to each Borrower and each other Obligor and that it has, independently and without reliance on any Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis of each Borrower and each other Obligor and decision to enter into this Agreement and that it will, independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. None of the Agents shall be required to keep itself informed as to the performance or observance by any Obligor of this Agreement, the Letters of Credit or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of any Obligor. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by an Agent hereunder, under the Letters of Credit or the other Loan Documents, none of the Agents shall have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of any Obligor (or any of their affiliates) which may come into the possession of any Agent. 10.8 Failure to Act. Except for action expressly required of an Agent hereunder, under the Letters of Credit or under the other Loan Documents, each Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction by the Lenders of their indemnification obligations under Section 10.6 hereof against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 10.9 Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor U.S. Agent or Canadian Agent, as the case may be, as provided below, U.S. Agent and Canadian Agent, respectively, may resign at any time by giving notice thereof to the U.S. Lenders and the Canadian Lenders, respectively, and to U.S. Borrower and Canadian Borrower, respectively. Any Agent may be removed at any time with or without cause by the Majority Lenders; provided, that such Agent shall continue as U.S. Agent or Canadian Agent, as the case may be, until such time as any successor shall have accepted appointment hereunder as U.S. Agent or Canadian Agent, as the case may be. Upon any such resignation or removal, (i) the Majority Lenders without the consent of any Borrower shall have the right to appoint a successor U.S. Agent or Canadian Agent, as the case may be, so long as such successor U.S. Agent or Canadian Agent, as the case may be, is also a Lender at the time of such appointment and (ii) the Majority Lenders shall have the right to appoint a successor U.S. Agent or Canadian Agent, as the case may be, that is not a Lender at the time of such appointment so long as Borrowers consent to such appointment (which consent shall not be unreasonably withheld). If no successor U.S. Agent or Canadian Agent, as the case may be, shall have been so appointed by the Majority Lenders and accepted such appointment within 30 days after the retiring U.S. Agent's or Canadian Agent's, as the case may be, giving of notice of resignation or the Majority Lenders' removal of the retiring U.S. Agent or Canadian Agent, as the case may be, then the retiring Agent may, on behalf of the applicable Lenders, appoint a successor U.S. Agent or Canadian Agent, as the case may be, without the necessity of any consent on the part of any Borrower or any Lender. Any successor U.S. Agent shall be a bank which has an office in the 80 86 United States and a combined capital and surplus of at least $250,000,000 and any successor Canadian Agent shall be a bank which has an office in Canada and a combined capital and surplus of at least C$250,000,000. Upon the acceptance of any appointment as U.S. Agent or Canadian Agent, as the case may be, hereunder 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 hereunder and under any other Loan Documents. Such successor Agent shall promptly specify by notice to Borrowers its Principal Office referred to in Section 3.1 and Section 4 hereof. After any retiring Agent's resignation or removal hereunder as an Agent, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. 10.10 No Partnership. Neither the execution and delivery of this Agreement nor any of the other Loan Documents nor any interest the Lenders, Agents or any of them may now or hereafter have in all or any part of the Obligations shall create or be construed as creating a partnership, joint venture or other joint enterprise between the Lenders or among the Lenders and any Agent. The relationship between the Lenders, on the one hand, and any Agent, on the other, is and shall be that of principals and agent only, and nothing in this Agreement or any of the other Loan Documents shall be construed to constitute any Agent as trustee or other fiduciary for any Lender or to impose on any Agent any duty, responsibility or obligation other than those expressly provided for herein and therein. 10.11 Authority of Agent. Each Lender acknowledges that the rights and responsibilities of each Agent under this Agreement and the Loan Documents with respect to any action taken by such Agent or the exercise or non-exercise by any Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement and/or the other Loan Documents shall, as between such Agent and the Lenders, be governed by this Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between such Agent and the Obligors, such Agent shall be conclusively presumed to be acting as agent for the applicable Lenders with full and valid authority so to act or refrain from acting; and each Obligor shall not be under any obligation, or entitlement, to make any inquiry respecting such authority. 11. Miscellaneous. 11.1 Waiver. No waiver of any Default or Event of Default shall be a waiver of any other Default or Event of Default. No failure on the part of any Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law or in equity. 81 87 11.2 Notices. All notices and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made by telegraph, telecopy (confirmed by mail), cable or other writing and telecopied, telegraphed, cabled, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof (or provided for in an Assignment and Acceptance); or, as to any party hereto, at such other address as shall be designated by such party in a notice (given in accordance with this Section) (i) as to any Borrower, to Agents, (ii) as to U.S. Agent, to U.S. Borrower and to each U.S. Lender, (iii) as to Canadian Agent, to Canadian Borrower and to each Canadian Lender, (iv) as to any U.S. Lender, to U.S. Borrower and Agents and (v) as to any Canadian Lender, to Canadian Borrower and Agents. Except as otherwise provided in this Agreement, all such notices or communications shall be deemed to have been duly given when (a) transmitted by telecopier or delivered to the telegraph or cable office, (b) personally delivered (c) one Business Day after deposit with an overnight mail or delivery service, postage prepaid or (d) three Business Days' after deposit in a receptacle maintained by the United States Postal Service or Canada Post, as the case may be, postage prepaid, registered or certified mail, return receipt requested, in each case given or addressed as aforesaid. 11.3 Expenses, Etc. Whether or not any Loan is ever made or any Bankers' Acceptances ever accepted and purchased or any Letter of Credit ever issued, Borrowers shall pay or reimburse within 10 Business Days after written demand (a) any Agent for paying the reasonable fees and expenses of legal counsel to such Agent, together with the reasonable fees and expenses of each local counsel to such Agent, in connection with the preparation, negotiation, execution and delivery of this Agreement (including the exhibits and schedules hereto), the Security Documents and the other Loan Documents and the making of the Loans and the acceptance and purchase of Bankers' Acceptances and the issuance of Letters of Credit hereunder, and any modification, supplement or waiver of any of the terms of this Agreement, the Letters of Credit or any other Loan Document; (b) any Agent for any reasonable and customary search fees, collateral audit fees, appraisal fees, survey fees, environmental study fees, and title insurance costs and premiums; (c) any Agent for reasonable out-of-pocket expenses incurred in connection with the preparation, documentation, administration and syndication of the Loans or any of the Loan Documents (including, without limitation, the advertising, marketing, printing, publicity, duplicating, mailing and similar expenses) of the Loans and Letter of Credit Liabilities; (d) Agent for paying all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement, any Letter of Credit or any other Loan Document or any other document referred to herein or therein; (e) any Agent for paying all costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any Lien contemplated by this Agreement, any Security Document or any document referred to herein or therein, and (f) following the occurrence and during the continuation of an Event of Default, any Lender or any Agent for paying all amounts reasonably expended, advanced or incurred by such Lender or such Agent to satisfy any obligation of any Obligor under this Agreement or any other Loan Document, to protect the Collateral, to collect the Obligations or to enforce, protect, preserve or defend the rights of the Lenders or Agents under this Agreement or any other Loan Document, including, without limitation, fees and expenses incurred in connection with such Lender's or such Agent's participation as a member of a creditor's committee in a case commenced under the Bankruptcy Code 82 88 or other similar law, fees and expenses incurred in connection with lifting the automatic stay prescribed in Section 362 of the Bankruptcy Code and fees and expenses incurred in connection with any action pursuant to Section 1129 of the Bankruptcy Code and all other reasonable and customary out-of-pocket expenses incurred by such Lender or such Agent in connection with such matters, together with interest thereon at the Past Due Rate applicable to U.S. Loans on each such amount from the due date until the date of reimbursement to such Lender or such Agent. 11.4 Indemnification. Borrowers, jointly and severally, shall indemnify each Agent, each Lender and each affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject, REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF ANY INDEMNIFIED PARTIES, insofar as such losses, liabilities, claims or damages arise out of or result from any (i) actual or proposed use by any Borrower of the proceeds of any extension of credit (whether a Loan, a Bankers' Acceptance or a Letter of Credit) by any Lender hereunder; (ii) breach by any Obligor of this Agreement or any other Loan Document; (iii) violation by any Obligor of any Legal Requirement, or (iv) investigation, litigation or other proceeding relating to any of the foregoing, and Borrowers, jointly and severally, shall reimburse each Agent, each Lender, and each Affiliate thereof and their respective directors, officers, employees and agents, upon demand for any reasonable and customary expenses (including reasonable and customary legal fees) incurred in connection with any such investigation or proceeding; provided, however, that none of the Borrowers shall have any obligations pursuant to this Section with respect to any losses, liabilities, claims, damages or expenses incurred by the Person seeking indemnification by reason of the gross negligence or willful misconduct of that Person or with respect to any disputes between or among any of Agents, Lenders and Issuers. Nothing in this Section is intended to limit the obligations of any Borrower under any other provision of this Agreement. Each Agent and each Lender, respectively, shall indemnify Borrowers and hold Borrowers harmless from and against the gross negligence or willful misconduct of such Agent or such Lender, as the case may be. Nothing in this Section shall render Canadian Borrower liable in respect of the U.S. Obligations. In the case of any indemnification hereunder, the applicable Agent or the respective Lender, as appropriate, shall give written notice to the applicable Borrower of any such claim or demand being made against an indemnified person and the applicable Borrower shall have the non-exclusive right to join in the defense against any such claim or demand, provided that if such Borrower provides a defense, the indemnified person shall bear its own cost of defense unless there is a conflict of interests between such Borrower and such indemnified person. No indemnified person may settle any claim to be indemnified without the consent of the applicable Borrower, such consent not to be unreasonably withheld or delayed. 11.5 Amendments, Etc. No amendment or modification of this Agreement, the Notes or any other Loan Document shall in any event be effective against any Borrower or any other Obligor party thereto unless the same shall be agreed or consented to in writing by such Person. No amendment, modification or waiver of any provision of this Agreement, the Notes or any other Loan Document, nor any consent to any departure by any Obligor therefrom, shall in any event be effective against the Lenders unless the same shall be agreed or consented to in writing by the Majority Lenders, and each such waiver or consent shall be effective only in the specific instance and for the 83 89 specific purpose for which given; provided, that no amendment, modification, waiver or consent shall, unless in writing and signed by each Lender affected thereby, do any of the following: (a) increase any U.S. Commitments or Canadian Commitments of any of the Lenders (or reinstate any termination or reduction of the U.S. Commitments or Canadian Commitments), or subject any of the Lenders to any additional obligations; (b) reduce the principal of, or interest on, any Loan, Reimbursement Obligation, fee or other amount due hereunder; (c) postpone or extend the Revolving Loan Maturity Date, the Term Loan Maturity Date, the Termination Date, the Availability Period or any scheduled date fixed for any payment of principal of, or interest on, any Loan, Reimbursement Obligation, fee or other sum to be paid hereunder or waive any Event of Default described in Section 9.1(a) hereof; (d) change the percentage of any of the U.S. Commitments or Canadian Commitments, as the case may be, or of the aggregate unpaid principal amount of Obligations, or the percentage of Lenders, which shall be required for the Lenders or any of them to take any action under this Agreement; (e) change any provision contained in Sections 2.2(c), 7.9, 11.3 or 11.4 hereof or this Section 11.5; (f) release any Person from liability under a Guaranty or release all or substantially all of the security for the Obligations or release Collateral (exclusive of Collateral with respect to which any Agent is obligated to provide a release pursuant to this Agreement or any of the other Loan Documents or by law) in any one (1) calendar year ascribed an aggregate value on the most recent financial statements of the applicable Borrower delivered to Agents in excess of $1,000,000; (g) increase any of the fixed percentages to be multiplied by the aggregate amounts of the components comprising the U.S. Borrowing Base or the Canadian Borrowing Base that are described in (i) and (ii) of the definition of the U.S. Borrowing Base and the Canadian Borrowing Base herein, or (h) modify the provisions of Sections 4.1(b) or 4.2 hereof regarding pro rata application of amounts after an Event of Default shall have occurred and be continuing. Notwithstanding anything in this Section 11.5 to the contrary, no amendment, modification, waiver or consent shall be made with respect to Section 10 without the consent of U.S. Agent to the extent it affects U.S. Agent, as U.S. Agent or Canadian Agent to the extent it affects Canadian Agent, as Canadian Agent. 11.6 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of Borrowers, Agents and the Lenders and their respective successors and assigns; provided, however, that, except as permitted by Section 8.4 hereof, no Borrower may assign or transfer any of its rights or obligations hereunder without the prior written consent of all of the Lenders, and any such assignment or transfer without such consent shall be null and void. Each Lender may sell participations to any Person in all or part of any Loan or Bankers' Acceptance, or all or part of its Notes, U.S. Commitments or Canadian Commitments, as the case may be, or interests in Letters of Credit or Bankers' Acceptances, in which event, without limiting the foregoing, the provisions of the Loan Documents shall inure to the benefit of each purchaser of a participation; provided, however, the pro rata treatment of payments, as described in Section 4.2 hereof and rights to compensation under Section 3.3 hereof, shall be determined as if such Lender had not sold such participation. No Lender that sells one or more participations to any Person shall be relieved by virtue of such participation from any of its obligations to Borrowers under this Agreement. In the event any Lender shall sell any participation, such Lender shall retain the sole right and responsibility to enforce the obligations of 84 90 Borrowers hereunder, including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement other than amendments, modifications or waivers with respect to (i) any fees payable hereunder to the Lenders, (ii) the amount of principal or the rate of interest payable on, or the dates fixed for the scheduled repayment of principal of, any of the Obligations and (iii) the release of the Liens on all or substantially all of the Collateral. (b) Each U.S. Lender may assign to one or more U.S. Lenders or any other Person all or a portion of its interests, rights and obligations under this Agreement; provided, however, that (i) the aggregate amount of the U.S. Commitments and Term Loans of the assigning U.S. Lender subject to each such assignment shall in no event be less than $5,000,000 and (ii) other than in the case of an assignment to another U.S. Lender (that is, at the time of the assignment, a party hereto) or to an Affiliate of such U.S. Lender or to a Federal Reserve Bank, Agents and, so long as no Event of Default shall have occurred and be continuing, U.S. Borrower must each give its prior written consent, which consents shall not be unreasonably withheld. Each Canadian Lender may assign to one or more Canadian Lenders or any other Person all or a portion of its interests, rights and obligations under this Agreement; provided, however, that (i) the aggregate amount of the Canadian Commitments of the assigning Canadian Lender subject to each such assignment shall in no event be less than $5,000,000 and (ii) other than in the case of an assignment to another Canadian Lender (that is, at the time of the assignment, a party hereto) or to an Affiliate of such Canadian Lender, Agents and, so long as no Event of Default shall have occurred and be continuing, Canadian Borrower must each give its prior written consent, which consents shall not be unreasonably withheld. As a condition precedent to any such assignment, the parties to each such assignment shall execute and deliver to the applicable Agent, for its acceptance an Assignment and Acceptance in substantially the form of Exhibit E hereto (each an "Assignment and Acceptance") with blanks appropriately completed, together with any Note or Notes subject to such assignment and a processing and recording fee of $3,000 paid by the assignee (for which Borrowers will have no liability). Upon such execution, delivery and acceptance, from and after the effective date specified in each Assignment and Acceptance, (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (B) the Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto except in respect of provisions of this Agreement which survive payment of the Obligations and termination of the U.S. Commitments or Canadian Commitments, as the case may be). Notwithstanding anything contained in this Agreement to the contrary, any Lender may at any time assign all or any portion of its rights under this Agreement and the other Loan Documents as collateral to a Federal Reserve Bank; provided that no such assignment shall release such Lender from any of its obligations hereunder. (c) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such Lender assignor makes no representation or warranty and assumes no responsibility with respect to any 85 91 statements, warranties or representations made in or in connection with this Agreement or any of the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant thereto; (ii) such Lender assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Borrower or any Obligor or the performance or observance by any Borrower or any Obligor of any of its obligations under this Agreement or any of the other Loan Documents to which it is a party or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements most recently delivered under either Section 6.2 or Section 7.2 hereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon any Agent, such Lender assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents; (v) such assignee appoints and authorizes U.S. Agent or Canadian Agent, as the case may be, to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to such Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of this Agreement and the other Loan Documents are required to be performed by it as a Lender. (d) The entries in the records of each applicable Agent as to each Assignment and Acceptance delivered to it and the names and addresses of the Lenders and the U.S. Commitments or Canadian Commitments of, and principal amount of the Obligations owing to, each Lender from time to time shall be conclusive, in the absence of manifest error, and Obligors, Agents and the Lenders may treat each Person the name of which is recorded in the books and records of the applicable Agent as a Lender hereunder for all purposes of this Agreement and the other Loan Documents. (e) Upon the applicable Agent's receipt of an Assignment and Acceptance executed by an assigning Lender and the assignee thereunder, together with any Note or Notes subject to such assignment and the written consent to such assignment (to the extent consent is required), such Agent shall, if such Assignment and Acceptance has been completed with blanks appropriately filled, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in its records and (iii) give prompt notice thereof to the applicable Borrower. Within five Business Days after receipt of notice, the applicable Borrower, at its own expense, shall execute and deliver to the applicable Agent new Notes payable to the order of such assignee in the appropriate amounts and, if the assigning Lender has retained U.S. Commitments or Canadian Commitments, as the case may be, or Term Loans hereunder, new Notes to the order of the assigning Lender in the appropriate amounts. Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in the forms required hereunder. Thereafter, the replaced Notes shall be surrendered to the applicable Agent by the applicable Lender or Lenders, marked renewed and substituted and the originals thereof delivered to the applicable Borrower (with copies to be retained by the applicable Agent). 86 92 (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 11.6, disclose to the assignee or participant or proposed assignee or participant, any information relating to any Borrower furnished to such Lender by or on behalf of any Borrower; provided such Person agrees to maintain the confidentiality of such information in accordance with Section 11.18. 11.7 Limitation of Interest. U.S. Borrower and the U.S. Lenders intend to strictly comply with all applicable usury laws of the United States and Texas (or the usury laws of any jurisdiction, including Canada, whose usury laws are deemed to apply to the Notes or any other Loan Documents despite the intention and desire of the parties to apply the usury laws of the State of Texas). Canadian Borrower and the Canadian Lenders intend to strictly comply with all applicable usury laws of Canada and Ontario (or the usury laws of any jurisdiction, including the State of Texas, whose usury laws are deemed to apply to the Notes or any other Loan Documents despite the intention and desire of the parties to apply the usury laws of Ontario and Canada). Accordingly, the provisions of this Section 11.7 shall govern and control over every other provision of this Agreement or any other Loan Document which conflicts or is inconsistent with this Section, even if such provision declares that it controls. As used in this Section, the term "interest" includes the aggregate of all charges, fees, benefits or other compensation which constitute interest under applicable law, provided that, to the maximum extent permitted by applicable law, (a) any non-principal payment shall be characterized as an expense or as compensation for something other than the use, forbearance or detention of money and not as interest and (b) all interest at any time contracted for, reserved, charged or received shall be amortized, prorated, allocated and spread, in equal parts during the full term of the Obligations. In no event shall Borrowers or any other Person be obligated to pay, or any Agent, any Issuer or any Lender have any right or privilege to reserve, receive or retain, (a) any interest in excess of the maximum amount of nonusurious interest permitted under applicable laws or (b) total interest in excess of the amount which such Person could lawfully have contracted for, reserved, received, retained or charged had the interest been calculated for the full term of the Obligations at the Ceiling Rate. To the maximum extent permitted by applicable law, the daily interest rates to be used in calculating interest at the Ceiling Rate shall be determined by dividing the applicable Ceiling Rate per annum by the number of days in the calendar year for which such calculation is being made. None of the terms and provisions contained in this Agreement or in any other Loan Document (including, without limitation, Section 9.1 hereof) which directly or indirectly relate to interest shall ever be construed without reference to this Section 11.7, or be construed to create a contract to pay for the use, forbearance or detention of money at an interest rate in excess of the Ceiling Rate. If the term of any Obligation is shortened by reason of acceleration of maturity as a result of any Default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason any Agent, any Issuer or any Lender at any time, including but not limited to, the stated maturity, is owed or receives (and/or has received) interest in excess of interest calculated at the Ceiling Rate, then and in any such event all of any such excess interest shall be canceled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to such Person, it shall be credited pro tanto against the then-outstanding principal balance of the applicable Borrower's obligations to such Person, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and 87 93 satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor. 11.8 Survival. The obligations of Borrowers under Sections 2.2(c), 2.2(d), 7.9, 11.3 and 11.4 hereof and all other obligations of Borrowers in any other Loan Document (to the extent stated therein), the obligations of each Issuer under the last sentence of Section 2.2(b)(iii) and the obligations of the Lenders under Sections 4.1(d), 10.6, 11.7, 11.13 and 11.18 hereof, shall, notwithstanding anything herein to the contrary, survive the repayment of the Loans and Reimbursement Obligations and the termination of the U.S. Commitments, the Canadian Commitments and the Letters of Credit. 11.9 Captions. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 11.10 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement and any of the parties hereto may execute this Agreement by signing any such counterpart. 11.11 Governing Law. THIS AGREEMENT AND (EXCEPT AS THEREIN PROVIDED) THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN EFFECT; PROVIDED, HOWEVER, THAT, EXCEPT AS MAY BE REQUIRED UNDER APPLICABLE LAWS, THE USURY LAWS OF THE STATE OF TEXAS OR THE UNITED STATES OF AMERICA SHALL NOT APPLY TO LOANS MADE TO AND BANKERS ACCEPTANCES ACCEPTED IN CANADA BY CANADIAN LENDERS DRAWN BY CANADIAN BORROWER, BUT RATHER THE USURY LAWS OF THE PROVINCE OF ONTARIO AND THE FEDERAL LAWS OF CANADA APPLICABLE THEREIN SHALL GOVERN IN SUCH CONTEXT. 11.12 Severability. Whenever possible, each provision of the Loan Documents shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of any Loan Document shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions of such Loan Document shall not be affected or impaired thereby. 11.13 Tax Forms; Net Payments. (a) Each U.S. Lender which is organized under the laws of a jurisdiction outside the United States shall, on the day of the initial borrowing from each such U.S. Lender hereunder and from time to time thereafter if requested by U.S. Borrower or U.S. Agent, provide U.S. Agent and U.S. Borrower with the forms prescribed by the Internal Revenue Service of the United States certifying as to such U.S. Lender's status for purposes of determining exemption from United States 88 94 withholding taxes with respect to all payments to be made to such U.S. Lender hereunder or other documents satisfactory to such U.S. Lender, U.S. Borrower and U.S. Agent indicating that all payments to be made to such U.S. Lender hereunder are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty. Unless U.S. Borrower and U.S. Agent shall have received such forms or such documents indicating that payments to such U.S. Lender hereunder are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, U.S. Borrower and U.S. Agent shall be entitled to withhold taxes from such payments at the applicable statutory rate. (b) Each Canadian Lender is a resident of Canada for purposes of the Income Tax Act (Canada). 11.14 Interest Act (Canada). Whenever interest is calculated on the basis of a year of 360 or 365 days, for the purposes of the Interest Act (Canada), the yearly rate of interest which is equivalent to the rate payable hereunder is the rate payable multiplied by the actual number of days in the year and divided by 360 or 365, as the case may be. All interest will be calculated using the nominal rate method and not the effective rate method and the deemed reinvestment principle shall not apply to such calculations. 11.15 Judgment Currency. The obligation of each Borrower to make payments on any Obligation to the Lenders or to any Agent hereunder in any currency (the "first currency") shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any other currency (the "second currency") except to the extent to which such tender or recovery shall result in the effective receipt by the applicable Lender or the applicable Agent of the full amount of the first currency payable, and accordingly the primary obligation of each Borrower shall be enforceable as an alternative or additional cause of action for the purpose of recovery in the second currency of the amount (if any) by which such effective receipt shall fall short of the full amount of the first currency payable and shall not be affected by a judgment being obtained for any other sum due hereunder. 11.16 Conflicts Between This Agreement and the Other Loan Documents. In the event of any conflict between the terms of this Agreement and the terms of any of the other Loan Documents, the terms of this Agreement shall control. 11.17 Limitation on Charges; Substitute Lenders; Non-Discrimination. Anything in Sections 2.2(d), 3.3(c) or 7.9 notwithstanding: (1) No Borrower shall be required to pay to any Lender reimbursement or indemnification with regard to any costs or expenses described in such Sections, unless such Lender notifies the applicable Borrower of such costs or expenses within 90 days after the date paid or incurred; (2) none of the Lenders shall be permitted to pass through to any Borrower charges and costs under such Sections on a discriminatory basis (i.e., which are not also 89 95 passed through by such Lender to other customers of such Lender similarly situated where such customer is subject to documents providing for such pass through); and (3) if any Lender elects to pass through to any Borrower any material charge or cost under such Sections or elects to terminate the availability of LIBOR Borrowings for any material period of time, the applicable Borrower may, within 60 days after the date of such event and so long as no Default shall have occurred and be continuing, elect to terminate such Lender as a party to this Agreement; provided that, concurrently with such termination such Borrower shall (i) if Agents and each of the other Lenders shall consent, pay that Lender all principal, interest and fees and other amounts owed to such Lender through such date of termination or (ii) have arranged for another financial institution approved by Agents (such approval not to be unreasonably withheld or delayed) as of such date, to become a substitute Lender for all purposes under this Agreement in the manner provided in Section 11.6; provided further that, prior to substitution for any Lender, the applicable Borrower shall have given written notice to Agents of such intention and the Lenders shall have the option, but no obligation, for a period of 60 days after receipt of such notice, to increase their U.S. Commitments or Canadian Commitments, as the case may be, in order to replace the affected Lender in lieu of such substitution. 11.18 Confidentiality. Each Lender agrees to exercise its best efforts to keep any information delivered or made available by any Obligor which is clearly indicated to be confidential information, confidential from anyone other than Persons employed or retained by such Lender or any of its Affiliates who are or are expected to become engaged in evaluating, approving, structuring or administering the Obligations; provided that nothing herein shall prevent any Lender from disclosing such information (a) to any other Lender; (b) pursuant to subpoena or upon the order of any court or administrative agency; (c) upon the request or demand of any regulatory agency or authority having jurisdiction over such Lender; (d) which has been publicly disclosed; (e) to the extent reasonably required in connection with any litigation to which any Agent, any Lender, any Obligor or their respective Affiliates may be a party; (f) to the extent reasonably required in connection with the exercise of any remedy hereunder; (g) to such Lender's bank counsel and independent auditors; and (h) to any actual or proposed participant or assignee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this Section. 11.19 Amendment and Restatement. This Agreement amends and restates in entirety that certain Loan Agreement dated June 30, 1997 executed by and among U.S. Borrower, Chase Bank of Texas, National Association (formerly known as Texas Commerce Bank National Association), as Agent and certain lenders therein named, as the same may have been amended. [REMAINDER OF PAGE LEFT BLANK INTENTIONALLY] 90 96 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date. NATIONAL TANK COMPANY, a Delaware corporation By: /s/ WILLIAM B. WIENER, III ------------------------------------------------ William B. Wiener, III, Senior Vice President NATCO CANADA, LTD., a corporation formed under the laws of the Province of Ontario By: /s/ WILLIAM B. WIENER, III ------------------------------------------------ William B. Wiener, III, Senior Vice President Address for Notices: Brookhollow Central III 2950 North Loop West, Suite 750 Houston, Texas 77092 Attention: William B. Wiener, III Telecopy No.: (713) 683-7841 91 97 CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, as U.S. Agent, Issuer of U.S. Letters of Credit and a U.S. Lender By: /s/ MONA M. FOCH ------------------------------------------------ Mona M. Foch, Senior Vice President Address for Notices: U.S. Commitment: 712 Main Street Houston, Texas 77002 $10,697,247.71 Attention: Manager, Structured Finance - Oil Service Telecopy No.: (713) 216-6710 with a copy to: Canadian Commitment: Ms. Muniram Appanna $0 The Chase Manhattan Bank One Chase Manhattan Plaza, 8th Floor New York, New York 10081 Term Loans: Telecopy No.: (212) 552-5777 $15,802,752.29 92 98 THE BANK OF NOVA SCOTIA, as Canadian Agent, Issuer of Canadian Letters of Credit and a Canadian Lender By: /s/ SUSAN DE ST. GORRE ------------------------------------------------- Name: Susan De St. Gorre ----------------------------------------------- Title: Account Manager ---------------------------------------------- Address for Notices: U.S. Commitment: 1100 Louisiana, Suite 3000 Houston, TX 77002 $0 Attention: Mr. Mark Ammerman Telecopy: (713) 752-2425 Canadian Commitment: with a copy to: $10,000,000 The Bank of Nova Scotia Calgary Commercial Banking Centre Term Loans: 240-8 Ave. S.W. Calgary, Alberta T2P 2N7 $0 Attention: Ms. Susan de St. Jorre Telecopy No.: (403) 221-6450 93 99 THE BANK OF NOVA SCOTIA, as a U.S. Lender By: /s/ F.C.H. ASHBY ------------------------------------------------- Name: F.C.H. Ashby ----------------------------------------------- Title: Senior Manager ---------------------------------------------- Address for Notices: U.S. Commitment: 1100 Louisiana, Suite 3000 Houston, TX 77002 $2,018,348.62 Attention: Mr. Mark Ammerman Telecopy: (713) 752-2425 Canadian Commitment: with a copy to: $0 The Bank of Nova Scotia Calgary Commercial Banking Centre Term Loans: 240-8 Ave. S.W. Calgary, Alberta T2P 2N7 $2,981,651.38 Attention: Ms. Susan de St. Jorre Telecopy No.: (403) 221-6450 94 100 WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/ FRANK W. SCHAGEMAN ------------------------------------------------- Name: Frank W. Schageman ----------------------------------------------- Title: Vice President ---------------------------------------------- Address for Notices: U.S. Commitment: 1000 Louisiana, 3rd Floor Houston, TX 77002 $2,018,348.62 Attention: Mr. Frank Schageman Telecopy: (713) 739-1087 Canadian Commitment: $0 Term Loans: $2,981,651.38 95 101 BANK ONE, TEXAS, N.A. By: /s/ KAREN S. SHOUSE ------------------------------------------------- Name: Karen S. Shouse ----------------------------------------------- Title: Vice President ---------------------------------------------- Address for Notices: U.S. Commitment: 910 Travis, 7th Floor Houston, TX 77002 $7,266,055.05 Attention: Ms. Karen Shouse Telecopy: (713) 751-6199 Canadian Commitment: $0 Term Loans: $10,733,944.95 96 102 NATCO Group Inc. joins in the execution hereof for the purpose of (i) acknowledging the representations, warranties, covenants and agreements set forth herein which relate to it, (ii) agreeing to be bound by the covenants and agreements set forth herein which relate to it and (iii) confirming the accuracy of the representations and warranties set forth herein which relate to it. NATCO GROUP INC., a Delaware corporation By: /s/ WILLIAM B. WIENER, III ----------------------------------------------- William B. Wiener, III, Senior Vice President 97 103 AMENDMENT TO LOAN AGREEMENT THIS AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made and entered into as of June 30, 1999 by and among NATIONAL TANK COMPANY, a Delaware corporation (the "U.S. Borrower"); NATCO CANADA, LTD., a corporation formed under the laws of the Province of Ontario (the "Canadian Borrower"); each of the Lenders which is or may from time to time become a party to the Loan Agreement (as defined below) (individually, a "Lender" and, collectively, the "Lenders"), CHASE BANK OF TEXAS, N. A., a national banking association (previously known as Texas Commerce Bank National Association), acting as agent for the U.S. Lenders (in such capacity, together with its successors in such capacity, the "U.S. Agent"), and THE BANK OF NOVA SCOTIA, as agent for the Canadian Lenders (in such capacity, together with its successors in such capacity, the "Canadian Agent"). The U.S. Borrower and the Canadian Borrower are herein collectively called the "Borrowers" and the U.S. Agent and the Canadian Agent are herein collectively called the "Agents". RECITALS A. The Borrowers, the Lenders and the Agents executed and delivered that certain Loan Agreement (the "Loan Agreement") dated as of November 20, 1998. Any capitalized term used in this Amendment and not otherwise defined shall have the meaning ascribed to it in the Loan Agreement. B. The Borrowers, the Lenders and the Agents desire to amend the Loan Agreement in certain respects. NOW, THEREFORE, in consideration of the premises and the mutual agreements, representations and warranties herein set forth, and further good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers, the Lenders and the Agents do hereby agree as follows: SECTION 1. Amendments to Loan Agreement. On and after the Amendment Effective Date, the Loan Agreement shall be amended as follows: (a) The definition of "Capital Expenditures" set forth in Section 1.1 of the Loan Agreement is hereby amended to read in its entirety as follows: Capital Expenditures means, with respect to any Person for any period, expenditures in respect of fixed or capital assets by such Person, including capital lease obligations incurred during such period (to the extent not already included), which would be reflected as additions to Property, plant or equipment on a balance sheet of such Person and its consolidated Subsidiaries, if any, prepared in accordance with GAAP; but excluding (i) expenditures during such period for the repair or replacement of any fixed or capital asset 104 which was destroyed, damaged or taken, in whole or in part, to the extent financed by the proceeds of an insurance policy maintained by such Person or the proceeds of a condemnation award and (ii) capital expenditures in the amount of $897,000.00 incurred during the nine-month period ending June 30, 1999 related to the expansion of plants of The Cynara Company and the Borrowers. (b) The definition of "U.S. Borrowing Base" set forth in Section 1.1 of the Loan Agreement is hereby amended to read in its entirety as follows: U.S. Borrowing Base means, as at any date, the amount of the U.S. Borrowing Base shown on the Borrowing Base Certificate then most recently delivered pursuant to Section 7.2(b) hereof, determined by calculating the amount equal to: (i) 80% of the aggregate amount of all Eligible Accounts of U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) at said date, plus (ii) the sum of (w) 75% of that portion of Eligible Inventory of Test, Inc. at said date (determined at the lower of cost or market on a consistent basis) which consists of costs in excess of billings for time and material contracts and which relate to signed time and material tickets, (x) 20% of that portion of Eligible Inventory of U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) at said date (determined at the lower of cost or market on a consistent basis) which consists of used finished goods, (y) 25% of that portion of Eligible Inventory of U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) at said date (determined at the lower of cost or market on a consistent basis) which consists of work-in- process relating to projects for customers that are not account debtors with respect to any Accounts owing to U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) which are not Eligible Accounts and (z) 50% of the aggregate amount of all other Eligible Inventory of U.S. Borrower and its Subsidiaries (other than Canadian Subsidiaries) at said date (determined at the lower of cost or market on a consistent basis); provided that the amount calculated pursuant to this clause (ii) shall not exceed 50% of the U.S. Borrowing Base. In the absence of a current Borrowing Base Certificate, U.S. Agent shall determine the U.S. Borrowing Base from time to time in its reasonable discretion, taking into account all information reasonably available to it, and the U.S. Borrowing Base from time to time so determined shall be the Borrowing Base for all purposes of this Agreement until a current Borrowing Base Certificate, in Proper Form, is furnished to and accepted by U.S. Agent. 2 105 (c) Section 7.3 of the Loan Agreement is hereby amended to read in its entirety as follows: 7.3 Financial Tests. Have and maintain: (a) Net Worth - Net Worth of not less than (1) at all times during the period commencing on June 30, 1999 through and including September 30, 1999, an amount equal to $30,000,000 and (2) at all times during each fiscal quarter thereafter, the sum of $30,000,000 plus 50% of the net income of U.S. Borrower and its Subsidiaries, on a consolidated basis (if positive), for the period from June 30, 1999 through the last day of the fiscal quarter ending immediately prior to the date of such calculation, plus 100% of the net proceeds realized from the issuance of any equity securities by U.S. Borrower during that period plus 100% of Net Equity Proceeds received during that period. (b) Debt to Capitalization Ratio - a Debt to Capitalization Ratio of not greater than (1) 60% at all times during the period commencing on June 30, 1999 through and including March 31, 2000; (2) 55% at all times during the period commencing on April 1, 2000 through and including June 30, 2000; (3) 50% at all times during the period commencing on July 1, 2000 through and including December 31, 2000, and (4) 45% at all times thereafter. (c) Fixed Charge Coverage Ratio - a Fixed Charge Coverage Ratio of not less than (1) 1.00 to 1.00 at all times during the period commencing on June 30, 1999 through and including December 31, 1999; (2) 1.10 to 1.00 at all times during the period commencing on January 1, 2000 through and including March 31, 2000 and (3) 1.25 to 1.00 at all times thereafter. (d) Section 8.10 of the Loan Agreement is hereby amended to read in its entirety as follows: 8.10 Key Agreements. Terminate or agree to the termination of any Key Agreement or amend, modify or obtain or grant a waiver of any provision of any of the Key Agreements if such action could reasonably be expected to have a Material Adverse Effect (provided that no consent of any Agent or any Lender shall be required with respect to an amendment of the EXIM Facility which has the sole effect of increasing the EXIM Facility to an amount not greater than $12,500,000). SECTION 2. Ratification. Except as expressly amended by this Amendment, the Loan Agreement and the other Loan Documents shall remain in full force and effect. None of the rights, title and interests existing and to exist under the Loan Agreement are hereby released, diminished 3 106 or impaired, and the Borrowers hereby reaffirm all covenants, representations and warranties in the Loan Agreement. SECTION 3. Expenses. The Borrowers shall pay to the Agents all reasonable fees and expenses of their respective legal counsel (pursuant to Section 11.3 of the Loan Agreement) incurred in connection with the execution of this Amendment. SECTION 4. Certifications. The Borrowers hereby certify that (a) no event which could reasonably be expected to have a Material Adverse Effect has occurred and is continuing and (b) no Default or Event of Default has occurred and is continuing or will occur as a result of this Amendment. SECTION 5. Miscellaneous. This Amendment (a) shall be binding upon and inure to the benefit of the Borrowers, the Lenders and the Agents and their respective successors, assigns, receivers and trustees; (b) may be modified or amended only by a writing signed by the required parties; (c) shall be governed by and construed in accordance with the laws of the State of Texas and the United States of America; (d) may be executed in several counterparts by the parties hereto on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original agreement, and all such separate counterparts shall constitute but one and the same agreement and (e) together with the other Loan Documents, embodies the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter. The headings herein shall be accorded no significance in interpreting this Amendment. NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SECTION 26.02 THE LOAN AGREEMENT, AS AMENDED BY THIS AMENDMENT, AND ALL OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE PARTIES PRIOR HERETO OR SUBSTANTIALLY CONCURRENTLY HEREWITH CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 4 107 IN WITNESS WHEREOF, the Borrowers, the Lenders and the Agents have caused this Amendment to be signed by their respective duly authorized officers, effective as of the date first above written. NATIONAL TANK COMPANY, a Delaware corporation By: /s/ STEPHEN J. GOODLAND ------------------------------------------ Name: Stephen J. Goodland ---------------------------------------- Title: Vice President - Finance and Accounting --------------------------------------- NATCO CANADA, LTD., a corporation formed under the laws of the Province of Ontario By: /s/ CALVIN BOETTCHER ------------------------------------------ Name: Calvin Boettcher ---------------------------------------- Title: Controller --------------------------------------- 5 108 CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, as U.S. Agent, Issuer of U.S. Letters of Credit and a U.S. Lender By: /s/ MONA M. FOCH ------------------------------------------ Name: Mona M. Foch ---------------------------------------- Title: Managing Director --------------------------------------- 6 109 THE BANK OF NOVA SCOTIA, as Canadian Agent, Issuer of Canadian Letters of Credit and a Canadian Lender By: /s/ SUSAN DE ST. GORRE ------------------------------------------ Name: Susan De St. Gorre ---------------------------------------- Title: Account Manager --------------------------------------- 7 110 THE BANK OF NOVA SCOTIA, as a U.S. Lender By: /s/ F.C.H. ASHBY ------------------------------------------ Name: F.C.H. Ashby ---------------------------------------- Title: Senior Manager --------------------------------------- 8 111 WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/ BRET C. WEST ------------------------------------------ Name: Bret C. West ---------------------------------------- Title: Vice President --------------------------------------- 9 112 BANK ONE, TEXAS, N.A. By: /s/ KAREN SHOUSE ------------------------------------------ Name: Karen Shouse ---------------------------------------- Title: Vice President --------------------------------------- 10 113 The undersigned hereby join in this Amendment to evidence their consent to execution by Borrowers of this Amendment, to confirm that each Loan Document now or previously executed by the undersigned applies and shall continue to apply to the Loan Agreement, as amended hereby, to acknowledge that without such consent and confirmation, Lender would not execute this Amendment and to join in the notice pursuant to Tex. Bus. & Comm. Code Section 26.02 set forth above. TOTAL ENGINEERING SERVICES TEAM, INC., a Louisiana corporation, TEST, INC., a Louisiana corporation, NATCO LONDON, INC., a Delaware corporation and NATCO GROUP INC., a Delaware corporation By: /s/ PATRICK M. McCARTHY ------------------------------------------ Name: Patrick M. McCarthy ---------------------------------------- Title: President - Natco Group Inc. --------------------------------------- 11 EX-10.23 13 EXIM CREDIT FACILITY, AS AMENDED 1 EXHIBIT 10.23 U.S. $3,000,000.00 INTERNATIONAL REVOLVING LOAN AGREEMENT DATED AS OF JUNE 30, 1997 BY AND BETWEEN NATIONAL TANK COMPANY AND TEXAS COMMERCE BANK NATIONAL ASSOCIATION 2 TABLE OF CONTENTS
Page ---- 1. CERTAIN DEFINITIONS......................................................................................1 2. THE LOANS AND LETTERS OF CREDIT..........................................................................1 2.1. The Loans....................................................................................1 2.2. International Borrowing Base.................................................................2 2.3. Letters of Credit............................................................................3 2.4. Letter of Credit Requests....................................................................4 2.5. Agreement to Repay Letter of Credit Drawings.................................................4 2.6. Conflict between Applications and Agreement..................................................6 2.7. Increased Costs; Unavailable LIBOR; Increased Capital........................................6 2.8. Interest Rate Protection.....................................................................7 2.9. Voluntary Conversion/Continuation of Loans; Past Due Rate....................................7 2.10. Illegality, Etc..............................................................................8 3. PREPAYMENTS AND OTHER PAYMENTS...........................................................................8 3.1. Required Prepayments.........................................................................8 3.2. Optional Prepayments.........................................................................8 3.3. Place of Payment or Prepayment...............................................................9 3.4. Prepayment Premium or Penalty................................................................9 3.5. Taxes........................................................................................9 3.6. Reduction or Termination of the Commitment...................................................9 4. FEES.....................................................................................................9 4.1. Facility Fee.................................................................................9 4.2. Letter of Credit Fees.......................................................................10 4.3. Fees Not Interest; Nonpayment...............................................................10 5. APPLICATION OF PROCEEDS.................................................................................10 6. REPRESENTATIONS AND WARRANTIES..........................................................................10 6.1. Organization and Qualification..............................................................10 6.2. Financial Statements; Positive Tangible Net Worth...........................................10 6.3. Litigation..................................................................................11 6.4. Default.....................................................................................11 6.5. Title to Assets; Ownership..................................................................11 6.6. Authorization, Validity, Etc................................................................11 6.7. Line of Business............................................................................12 6.8. Taxes.......................................................................................12 6.9. Conflicting or Adverse Agreements or Restrictions...........................................12 6.10. Information.................................................................................12 6.11. No Consent..................................................................................12 6.12. Environmental Matters.......................................................................12 6.13. Debt........................................................................................13
-i- 3
Page ---- 7. CONDITIONS..............................................................................................13 7.1. Representations True and No Defaults........................................................13 7.2. Terms of Sale...............................................................................13 7.3. Governmental Approvals......................................................................14 7.4. Borrowing Documents.........................................................................14 7.5. Letter of Credit Documents..................................................................14 7.6. Required Initial Documents and Certificates.................................................14 7.7. Eximbank Acknowledgment, Etc................................................................15 7.8. Post-Closing Lien Search....................................................................16 7.9. Approval of Authorized Officer..............................................................16 8. AFFIRMATIVE COVENANTS...................................................................................16 8.1. Financial Statements and Information........................................................16 8.2. Books and Records...........................................................................17 8.3. Insurance...................................................................................17 8.4. Inspection of Property and Records; Audits of Collateral....................................17 8.5. Notice of Certain Matters...................................................................18 8.6. Security and Further Assurances.............................................................18 8.7. Export Insurance............................................................................19 8.8. Maintenance of Property.....................................................................19 8.9. Existence, Laws and Obligations.............................................................19 8.10. Assignment of International Letter of Credit Proceeds.......................................19 8.11. Environmental Matters.......................................................................20 8.12. Controlling Affiliates......................................................................20 9. NEGATIVE COVENANTS......................................................................................20 9.1. Liens.......................................................................................20 9.2. Merger, Consolidation, Etc..................................................................20 9.3. Nature of Business; Management..............................................................21 9.4. Loans and Investments.......................................................................21 9.5. Financial Covenants.........................................................................21 9.6. Debt........................................................................................21 9.7. Affiliate Transactions......................................................................22 9.8. Restricted Payments.........................................................................22 9.9. Change in Accounting Method.................................................................22 9.10. Export Orders and Indirect Export Orders....................................................22 9.11. Copyrights, Patents and Software............................................................22 9.12. Eximbank Violations.........................................................................22 10. EVENTS OF DEFAULT; REMEDIES.............................................................................23 10.1. Failure to Pay Principal or Interest........................................................23 10.2. Failure to Pay Other Amounts................................................................23 10.3. Misrepresentation or Breach of Warranty.....................................................23 10.4. Violation of Covenants......................................................................23 10.5. Bankruptcy and Other Matters................................................................23 10.6. Dissolution.................................................................................24
-ii- 4
Page ---- 10.7. Liens.......................................................................................24 10.8. Collateral..................................................................................24 10.9. International Security Documents............................................................24 10.10. Cross-Default to Export Orders, Indirect Export Orders and Direct Export Contracts.....................................................................24 10.11. Cross-Default to Domestic Loan Documents....................................................24 10.12. Cross-Default to Non-Eximbank Debt..........................................................24 10.13. Cross-Acceleration to Other Debt............................................................24 10.14. Undischarged Judgment.......................................................................24 10.15. Cross-Default to Borrower Agreement.........................................................25 10.16. Change of Control...........................................................................25 10.17. Controlling Affiliates......................................................................25 10.18. Impairment of Eximbank Guaranty.............................................................25 10.19. Impairment of International Loan Documents, Export Orders, Indirect Export Orders and Direct Export Contracts..........................................25 10.20. Negative Pledge on Shares...................................................................25 10.21. Other Remedies..............................................................................25 10.22. Collateral Account..........................................................................26 10.23. Remedies Cumulative.........................................................................26 10.24. Distributions in Violation of the Eximbank Guaranty.........................................26 10.25. Material Litigation.........................................................................26 11. MISCELLANEOUS...........................................................................................26 11.1. Representation by the Bank..................................................................26 11.2. Waivers, Etc................................................................................26 11.3. Reimbursement of Expenses...................................................................27 11.4. Notices.....................................................................................27 11.5. Governing Law...............................................................................28 11.6. Survival of Representations, Warranties and Covenants.......................................28 11.7. Counterparts................................................................................28 11.8. Separability................................................................................28 11.9. Descriptive Headings........................................................................28 11.10. Accounting Terms............................................................................28 11.11. Limitation of Liability.....................................................................28 11.12. Set-off.....................................................................................29 11.13. Sale or Assignment..........................................................................29 11.14. Interest....................................................................................29 11.15. Indemnification.............................................................................30 11.16. Payments Set Aside..........................................................................30 11.17. Loan Agreement Controls.....................................................................31 11.18. FINAL AGREEMENT.............................................................................31 11.19. WAIVER OF JURY TRIAL........................................................................31
-iii- 5 Exhibit A - Definitions Exhibit B - Form of International Revolving Note Exhibit C - Form of Request for Borrowing Exhibit D - Form of International Borrowing Base Certificate, together with Annex I and II Exhibit E - Form of Compliance Certificate Exhibit F - Form of Letter of Credit Request Exhibit G - Notice of Rate Change/Continuation Schedule 6.1 - Subsidiaries Schedule 6.3 - Litigation Schedule 6.5 - Ownership Schedule 6.13 - Existing Indebtedness Schedule 8.3 - Insurance Schedule 9.1 - Existing Liens -iv- 6 INTERNATIONAL REVOLVING LOAN AGREEMENT NATIONAL TANK COMPANY, a Delaware corporation (hereinafter called the "Borrower"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association (together with its successors and assigns, hereinafter called the "Bank"), hereby agree as follows: 1. CERTAIN DEFINITIONS. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings given to them in Exhibit A to this Agreement. 2. THE LOANS AND LETTERS OF CREDIT. 2.1. THE LOANS. (a) Upon the terms and conditions and relying upon the representations and warranties herein set forth, the Bank agrees to make Loans to the Borrower on any one or more Business Days prior to the Maturity Date, up to an aggregate principal amount of Loans not exceeding at any one time outstanding the lesser of (i) $3,000,000.00 (such amount, as it may be reduced from time to time pursuant to Section 3.6, being the Bank's "Commitment") or (ii) the International Borrowing Base. Subject to the terms and conditions of this Agreement, the Borrower may borrow, repay and reborrow hereunder. (b) The Borrower shall execute and deliver to the Bank to evidence the Loans made by the Bank under the Bank's Commitment, a Note which shall be (i) dated of even date herewith; (ii) in the principal amount of the Commitment; and (iii) in substantially the form attached hereto as Exhibit B, with the blanks appropriately filled. The outstanding principal balance of the Note shall be payable on or before the Maturity Date. The Note shall bear interest on the unpaid principal amount thereof from time to time outstanding, payable on the last Business Day of each month, commencing on July 31, 1997, and at maturity, at a rate per annum (calculated based on a year of 360 days) which (A) in the case of a Base Rate Loan shall be equal to the lesser of (i) the Base Rate, such interest rate to change automatically from time to time effective as of the date of each change in the Base Rate, or (ii) the Highest Lawful Rate, and (B) in the case of a LIBOR Rate Loan shall be equal to the lesser of (i) the LIBOR Rate plus 2.25%, such interest rate to change automatically from time to time effective as of the date of each change in the LIBOR Rate, or (ii) the Highest Lawful Rate. Any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest at the Past Due Rate. (c) Each Loan (other than a Loan made pursuant to Section 2.5(a) to repay a reimbursement obligation) made hereunder shall be in $100,000 increments and in a -1- 7 principal amount of not less than $500,000 or the balance of the Commitment, if such balance is less than $500,000, and shall be made on prior written notice from the Borrower to the Bank in the form of Exhibit C attached hereto (the "Request for Borrowing") delivered to the Bank not later than 12:00 noon (Houston time) (i) in the case of a LIBOR Rate Loan on the third Business Day prior to the date of the proposed Loan (the "Borrowing Date"), and (ii) in the case of a Base Rate Loan at least one Business Day prior to the proposed Borrowing Date. Each Request for Borrowing shall specify (i) the amount of the proposed borrowing and of each Loan comprising a part thereof; (ii) the Borrowing Date; (iii) the Type of Loan requested; (iv) with respect to any LIBOR Rate Loan, the Interest Period with respect to each such Loan and the Expiration Date of each such Interest Period (provided, that there shall not be more than three (3) Interest Periods in effect at any one time under this Agreement). The Borrower may give the Bank telephonic notice, including by telephonic facsimile, by the required time of any proposed borrowing under this Section 2.1(c); provided, however, that such telephonic notice shall be confirmed in original writing by delivery to the Bank promptly (but in no event later than the Borrowing Date relating to any such borrowing) of a Request for Borrowing. The Bank shall not incur any liability to the Borrower in acting upon any telephonic notice referred to above which the Bank believes to have been given by the Borrower, or for otherwise acting in good faith under this Section 2.1(c). Upon fulfillment of the applicable conditions set forth in Section 7, on the Borrowing Date, the Bank shall make the borrowing available to the Borrower. The Bank shall pay or deliver the proceeds of each borrowing to or upon the order of the Borrower; provided that in the case of the first Loan, such payment or delivery shall be made only against delivery to the Bank of the Note payable to the order of the Bank. The Bank's records as to the date and principal amount of each Loan and each payment of principal thereon shall be controlling. Any deposit to or for the Borrower's account by the Bank pursuant to a request (whether written or oral) believed by the Bank to be an authorized request by the Borrower for a Loan hereunder shall be deemed to be a Loan hereunder for all purposes with the same effect as if the Borrower had in fact requested the Bank to make such Loan. (d) Each Request for Borrowing shall be irrevocable and binding on the Borrower. In the case of any request for a LIBOR Rate Loan, the Borrower shall indemnify the Bank against any loss, cost or expense incurred by the Bank as a result of any failure to fulfill on or before the Borrowing Date specified in such Request for Borrowing for such Loan the applicable conditions set forth in Section 7, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Bank to fund the Loan when the Loan, as a result of such failure, is not made on such date. 2.2. INTERNATIONAL BORROWING BASE. (a) From the date hereof to the date of the first determination of the International Borrowing Base as hereinafter provided, the amount of the International Borrowing Base shall be $0. -2- 8 (b) As soon as available, and in any event within twenty (20) Business Days after the end of each calendar month, the Borrower shall furnish the Bank an international borrowing base detailed scheduled report (the "International Borrowing Base Certificate") in the form of Exhibit D, which is dated as of the end of each calendar month and which includes a list of the Eligible Accounts Receivable and Eligible Inventory of the Borrower as at the end of the preceding month, such list to be in such form and containing such information and detail as the Bank may reasonably request, and as is satisfactory to the Bank, to comply with the requirements of the Eximbank Guaranty, including, without limiting the generality of the foregoing, as to Eligible Accounts Receivable, aging thereof in the customary manner. The inclusion of any receivable or inventory in the International Borrowing Base Certificate shall constitute a representation and warranty by the Borrower that such receivable is an Eligible Accounts Receivable or Eligible Inventory, as the case may be. The Bank may, on demand, inspect the documentation supporting any International Borrowing Base Certificate. (c) Two (2) Business Days after the receipt of any such International Borrowing Base Certificate (unless the Bank prior to such date has notified the Borrower of its determination of a different International Borrowing Base) the International Borrowing Base amount stated in any such International Borrowing Base Certificate shall automatically be deemed the International Borrowing Base amount until the earlier of (i) the date of the next determination or (ii) the date the Bank notifies the Borrower of its determination of a different International Borrowing Base. The date of any such notification (if any) by the Bank is herein called a "Determination Date" and any increase or reduction in the International Borrowing Base by the Bank shall be effective as of such date. Each determination of the International Borrowing Base shall be made by the Bank in its reasonable business judgment, based on the most recent International Borrowing Base Certificate furnished by the Borrower and other information available to the Bank. 2.3. LETTERS OF CREDIT. (a) Subject to and upon the terms and conditions herein set forth, including, without limitation, the applicable terms and conditions set forth in Section 7 hereof, the Bank agrees that it will, following its receipt of a Letter of Credit Request, issue for the account of the Borrower and in support of the obligations of the Borrower, one or more irrevocable letters of credit which either (i) can be drawn down by a Buyer only if the Borrower fails to perform all of its obligations under an Export Order or Indirect Export Order, or (ii) can be drawn down by a United States supplier if the Borrower fails to pay for goods or services purchased from said supplier by the Borrower in support of export sales to be made pursuant to an Export Order or Indirect Export Order (all such letters of credit collectively, the "Letters of Credit"); provided that the Bank shall be under no obligation to issue any Letter of Credit if at the time of such issuance: (i) any order, judgment or decree of any Governmental Authority or arbitrator shall purport by its terms to enjoin or restrain the Bank from issuing such Letter of Credit or any requirement of law applicable to the Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Bank shall prohibit, or request that the Bank refrain from, the issuance of letters of credit generally; or -3- 9 (ii) the Stated Amount of such Letter of Credit plus the Letter of Credit Outstandings at such time (subject to any adjustment pursuant to Section 2.3(c), if any) and the aggregate principal amount of all Loans then outstanding (after giving effect to the principal amount of all Loans repaid and all Unpaid Drawings reimbursed prior to or concurrently with the issuance of such Letter of Credit) exceeds the lesser of (A) the Commitment (after giving effect to any reductions to the Commitment on such date) and (B) the International Borrowing Base then in effect; or (iii) unless the Bank shall give its prior written consent in its sole discretion, the expiry date, or, in the case of any Letter of Credit containing an expiry date that is extendible at the option of the Bank, the initial expiry date of such Letter of Credit, is a date that is later than the scheduled Maturity Date; or (iv) the expiry date is not later than twelve (12) months from the date of issuance of such letter of credit. (b) Notwithstanding the foregoing, the Bank may not issue during the final sixty (60) days of the term of this Agreement any Letters of Credit which expire after the Maturity Date unless the Bank either has decided to renew this Agreement or has obtained the prior written approval of Eximbank. (c) The Bank may from time to time, in its sole and absolute discretion, allow the issuance of Letters of Credit that are less than 100% collateralized. 2.4. LETTER OF CREDIT REQUESTS. (a) Whenever the Borrower desires that a Letter of Credit be issued for its account or that an existing expiry date shall be extended, it shall deliver to the Bank its prior written request therefore not later than 12:00 noon (Houston time) on at least the second (2nd) Business Day prior to the requested issuance or extension date, as the case may be. Each such request shall be executed by the Borrower and shall be in the form of Exhibit F attached hereto (each a "Letter of Credit Request") and, in the case of the issuance of any Letter of Credit, shall be accompanied by an Application therefor, completed to the satisfaction of the Bank, and such other certificates, documents and other papers and information as the Bank may reasonably request. Each Letter of Credit shall be denominated in Dollars, shall expire no later than the date specified in Section 2.3, shall not be in an amount greater than is permitted under Section 2.3(a) and shall be in such form as may be approved from time to time by the Bank and the Borrower. (b) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the Borrower that such Letter of Credit may be issued in accordance with, and will not violate the requirements of Section 2.3(a) and Section 7 of this Agreement. Upon its issuance of any Letter of Credit or the extension of the existing expiry date of any Letter of Credit, as the case may be, the Bank shall promptly notify the Borrower of such issuance or extension, which notice shall be accompanied by a copy of the Letter of Credit actually issued or a copy of any amendment extending the existing expiry date of any Letter of Credit, as the case may be. -4- 10 2.5. AGREEMENT TO REPAY LETTER OF CREDIT DRAWINGS. (a) Upon the receipt by the Bank of any Drawing from a beneficiary under a Letter of Credit, the Bank promptly will provide the Borrower with telecopy notice thereof. The Borrower hereby agrees to reimburse the Bank by making payment to the Bank in immediately available funds at the office, for any payment made by the Bank under any Letter of Credit issued by it (each such amount so paid until reimbursed, an "Unpaid Drawing") immediately after, and in any event on the date of, such payment, with interest on the amount so paid by the Bank, to the extent not reimbursed prior to 2:00 p.m. (Houston time) on the date of such payment, from and including the date paid but excluding the date reimbursement is made as provided above, at a rate per annum equal to the Highest Lawful Rate, such interest to be payable on demand. Unless otherwise paid by the Borrower, such Unpaid Drawing may (and, if the Bank so desires, shall automatically, provided that the Bank give notice thereof to Borrower promptly thereafter), subject to satisfaction of the conditions precedent set forth in Sections 2.3 and 7, be paid with the proceeds of Loans which shall bear interest at an annual rate equal to the Base Rate. (b) The Borrower's obligations under this Section 2.5 to reimburse the Bank with respect to Unpaid Drawings (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances (except as provided below with respect to the gross negligence or willful misconduct of the Bank) and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the Bank, including any defense based upon the failure of any drawing under a Letter of Credit (each a "Drawing") to conform to the terms of the Letter of Credit (other than a defense based upon the gross negligence or willful misconduct of the Bank in determining whether such Drawing conforms to the terms of the Letter of Credit) or any non-application or misapplication by the beneficiary of the proceeds of such Drawing, including any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other International Loan Documents; (ii) the existence of any claim, setoff, defense or other right which the Borrower may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Bank, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower or any other Person and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the International Loan Documents; (v) the occurrence of any Default or Event of Default; or -5- 11 (vi) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Borrower; provided that none of the foregoing is attributable to the gross negligence or willful misconduct of the Bank. (c) The Borrower also agrees with the Bank that, in the absence of gross negligence or willful misconduct of the Bank, the Bank shall not be responsible for, and the Borrower's reimbursement obligations under Section 2.6(a) shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged or any dispute between or among the Borrower or any other Person and the beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of the Borrower or any other Person against any beneficiary of such Letter of Credit or any such transferee. (d) The Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by the Bank's gross negligence or willful misconduct. The Borrower agrees that any action taken or omitted by the Bank under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Customs and Practice for Documentary Credits (1994 Revision), International Chamber of Commerce, Publication No. 500 (and any subsequent revisions thereof approved by a Congress of the International Chamber of Commerce and adhered to by such Bank) and, to the extent not inconsistent therewith, the Uniform Commercial Code of the State of Texas, shall not result in any liability of the Bank to the Borrower or any other Person. IT IS THE INTENT OF THE PARTIES HERETO THAT THE BANK SHALL NOT HAVE ANY LIABILITY UNDER THIS SECTION 2.5 FOR THE ORDINARY SOLE OR CONTRIBUTORY NEGLIGENCE OF THE BANK. 2.6. CONFLICT BETWEEN APPLICATIONS AND AGREEMENT. To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Agreement, the provisions of this Agreement shall control. 2.7. INCREASED COSTS; UNAVAILABLE LIBOR; INCREASED CAPITAL. (a) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to the Bank of agreeing to make or making, funding or maintaining LIBOR Rate Loans, then the Borrower shall from time to time, upon demand by the Bank, pay to the Bank additional amounts sufficient to compensate the Bank for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower by the Bank, shall be conclusive and binding for all purposes, absent manifest error. (b) If the Borrower shall have chosen the LIBOR Rate in a Request for Borrowing or a Notice of Rate Change/Continuation and not later than 11:00 a.m. (Houston, Texas time) one -6- 12 Business Day prior to the Borrowing Date or Conversion/Continuation Date, as the case may be, the Bank notifies the Borrower that (i) deposits in Dollars in the principal amount of such LIBOR Rate Loan are not being offered to the Bank in the interbank market selected by the Bank for the Interest Period applicable thereto or (ii) adequate and reasonable means do not exist for ascertaining the chosen LIBOR Rate in respect of such LIBOR Rate Loan or (iii) the LIBOR Rate for any Interest Period for such LIBOR Rate Loan will not adequately reflect the cost to the Bank of making such LIBOR Rate Loan for such Interest Period, then such LIBOR Rate shall not become effective as to such LIBOR Rate Loan on such Borrowing Date or the Conversion/Continuation Date, as the case may be, or at any time thereafter until such time thereafter as the Borrower receives notice from the Bank that the circumstances giving rise to such determination no longer apply and such Loan shall bear interest at the lesser of (i) the Base Rate or (ii) the Highest Lawful Rate. (c) If the Bank determines that compliance with any law or regulation or any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and that the amount of such capital is increased by or based upon the existence of the Bank's Commitment hereunder and other commitments of this type, then, within fifteen (15) Business Days after demand by the Bank, the Borrower shall pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank or such corporation in the light of such circumstances. A certificate as to such amounts submitted to the Borrower by the Bank shall be conclusive and binding for all purposes, absent manifest error. (d) Anything in this Section notwithstanding: (i) the Borrower shall not be required to pay to the Bank reimbursement or indemnification with regard to any costs or expenses described in this Section, unless the Bank notifies the Borrower of such costs or expenses within 90 days after the date paid or incurred; and (ii) the Bank shall not be permitted to pass through to the Borrower charges and costs under this Section on a discriminatory basis (i.e., which are not also passed through by the Bank to other customers of the Bank similarly situated where such customer is subject to documents providing for such pass through). 2.8. INTEREST RATE PROTECTION. If the Borrower shall fail to select the duration of any Interest Period for any LIBOR Rate Loan in accordance with the provisions hereof, such Loan will automatically, on the last day of the then existing Interest Period therefor, convert into a Base Rate Loan. 2.9. VOLUNTARY CONVERSION/CONTINUATION OF LOANS; PAST DUE RATE. (a) So long as no Default or Event of Default has occurred and is continuing, the Borrower may (i) change the interest rates to apply to any Loan or (ii) elect to continue all or any part of the outstanding principal balance of any LIBOR Rate Loan as an Loan of such Type by giving the Bank an irrevocable written notice (the "Notice of Rate Change/Continuation") in the form of Exhibit G hereto, specifying (A) the date on which such Loan was made; (B) the interest rate then applicable to such Loan; (C) with respect to any LIBOR Rate Loan, the Interest Period then applicable to each such Loan; (D) the principal amount of such Loan to remain outstanding; (E) the Type of Loan and, with respect to any LIBOR Rate Loan, the Interest Period to become applicable -7- 13 to such Loan on the effective date of the rate change or continuation; and (F) the requested effective date of the rate change or continuation (the "Conversion/Continuation Date"). In the case of the conversion of all or any part of any Base Rate Loan into a LIBOR Rate Loan or the continuation of any LIBOR Rate Loan as an Loan of such Type, such notice must be received by the Bank not later than 11:00 A.M. (Houston time) at least three (3) full Business Days prior to the Conversion/Continuation Date, and otherwise at least one (1) full Business Day prior thereto. Each rate so specified shall become effective on the Conversion/Continuation Date and remain in effect until the expiration of the applicable Interest Period specified in such Notice of Rate Change/Continuation. (b) Nothing contained herein shall authorize the Borrower (i) to convert any Loan into or continue any Loan as a LIBOR Rate Loan unless the Expiration Date of the Interest Period for such Loan occurs on or before the Maturity Date or (ii) to continue or change the interest rates applicable to any LIBOR Rate Loan prior to the Expiration Date of the Interest Period with respect thereto. (c) Notwithstanding anything set forth herein to the contrary, any Loan which is not paid when due shall bear interest at a rate per annum which shall be equal to the lesser of (i) 3% above the interest rate otherwise applicable thereto or (ii) the Highest Lawful Rate, which interest shall be due and payable on demand. 2.10. ILLEGALITY, ETC. Notwithstanding any other provision of this Agreement, if the Bank shall notify the Borrower that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other Governmental Authority asserts that it is unlawful, for the Bank to perform its obligations hereunder to make LIBOR Rate Loans or to fund or maintain LIBOR Rate Loans hereunder, (i) the obligation of the Bank to make, or to convert Loans into, LIBOR Rate Loans shall be suspended until the Bank shall notify the Borrower that the circumstances causing such suspension no longer exist and (ii) the Borrower shall forthwith prepay in full all LIBOR Rate Loans of the Bank then outstanding, together with interest accrued thereon, unless the Borrower, within five (5) Business Days of notice from the Bank, converts all LIBOR Rate Loans of the Bank then outstanding into a Base Rate Loan. 3. PREPAYMENTS AND OTHER PAYMENTS. 3.1. REQUIRED PREPAYMENTS. (a) The Borrower agrees that if at any time it or the Bank determines that the aggregate principal amount of Loans outstanding plus the Letter of Credit Outstandings (subject to any adjustment pursuant to Section 2.3(c), if any) exceeds the International Borrowing Base, the Borrower will, within five (5) Business Days, either (i) make a prepayment of principal in an amount at least equal to such excess, or (ii) furnish additional security to the Bank, in form and amount satisfactory to the Bank and the Eximbank. (b) The Borrower agrees that if at any time the aggregate principal amount of Loans outstanding plus the Letter of Credit Outstandings exceeds the amount of the Commitment, the Borrower shall immediately make a prepayment of principal in an amount at least equal to such excess. -8- 14 3.2. OPTIONAL PREPAYMENTS. The Borrower shall have the right at any time and from time to time to prepay the Note, in whole or in part, provided that each partial prepayment shall be in an aggregate principal amount of at least $50,000 or such lesser amount as may be due and owing. In the event of such prepayment of a LIBOR Rate Loan, the Borrower shall be obligated to reimburse the Bank in respect thereof pursuant to Section 3.4. 3.3. PLACE OF PAYMENT OR PREPAYMENT. All payments and prepayments of the International Obligations made in accordance with the provisions of this Agreement or of the Note, including, without limitation, fees, principal or interest, shall be made to the Bank no later than 2:00 p.m. (Houston time) on the date when due, in immediately available funds. 3.4. PREPAYMENT PREMIUM OR PENALTY. Each prepayment pursuant to Section 3.1 or 3.2 shall be without premium or penalty, provided, if any payment of principal of any LIBOR Rate Loan is made other than on the last day of the Interest Period for such Loan, as a result of a payment pursuant to Sections 3.1 or 3.2 or acceleration of the maturity of the Loans and the Notes pursuant to Section 10 or for any other reason, the Borrower shall, within 15 Business Days after receipt of Bank's demand, pay to the Bank any amounts required to compensate the Bank for additional losses, costs or expenses which it may reasonably incur as a result of such payment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Bank to fund or maintain such Loan. 3.5. TAXES. All payments (whether of principal, interest, reimbursements or otherwise) under this Agreement or on the Note shall be made by the Borrower without set-off or counterclaim and shall be made free and clear of and without deduction for any present or future tax, levy, impost or any other charge, if any, of any nature whatsoever now or hereafter imposed by any taxing authority, but excluding taxes imposed on or measured by the Bank's net income and franchise taxes imposed on the Bank. If the making of such payments is prohibited by law unless such a tax, levy, impost or other charge is deducted or withheld therefrom, the Borrower shall pay to the Bank, on the date of each such payment, such additional amounts as may be necessary in order that the net amounts received by the Bank after such deduction or withholding shall equal the amounts which would have been received if such deduction or withholding were not required. 3.6. REDUCTION OR TERMINATION OF THE COMMITMENT. The Borrower may at any time or from time to time reduce or terminate the Commitment by giving written notice thereof no later than 2:00 p.m. (Houston time) not less than two (2) Business Days' prior to such reduction or termination. Any reduction in the Commitment shall be effective on the date specified in the Borrower's notice with respect to such reduction. The Commitment shall automatically terminate on the Maturity Date or in the event of acceleration of the Maturity Date of the Note. Each reduction of the Commitment hereunder shall be irrevocable. 4. FEES. 4.1. FACILITY FEE. The Borrower hereby irrevocably agrees to pay $30,000 to the Bank on the Closing Date. In no event shall such amount be refunded to the Borrower, whether or -9- 15 not the transactions contemplated hereby are consummated. The required facility fee hereunder is 1.0% of the Commitment. 4.2. LETTER OF CREDIT FEES. The Borrower agrees to pay the Bank a fee in respect of each Letter of Credit issued for the account of the Borrower (the "Letter of Credit Fee"), computed at the rate of 1% per annum on the initial Stated Amount of such Letter of Credit. Letter of Credit Fees shall be due and payable quarterly, in advance. Fees due under this Section 4.2 shall be computed on the basis of a year of 360 days. 4.3. FEES NOT INTEREST; NONPAYMENT. The fees described in this Agreement represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit and do not constitute compensation for the use, detention or forbearance of money, and the obligation of the Borrower to pay each fee described herein shall be in addition to, and not in lieu of, the obligation of the Borrower to pay interest, other fees described in this Agreement, and expenses otherwise described in this Agreement. Fees shall be payable when due in Dollars and in immediately available funds. All fees shall be non-refundable, and shall, to the fullest extent permitted by law, bear interest, if not paid when due, at a rate per annum equal to the Past Due Rate. 5. APPLICATION OF PROCEEDS. The Borrower agrees that (a) the proceeds of the Loans shall be used exclusively for purposes permitted pursuant to the Eximbank Guaranty and the Borrower Agreement and (b) the Letters of Credit shall be issued solely to support the Borrower's obligations (i) under an Export Order or Indirect Export Order, or (ii) to pay for goods or services purchased from a United States supplier in support of export sales to be made, pursuant to an Export Order or Indirect Export Order. 6. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants that: 6.1. ORGANIZATION AND QUALIFICATION. The Borrower and each Subsidiary (a) is duly organized, validly existing, and in good standing under the laws of its state of formation; (b) has the power to own its Properties and to carry on its business as now conducted; and (c) is duly qualified to do business and is in good standing in every jurisdiction where such qualification is necessary. The Borrower has no Subsidiaries other than those listed on Schedule 6.1. 6.2. FINANCIAL STATEMENTS; POSITIVE TANGIBLE NET WORTH. The Borrower and each Guarantor has furnished the Bank with the following financial statements: (a) its year-end Annual Audited Financial Statements for the fiscal periods ended 1994, 1995 and 1996; and (b) its balance sheet and statement of operations and retained earnings as at and for the 12 month period ended March 31, 1997. These statements have been prepared in conformity with GAAP. Such statements present, in all material respects, the financial condition of the Borrower or Guarantor and its Subsidiaries and the results of its operations as at the dates and for the periods indicated. There has been no material adverse change in the condition, financial or otherwise, of the Borrower since March 31, 1997. During the period from March 31, 1997 to the Closing Date, the Borrower has had a positive tangible net worth, as determined in accordance with GAAP. For the purpose of this determination, net worth (as determined in accordance with GAAP) must be (i) increased by any -10- 16 Indebtedness of the Borrower and its Subsidiaries subordinated to the Loans and (ii) decreased by all intangible assets (including, without limitation, all patents, licenses, goodwill, subscription lists, capitalized software, organization expenses, covenants not to compete, and investments in and monies due from Affiliates, officers and directors of the Borrower and its Subsidiaries). 6.3. LITIGATION. Other than as set forth on Schedule 6.3, there is no material action or proceeding pending or, to the knowledge of the Borrower, threatened against or involving the Borrower or any Subsidiary thereof before any court, administrative agency or arbitrator which, if adversely determined, could reasonably be expected to have a Material Adverse Effect. There is no outstanding judgment, order or decree binding upon the Borrower or any Subsidiary before or by any administrative or governmental authority. 6.4. DEFAULT. Neither the Borrower nor any Subsidiary is in default under or in violation of the provisions of (i) any instrument evidencing any Indebtedness or (ii) any agreement relating thereto or (iii) any Governmental Requirement (except where such default or violation could not reasonably be likely to have a Material Adverse Effect) or (iv) any Export Order or Indirect Export Order (which is a material violation of such Export Order or Indirect Export Order), which has not been waived by the applicable lender or other party thereto. 6.5. TITLE TO ASSETS; OWNERSHIP. (a) The Borrower and each Subsidiary has good and marketable title to its material Properties, subject to no Liens except as permitted by Section 9.1 hereof. (b) The Persons identified on Schedule 6.5 directly own, free and clear of all Liens or restrictions on transferability or voting, one hundred percent (100%) of the outstanding shares of the Borrower and all such shares are validly issued, fully paid and non-assessable. There are no outstanding warrants, options, contracts or commitments of any kind entitling any Person to purchase or otherwise acquire (i) any shares of the capital stock (or other equivalent interests) of the Borrower or (ii) any securities convertible into or exchangeable for any shares (or other equivalent interests) of such capital stock (or other equivalent interests). No securities are outstanding which are convertible into or exchangeable for any shares of capital stock (or other equivalent interests) of the Borrower. The Persons identified on Schedule 6.5 as Controlling Affiliates are the only Controlling Affiliates of the Borrower. 6.6. AUTHORIZATION, VALIDITY, ETC. The Borrower has the power and authority to make, execute, deliver and carry out the International Loan Documents to which it is a party and the transactions contemplated therein and to perform its obligations thereunder and all such action has been duly authorized by all necessary proceedings on its part. The International Loan Documents have been duly and validly executed and delivered by the Borrower and the Guarantors and constitute valid and legally binding agreements of the Borrower and the Guarantors enforceable in accordance with their respective terms, except as limited by Debtor Laws. The Liens created by the International Security Documents will constitute valid and perfected Liens on the International Collateral described therein subject in priority to no other Liens whatsoever. The liens created by the International Security Documents will constitute valid and perfected Liens on the Domestic Collateral, subject in priority to no other Liens whatsoever, other than Permitted Liens and Liens securing the Domestic Obligations. -11- 17 6.7. LINE OF BUSINESS. The Borrower's line of business is to design, distribute, install and service production processing equipment and systems for the petroleum industry worldwide. The Borrower provides a wide spectrum of equipment and systems for separating one substance from another in a hydrocarbon fluid stream and removing contaminants from gases and liquids. 6.8. TAXES. (a) The Borrower and each Subsidiary has filed, or has caused to be filed, all tax returns required to be filed and has paid, or has caused to be paid, all taxes shown on said returns and all assessments which are not yet delinquent. The Borrower is not aware of any pending investigation by any taxing authority or of any claims by any Governmental Authority for any unpaid taxes, except liabilities contested in good faith. (b) The Borrower and each Guarantor has furnished the Bank a copy of its signed federal tax returns, including federal income tax returns, for the years 1994, 1995 and 1996. 6.9. CONFLICTING OR ADVERSE AGREEMENTS OR RESTRICTIONS. Neither the execution, delivery and performance of the International Loan Documents to which the Borrower or any Subsidiary is a party, any Export Order, or any Indirect Export Order, nor the consummation of the transactions contemplated thereby nor fulfillment of and compliance with the respective terms, conditions and provisions thereof, will conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation or imposition of any Lien on any of the Property of the Borrower or any Subsidiary or Guarantor pursuant to, (a) the charter or bylaws of such Person; (b) any Governmental Requirement; or (c) the terms, conditions or provisions of any material contract to which such Person is a party or by which it is bound or to which it is subject. 6.10. INFORMATION. Neither this Agreement nor any other document, certificate or statement furnished to the Bank by or on behalf of the Borrower or any Subsidiary or Guarantor in connection with this Agreement (including, without limitation, any Export Order or any International Borrowing Base Certificate) contains any statement of fact which is untrue or incorrect in any material respect or omits to state a fact necessary in order to make the statements contained herein and therein not misleading. There is no fact peculiar to the Borrower which currently or (so far as the Borrower can now reasonably foresee) in the future may result in the existence of a Material Adverse Effect. 6.11. NO CONSENT. Except to the extent obtained, no authorization or approval or other action by, and no notice to or filing with, any Person or any Governmental Authority is required for the due execution, delivery, and performance (a) by the Borrower or any Subsidiary or Guarantor of any International Loan Document to which it is a party or the borrowings hereunder, in each case as contemplated herein, or the effectuation of the transactions contemplated under any International Loan Document to which it is a party, or (b) of any Export Order or any Indirect Export Order by the parties thereto or the effectuation of the transactions contemplated thereunder. 6.12. ENVIRONMENTAL MATTERS. The Borrower and each Subsidiary (a) owns, possesses or otherwise holds, and is in compliance with the terms and conditions of, all Governmental Approvals under Environmental Laws necessary for the ownership or lease and -12- 18 operation of its Property and the carrying on of its business as now conducted or proposed to be conducted and except where the failure would not reasonably be expected to have a Material Adverse Effect, and (b) is in compliance with all Governmental Requirements relating to the environment except where the failure would not reasonably be expected to have a Material Adverse Effect. There are no civil, criminal or administrative actions, investigations or proceedings or claims pending or, to the best knowledge of the Borrower, threatened against the Borrower or any Subsidiary, for noncompliance with Environmental Laws or arising out of the presence or release of hazardous materials at, on or under any Property now owned, leased or operated by the Borrower or any Subsidiary which, if adversely determined, could reasonably be expected to have a Material Adverse Effect. 6.13. DEBT. Attached hereto as Schedule 6.13 is a complete list, as of the Closing Date, of all agreements or instruments evidencing Indebtedness of the Borrower, each Subsidiary and the Guarantors not reflected in the Annual Audited Financial Statements previously furnished to the Bank pursuant to Section 6.2 (other than the International Loan Documents, the Domestic Loan Documents and agreements or instruments evidencing Indebtedness arising from or with respect to current accounts payable and unsecured current liabilities, not the result of borrowing, to vendors, suppliers and Persons providing services, for expenditures and/or goods and services normally required by it in the ordinary course of business and on ordinary trade terms). 6.14. NO UNTRUE OR MISLEADING STATEMENTS. No document, instrument or other writing furnished to the Bank by or on behalf of the Borrower, any Subsidiary or Guarantor in connection with the transactions contemplated by the International Loan Documents contains any untrue material statement of fact or omits to state any such fact necessary to make the representations, warranties and other statements contained herein or in such other document, instrument or writing not misleading in any material respect. 7. CONDITIONS. The obligation of the Bank to make each Loan, to issue each Letter of Credit, is subject to the following conditions: 7.1. REPRESENTATIONS TRUE AND NO DEFAULTS. (a) The representations and warranties of the Borrower contained in the International Loan Documents shall be true and correct on and as of the particular Borrowing Date or the date of the issuance of any Letter of Credit, as the case may be, as though made on and as of such date unless otherwise limited to an earlier date; (b) no event which could reasonably be expected to have a Material Adverse Effect shall have occurred and be continuing; and (c) no Event of Default or Default shall have occurred. 7.2. TERMS OF SALE. Loans and Letters of Credit shall be made or issued, as the case may be, only against Export Orders and Indirect Export Orders, copies of which have been delivered to the Bank and which are maintained on file with the Borrower. With respect to Loans and Letters of Credit to be made or issued, as the case may be, against Indirect Export Orders, if requested by the Bank, a copy of each Direct Export Contract pursuant to which the Items will be exported shall have been delivered to the Bank. Unless waived by the Bank and the Eximbank, the Borrower must execute an assignment of any contract and the proceeds thereof in favor of the Bank, for the benefit of any Loan or Letter of Credit related thereto, such assignment to be in form and substance satisfactory to the Bank. Each Loan and Letter of Credit hereunder is subject to the -13- 19 condition precedent that the Bank shall have reviewed and approved in its sole discretion the terms and conditions, including without limitation that there exists satisfactory evidence that the Items will in fact be exported, of the applicable Export Order or Indirect Export Order and, if required by the Bank, any Direct Export Contracts. 7.3. GOVERNMENTAL APPROVALS. The Borrower, each Subsidiary, the Guarantors, and the Bank shall have obtained all Governmental Approvals required for the making and carrying out of this Agreement, the making of the Loans and the issuance of Letters of Credit pursuant hereto and the issuance of the Note to evidence such Loans and the execution, delivery and performance of the applicable Export Order or Indirect Export Order. Without limitation of the foregoing, no Loan shall be made or Letter of Credit issued hereunder (a) in violation of the Eximbank Guaranty or contrary to the instructions of the Eximbank; (b) following the occurrence of an event of default or of any event which but for the giving of notice or the lapse of time or both would constitute and event of default pursuant to Section 4.5 of the Eximbank Guaranty; or (c) without the prior written approval of the Bank and the Eximbank subsequent to the event of an occurrence under any insurance policy referred to in Section 8.7 hereof. 7.4. BORROWING DOCUMENTS; INTERNATIONAL BORROWING BASE CERTIFICATE. The Bank shall have timely received from the Borrower a duly executed and completed Request for Borrowing in respect of Loans to be made on such Borrowing Date, an International Borrowing Base Certificate dated within the past five (5) Business Days, and such other documents and certificates relating to the transactions herein contemplated as the Bank may reasonably request. 7.5. LETTER OF CREDIT DOCUMENTS. On the date of the issuance of any Letter of Credit, the Bank shall have received from the Borrower a Letter of Credit Request in respect of Letters of Credit to be issued on such issuance date together with such other documents and certificates relating to the transactions herein contemplated as the Bank may reasonably request. Without limitation of the foregoing, each Letter of Credit shall be issued only upon receipt of an International Borrowing Base Certificate current within the past five (5) Business Days. 7.6. REQUIRED INITIAL DOCUMENTS AND CERTIFICATES. On or before the first Loan is made, or Letter of Credit issued, hereunder (the "Initial Date"), the Bank shall have received from the Borrower the following, in each case in form, scope and substance satisfactory to the Bank: (i) the SBA/Eximbank Joint Application, duly executed by the parties thereto, together with the $100 application fee related thereto; (ii) the Borrower Agreement duly executed by the parties thereto; (iii) this Agreement, together with all schedules and exhibits thereto; (iv) the Note duly executed by the Borrower; (v) the International Security Agreement duly executed by the parties thereto; (vi) the International Guaranties duly executed by the Guarantors; -14- 20 (vii) an Officer's Certificate of the Borrower dated as of the Closing Date to which are attached true and correct copies of the articles of incorporation and bylaws of the Borrower and corporate resolutions duly adopted by the Board of Directors of the Borrower authorizing the transactions contemplated by the International Loan Documents; (viii) satisfactory results of on-line search as to the continued existence and good standing of the Borrower; (ix) satisfactory results of on-line search as to each state in which the Borrower is authorized and qualified to do business as to its due qualification and good standing; (x) an International Borrowing Base Certificate dated within five (5) Business Days preceding the Initial Date, as required by Section 7.4; (xi) copies of duly executed UCC-1 Financing Statements and all other requisite filing documents necessary to perfect the Liens granted pursuant to the International Security Documents and duly executed releases or assignments of Liens and UCC-3 financing statements in recordable form, and in form and substance satisfactory to the Bank, and filed with the appropriate filing offices, covering all of the Collateral subject thereto, as may be necessary to reflect that the Liens granted to the Bank are of the priority required by Section 9.1 hereof; (xii) a copy of the fully effective Eximbank insurance policy complying with the terms of Section 8.7 hereof, together with an assignment thereof in favor of the Bank; (xiii) the facility fee required under Section 4.1; (xiv) the Borrower's monthly inventory listing and accounts receivable aging schedule showing all of the Borrower's inventory and accounts receivable as of the last day of the calendar month immediately preceding the Initial Date; (xv) satisfactory completion of field analysis and due diligence of the Borrower to be performed by the Bank; and (xvi) the Borrower's and each Guarantor's financial statements and signed federal tax returns as contemplated in Sections 6.2 and 6.8(b). In addition, as of the Initial Date, all legal matters incident to the transactions herein contemplated shall be reasonably satisfactory to the Bank. 7.7. EXIMBANK ACKNOWLEDGMENT, ETC. On or before the Initial Date, the Eximbank shall have received from the Bank copies of all documents required pursuant to the Eximbank Guaranty. The Bank shall have received from the Eximbank (a) an acknowledged Loan Authorization Notice executed by an Authorized Officer evidencing the Eximbank's commitment to issue a guarantee pursuant to the Bank's exercise of its delegated authority with respect to this Agreement, together with all other acknowledged items referred to in Section 3 of the Delegated -15- 21 Authority Letter Agreement and (b) an acknowledgment of the Eximbank's receipt of its portion of the facility fee referred to in Section 4.1 hereof. 7.8. POST-CLOSING LIEN SEARCH. On or before the Initial Date, Bank shall have received the results of all post-closing lien searches confirming that the Bank has obtained a perfected security interest in the Collateral of the priority required by Section 9.1. 7.9. APPROVAL OF AUTHORIZED OFFICER. Eximbank requires that an Authorized Officer approve in writing any Loan made, or Letter of Credit issued hereunder. Such approval shall not be withheld provided all requirements set forth herein and in the Borrower Agreement are fully complied with. 8. AFFIRMATIVE COVENANTS. The Borrower covenants and agrees that, so long as the Borrower may borrow hereunder and until payment in full of the Note, the Borrower will: 8.1. FINANCIAL STATEMENTS AND INFORMATION. Deliver to the Bank in duplicate: (a) as soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year of the Borrower, the Annual Audited Financial Statements of (i) the Borrower and its Subsidiaries prepared on a consolidated basis, and (ii) each Guarantor; (b) as soon as available, and in any event within one hundred eighty (180) days after the end of each year, a copy of Borrower's and each Guarantor's signed federal tax returns, including federal income tax returns, and all supporting documentation; (c) as soon as available, and in any event within thirty (30) days after the end of each calendar month (including a month ending a fiscal year), Monthly Unaudited Financial Statements of the Borrower and its Subsidiaries prepared on a consolidated basis; (d) as soon as available, and in any event within twenty (20) Business Days after the end of each month, an International Borrowing Base Certificate dated within the past five (5) Business Days of the Bank's receipt thereof; (e) promptly after such request is submitted to the appropriate Governmental Authority, any request for waiver of funding standards or extension of amortization periods with respect to any employee benefit plan; (f) contemporaneously therewith or within 10 days thereafter copies of all statements and reports sent to the stockholders of the Borrower or any Subsidiary, or filed with the Securities and Exchange Commission; (g) such additional financial or other information as the Bank may reasonably request; -16- 22 (h) as soon as available, and in any event within 30 days after the end of each calendar month, the Borrower's monthly inventory listing and accounts receivable aging schedule showing all of the Borrower's inventory and accounts receivable; and (i) as soon as available, and in any event within forty-five (45) days after the end of each quarter, quarterly financial statements of the Borrower. Together with each delivery of the Annual Audited Financial Statements, the Borrower will deliver to the Bank an Compliance Certificate in the form of Exhibit E hereto, stating that there exists no Event of Default or Default, or, if any such Event of Default or Default exists, stating the nature thereof, the period of existence thereof and what action the Borrower has taken or proposes to take with respect thereto. The Bank is authorized to deliver a copy of any information and financial statement delivered to it to the Eximbank and any Governmental Authority having jurisdiction over the Bank. 8.2. BOOKS AND RECORDS. Maintain, and cause its Subsidiaries to maintain, proper books of record and account in accordance with GAAP in which true, full and correct entries will be made of all its dealings and business affairs. 8.3. INSURANCE. Maintain, and cause its Subsidiaries to maintain, insurance with financially sound, responsible and reputable companies in such types (including, without limitation, fire and casualty) and amounts and against such casualties, risks and contingencies as is customarily carried by owners of similar businesses and Properties, and furnish to the Bank, together with each delivery of financial statements under Section 8.1(a), an Officer's Certificate containing full information as to the insurance carried. Without limiting the generality of the foregoing, the Borrower will comply with the insurance requirements set forth in each International Security Document to which the Borrower is a party. For purposes hereof, the Borrower's types and amounts of insurance set forth in Schedule 8.3 shall be acceptable to the Bank. 8.4. INSPECTION OF PROPERTY AND RECORDS; AUDITS OF COLLATERAL. (a) Permit, and cause its Subsidiaries to permit, any Person designated by the Bank in writing to visit and inspect any of the Properties, books and financial records of the Borrower and its Subsidiaries and discuss its affairs and finances with its officers, all at such times as the Bank may reasonably request at a mutually agreeable time, and cause its officers and employees to give full cooperation and assistance in connection therewith. Without limiting the generality of the foregoing, the Borrower will permit, and cause its Subsidiaries to permit, any officer or employee of, or agent designated by, the Bank to have access to, examine and inspect the Collateral and to audit and make extracts from the Borrower's records, files and books of account in order to verify such Collateral. (b) The Borrower will, from time to time, on at least a semiannually basis, permit the Bank, an independent certified public accountant or another appropriate entity acceptable to the Bank to audit the Borrower's books, records and procedures with respect to the Inventory, Accounts Receivable and other Collateral. This inspection shall include a physical inspection of the Collateral -17- 23 in accordance with normal commercial lending practices, except that a book audit shall be made of the Borrower's Accounts Receivable and any intangible Collateral. Promptly after the conclusion of each such audit, the Borrower shall pay to the Bank its reasonable and customary out-of-pocket expenses associated with such audit. 8.5. NOTICE OF CERTAIN MATTERS. Notify the Bank immediately upon acquiring knowledge of the occurrence of any of the following events: (a) the occurrence of any event having a Material Adverse Effect; (b) the occurrence of any Event of Default or any Default; (c) the existence of any condition requiring a mandatory prepayment pursuant to Section 3.1 hereof; (d) any failure to pay when due any amount payable to the Bank by the Borrower, any Subsidiary or any Guarantor under any non-Eximbank guaranteed loan(s) extended by the Bank to the Borrower, any Subsidiary or any Guarantor; (e) the filing of an action for debtor's relief by, against, or on behalf of the Borrower, any Subsidiary or any Guarantor; (f) any actual or threatened breach of any Export Order, Indirect Export Order or Direct Export Contract by any party to any such contract or (g) any threatened or pending material litigation against the Borrower, any Subsidiary or any Guarantor or any material dispute involving the Borrower, any Subsidiary or any Guarantor. The Borrower shall promptly notify the Bank in writing of the occurrence of any of the following: (a) the Borrower, any Subsidiary or any Guarantor begins or consents in any manner to any proceeding or arrangement for its liquidation in whole or in part or to any other proceeding or arrangement whereby any of its liabilities or whereby any receiver, trustee, liquidator or the like is appointed for it or any substantial part of its assets (including, without limitation, the filing by the Borrower, any Subsidiary or any Guarantor of a petition for appointment as a debtor-in-possession under Title 11 of the U.S. Code); (b) the Borrower, any Subsidiary or any Guarantor fails to obtain the dismissal or stay on appeal within thirty (30) calendar days of the commencement of any proceeding arrangement referred to in (a) above; (c) the Borrower, any Subsidiary or any Guarantor begins any other procedure for the relief of financially distressed or insolvent debtors, or such procedure has been commenced against it, whether voluntarily or involuntarily, and such procedure has not been effectively terminated, dismissed or stayed within thirty (30) calendar days after the commencement thereof, or (d) the Borrower, any Subsidiary or any Guarantor begins any procedure for its dissolution, or a procedure therefore has been commenced against it. 8.6. SECURITY AND FURTHER ASSURANCES. The Borrower shall, whenever and as often as the Bank may reasonably request, at the Borrower's own expense, promptly execute and deliver all such further instruments (including, without limiting the generality of the foregoing, additional security agreements, deeds of trust and financing statements) and do such other acts (including, without limitation, field warehousing) as the Bank may reasonably request for the purpose of protecting or perfecting any Lien created or granted or intended to be created or granted in the International Security Documents or in order to ensure that any such Lien is of the priority purported to be granted thereby and as required by Section 9.1 hereof, or in order to police or protect any Collateral or otherwise to carry out more effectually the purposes and intent of the International Loan Documents. -18- 24 8.7. EXPORT INSURANCE. (a) Any Eligible Account Receivable to be covered by the Eximbank insurance must be insured by the Eximbank pursuant to a policy in form and substance, and in such amounts, satisfactory to the Bank; (b) any Eligible Account Receivable to be covered by private sector insurance must be pursuant to a policy in form and substance, and in such amounts, satisfactory to the Bank; (c) the Borrower shall keep each such policy in full force and effect and timely pay all premiums thereon and deliver copies thereof to the Bank, together with all endorsements, declarations, amendments and renewals; (d) the Borrower shall immediately notify the Bank of any loss related to the accounts receivable and of any submission of a claim under any such policy and upon the event of an occurrence thereunder; (e) the Borrower hereby assigns and grants to the Bank its rights to claim payment(s) under any such policy, such assignments to be notified to the policy issuers in the manner required by the Bank and a duly executed original of each such notification to be delivered to the Bank; and (f) the proceeds of any such assignment paid to the Bank shall be applied first towards reducing any amount then outstanding hereunder. Any excess thereafter shall be promptly paid to the Borrower. 8.8. MAINTENANCE OF PROPERTY. Cause its and each Subsidiary's material Properties to be maintained, preserved, protected and kept in reasonably good repair, working order and condition so that the business carried on in connection therewith may be conducted properly and efficiently. 8.9. EXISTENCE, LAWS AND OBLIGATIONS. Maintain, and cause each Subsidiary to maintain, its existence, and pay, or cause to be paid, all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which if unpaid might become a Lien against the Property of the Borrower or any Subsidiary; except liabilities which are being contested in good faith and which are not owed to a Government Authority. The Borrower will comply, and cause each Subsidiary to comply, with all Governmental Requirements except where failure to so comply could not reasonably be expected to have a Material Adverse Effect. 8.10. ASSIGNMENT OF INTERNATIONAL LETTER OF CREDIT PROCEEDS. Each letter of credit issued in favor of the Borrower with respect to the sale of Items to be financed under this Agreement, if any, (a) shall be in form and substance reasonably satisfactory to the Bank, and (b) shall be issued and/or confirmed in the manner required by the Bank by financial institutions acceptable to the Bank, and shall list the Bank as the advising and paying bank. If required by the Bank, any such letter of credit shall provide for an assignment of proceeds thereof, in form and substance satisfactory to the Bank. -19- 25 8.11. ENVIRONMENTAL MATTERS. At all times: (a) comply, and cause each Subsidiary to comply, with all applicable Governmental Requirements under and Governmental Approvals under Environmental Laws except where failure to so comply could not reasonably be expected to have a Material Adverse Effect; (b) promptly notify the Bank and provide copies upon receipt of all material written claims, complaints, notices or inquiries relating to the environmental condition of the facilities and Properties of the Borrower or any Subsidiary or its compliance with Environmental Laws; and (c) provide such information and certifications which the Bank may reasonably request from time to time to evidence compliance with this Section 8.11. 8.12. CONTROLLING AFFILIATES. If any Person shall become a Controlling Affiliate, then the Borrower will, and will cause such Controlling Affiliate to, amend the International Loan Documents and execute additional documents as may be required by the Bank or Eximbank. 9. NEGATIVE COVENANTS. So long as the Borrower may borrow hereunder and until payment in full of the Note, unless the Bank shall otherwise give its prior written consent in its sole and absolute discretion: 9.1. LIENS. The Borrower will not, and will not permit any Subsidiary to create, incur, assume or permit to exist any Lien (including any charge upon assets purchased under a conditional sales agreement, purchase money mortgage, security agreement or other title retention agreement) upon any of its Properties, or the proceeds thereof, whether now owned or hereafter acquired, except (a) Permitted Liens and Liens set forth on Schedule 9.1, provided that any such Lien (i) is not extended to any other Property, (ii) secures only Indebtedness permitted by Section 9.6 and (iii) no such Lien shall encumber the Collateral subject to the International Security Documents, (b) Liens in favor of the Bank and Domestic Lenders created by the International Security Documents and pursuant to the Domestic Security Documents, and (c) Liens permitted pursuant to Section 8.2 of the Domestic Credit Agreement. NOTHING WITHIN THIS SECTION SHALL PERMIT THE BORROWER TO TAKE ANY ACTION WHICH WOULD CAUSE THE LIEN ON THE INTERNATIONAL COLLATERAL CREATED IN FAVOR OF THE BANK PURSUANT TO THE INTERNATIONAL SECURITY DOCUMENTS TO FAIL TO BE A VALID FIRST PRIORITY LIEN, AND THE LIEN ON THE DOMESTIC COLLATERAL CREATED IN FAVOR OF THE BANK PURSUANT TO THE INTERNATIONAL SECURITY DOCUMENTS TO BE A VALID LIEN WHICH IS JUNIOR IN PRIORITY ONLY TO LIENS CREATED PURSUANT TO THE DOMESTIC SECURITY DOCUMENTS, AND THE BORROWER WILL NOT TAKE ANY SUCH ACTION. 9.2. MERGER, CONSOLIDATION, ETC. Without the prior written consent of the Bank and the Eximbank, the Borrower will not merge or consolidate with any other Person or sell, lease, transfer or otherwise dispose of (whether in one transaction or a series of transactions) all or a substantial part of its assets or any part of its assets which are essential to the conduct of its business or operations or acquire (whether in one transaction or a series of transactions) all or a substantial part of the assets of any Person or make any material change in its corporate structure or identity, -20- 26 or enter into any agreement to do any of the foregoing. Without the prior written consent of the Bank and the Eximbank, the Borrower shall not form, acquire or create any Subsidiary. Without the prior written consent of the Bank and the Eximbank, the Borrower shall not, and will not permit any of its Subsidiaries to, transfer, purchase or redeem, or permit any Subsidiary to transfer, purchase or redeem, any shares of the Borrower's or any Subsidiary's capital stock unless such transfer, purchase or redemption is effected solely from the proceeds of and within a reasonable time after the issuance to third parties by the Borrower or its Subsidiary of capital stock which is in addition to the capital stock of the Borrower or its Subsidiary, as the case may be, outstanding on the date hereof. 9.3. NATURE OF BUSINESS; MANAGEMENT. Neither the Borrower nor any Subsidiary will change its line of business from that described in Section 6.7 or enter into any business which is substantially different from such business. 9.4. LOANS AND INVESTMENTS. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, make or have outstanding any loans, advances or other extensions of credit; or make or permit to remain outstanding any capital contributions to, or purchase or own any stocks, bonds, notes, debentures or other securities of, any Person other than as permitted by Section 8.8 of the Domestic Credit Agreement. This Section 9.4 shall not be construed to prohibit advances made to employees, officers and directors in the usual, customary and ordinary course of business. 9.5. FINANCIAL COVENANTS. Throughout the term of this Agreement, the Borrower shall comply with each of the financial tests in Section 7.3 of the Domestic Credit Agreement. The Borrower shall deliver schedules reflecting the calculation of such amounts and ratios concurrently with each set of financial statements delivered under Section 8.1(a) of this Agreement. 9.6. DEBT. The Borrower will not, and will not permit any Subsidiary to create, incur, suffer or permit to exist, or assume or guarantee, directly or indirectly, or become or remain liable with respect to any Indebtedness, contingent or otherwise, except: (a) Indebtedness to the Bank; (b) Indebtedness previously approved by the Bank in writing on any date following the Closing Date; (c) current accounts payable and unsecured current liabilities, not the result of borrowing, to vendors, suppliers and persons providing services, for expenditures and/or goods and services normally required by it in the ordinary course of business and on ordinary trade terms, and liabilities related to deferred premiums for liability insurance; (d) Indebtedness set forth on Schedule 6.13 hereof or reflected in the Borrower's Annual Audited Financial Statements delivered to the Bank prior to the date hereof pursuant to Section 6.2, including any renewals or modifications, but not increases, thereof; and -21- 27 (e) Indebtedness permitted by Section 8.1(d) - (i) of the Domestic Credit Agreement. 9.7. AFFILIATE TRANSACTIONS. The Borrower will not, and will not permit any Subsidiary to enter into any transaction or agreement with any officer, director or holder of any outstanding capital stock of the Borrower or any Subsidiary (or any member of the family of such Person, or any Person controlling, controlled by or under common control with such Person) unless the same is upon terms substantially similar to those obtainable from wholly unrelated sources. Without limitation of the foregoing, and except as expressly permitted herein, in no event shall the Borrower or any Subsidiary make any advances to any stockholder or affiliated or related entity (including but not limited to, partnerships, joint ventures, joint stock companies, sister companies, parent companies or subsidiaries). In the event that any such advances are made, the Bank shall not make any further disbursements to the Borrower hereunder without the prior written approval of Eximbank. 9.8. RESTRICTED PAYMENTS. The Borrower will not (a) purchase, redeem, retire or otherwise acquire, directly or indirectly, any shares of its capital stock or other equity interests; (b) declare or pay any dividend (except stock dividends); (c) make any other disposition of any Property or cash to owners of an equity interest in their capacity as such; (d) Tax Dividends with respect to its estimated taxable income; or (e) as allowed under Section 8.5 of the Domestic Credit Agreement. 9.9. CHANGE IN ACCOUNTING METHOD. The Borrower will not make any change in the method of computing depreciation for either tax or book purposes or any other material change in accounting method without prior written notice to the Bank, except for any changes required by GAAP or applicable law. The Borrower will not change its fiscal year. 9.10. EXPORT ORDERS AND INDIRECT EXPORT ORDERS. The Borrower will not consent to any material and adverse modification, supplement or waiver of any of the provisions of any Export Order or any Indirect Export Order without the prior consent of the Bank and excluding change orders in the ordinary course of business; provided, no such modifications or change orders may be made if the effect thereof would cause the Loans outstanding plus the Letter of Credit Outstandings to exceed the International Borrowing Base if calculated after taking into effect such modification or change. The Borrower will not assign or terminate any of its obligations, nor will it consent to any assignment or termination of any other Person's obligations, under any Export Order or any Indirect Export Order without the prior written consent of the Bank. 9.11. COPYRIGHTS, PATENTS AND SOFTWARE. Except for (a) Permitted Liens and (b) Liens to secure the Domestic Obligations, neither the Borrower or any Subsidiary will create or suffer to exist any Lien upon any of its copyrights, patents, software or other similar Property now owned or hereafter acquired, or acquire any copyrights, patents, software or other similar Property upon any conditional sale or other title retention device or arrangement or any purchase money security agreement; or in any manner directly or indirectly sell, assign, pledge or otherwise transfer any of its copyrights, patents, software or other similar Property; provided, however, that Borrower shall be entitled to sell software in the ordinary course of business and Borrower shall be entitled to assign rights to market its software for sale in the ordinary course of its business. -22- 28 9.12. EXIMBANK VIOLATIONS. Notwithstanding anything herein to the contrary, neither the Borrower nor any Subsidiary or Guarantor will take any action which if taken would violate any rule, regulation or other requirement of Eximbank applicable to such Borrower, Subsidiary or Guarantor, or violate any agreement which such Borrower, Subsidiary or Guarantor has with Eximbank. 10. EVENTS OF DEFAULT; REMEDIES. If any of the following events shall occur, then the Bank may (a) by notice to the Borrower, declare the Commitment of the Bank and the obligation of the Bank to make Loans and issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and (b) declare the Note and all interest accrued and unpaid thereon, and all other amounts payable under the Note and this Agreement, to be forthwith due and payable, whereupon the Note, all such interest and all such other amounts, shall become and be forthwith due and payable without presentment, demand, protest, or further notice of any kind (including, without limitation, notice of default, notice of intent to accelerate and notice of acceleration), all of which are hereby expressly waived by the Borrower; provided, however, that with respect to any Event of Default described in Section 10.5 hereof, (i) the Commitment of the Bank and the obligation of the Bank to make Loans and issue Letters of Credit hereunder shall automatically be terminated and (ii) the entire unpaid principal amount of the Note, all interest accrued and unpaid thereon, and all such other amounts payable under the Note and this Agreement, shall automatically become immediately due and payable, without presentment, demand, protest, or any notice of any kind (including, without limitation, notice of default, notice of intent to accelerate and notice of acceleration), all of which are hereby expressly waived by the Borrower. 10.1. FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower does not pay, repay or prepay any principal of the Note when due; or 10.2. FAILURE TO PAY OTHER AMOUNTS. The Borrower does not pay any interest on the Note, other obligation or amount payable under this Agreement or the Note or any other International Loan Document to which it is a party when due and such failure continues for a period of five days; or 10.3. MISREPRESENTATION OR BREACH OF WARRANTY. Any representation or warranty made by the Borrower, any Subsidiary or any Guarantor herein or in any other International Loan Document or otherwise furnished to the Bank in connection with this Agreement shall be incorrect, false or misleading in any material respect when made; or 10.4. VIOLATION OF COVENANTS. The Borrower, any Subsidiary or any Guarantor violates any covenant, agreement or condition contained herein or in any other International Loan Document to which it is a party; or 10.5. BANKRUPTCY AND OTHER MATTERS. (i) The Borrower, any Subsidiary or any Guarantor begins or consents in any manner to any proceeding or arrangement for its liquidation in whole or in part or to any other proceeding or arrangement whereby any of its assets are subject generally to the payment of its liabilities or whereby any receiver, trustee, liquidator or the like is appointed for it or any substantial part of its assets (including without limitation the filing by the Borrower, any Subsidiary or any Guarantor of a petition for appointment as a debtor-in-possession -23- 29 under Title 11 of the U.S. Code); (ii) the Borrower, any Subsidiary or any Guarantor fails to obtain the dismissal or stay on appeal within thirty (30) calendar days of the commencement of any proceeding arrangement referred to in (i) above; (iii) the Borrower, any Subsidiary or any Guarantor begins any other procedure for the relief of financially distressed or insolvent debtors, or such procedure has been commenced against it, whether voluntarily or involuntarily, and such procedure has not been effectively terminated, dismissed or stayed within thirty (30) calendar days after the commencement thereof; (iv) the Borrower, any Subsidiary or any Guarantor begins any procedure for its dissolution, or a procedure therefor has been commenced against it; or (v) the Borrower, any Subsidiary or any Guarantor shall fail generally to pay its debts as they become due; or 10.6. DISSOLUTION. Any order is entered in any proceeding against the Borrower or any Subsidiary decreeing the dissolution, liquidation, winding-up or split-up of the Borrower or any Subsidiary; or 10.7. LIENS. The Borrower, any Subsidiary or any Guarantor claims, or any court finds or rules, that the Bank does not have a valid Lien or a Lien of the purported priority as provided in any International Security Document; or 10.8. COLLATERAL. The Borrower or any Subsidiary sells, encumbers or abandons (except as otherwise expressly permitted by the International Loan Documents) any of the Property now or hereafter subject to any of the International Security Documents (other than the sale of inventory in the normal course of business); or any levy, seizure, or attachment is made thereof or thereon; or such Property is lost, stolen, substantially damaged or destroyed; or 10.9. INTERNATIONAL SECURITY DOCUMENTS. The Borrower violates any covenant, agreement or condition contained in any International Security Documents or any default or event of default otherwise occurs thereunder; or 10.10. CROSS-DEFAULT TO EXPORT ORDERS, INDIRECT EXPORT ORDERS AND DIRECT EXPORT CONTRACTS. The Borrower is in breach of any material provision of any Export Order, any Indirect Export Order or any Direct Export Contract; or 10.11. CROSS-DEFAULT TO DOMESTIC LOAN DOCUMENTS. An event of default shall occur under any of the Domestic Loan Documents, unless the same shall have been waived in accordance with the terms thereof; or 10.12. CROSS-DEFAULT TO NON-EXIMBANK DEBT. The Borrower, any Subsidiary or any Guarantor does not pay when due any amount payable to the Bank under any loan or other extension of credit from the Bank to the Borrower, any Subsidiary or any Guarantor which is not guaranteed by the Eximbank, unless the same shall have been waived by the Bank in accordance with the terms thereof; or 10.13. CROSS-ACCELERATION TO OTHER DEBT. Any event occurs which results in acceleration of any Indebtedness in excess of $3,000,000 of the Borrower, any Subsidiary or any Guarantor or if default shall be made in the payment of any such Indebtedness at the stated maturity thereof, after any applicable period of grace; or -24- 30 10.14. UNDISCHARGED JUDGMENT. Final judgment shall be rendered against the Borrower, any Subsidiary or any Guarantor and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed, released, bonded or vacated; or 10.15. CROSS-DEFAULT TO BORROWER AGREEMENT. The Borrower violates any covenant, agreement or condition contained in the Borrower Agreement or any default or event of default otherwise occurs thereunder; or 10.16. CHANGE OF CONTROL. A Change of Control shall occur; or 10.17. CONTROLLING AFFILIATES. A Person, other than those in compliance with Section 8.12, shall become a Controlling Affiliate of the Borrower; or 10.18. IMPAIRMENT OF EXIMBANK GUARANTY. The Eximbank Guaranty shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested, challenged or denied by the Eximbank, the Borrower, any Governmental Authority, any Affiliate of the Borrower, any Subsidiary or any Guarantor; or 10.19. IMPAIRMENT OF INTERNATIONAL LOAN DOCUMENTS, EXPORT ORDERS, INDIRECT EXPORT ORDERS AND DIRECT EXPORT CONTRACTS. This Agreement, the Note, any Export Order, any Indirect Export Order, any Direct Export Contract, or any other International Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability hereof or thereof shall be contested, challenged or denied by the Borrower, any Governmental Authority, any Affiliate of the Borrower, any Subsidiary or any Guarantor, or any Lien created by the International Security Documents shall cease to be in effect or shall cease to be a valid first priority Lien; or 10.20. NEGATIVE PLEDGE ON SHARES. Any Lien shall exist on any of the outstanding shares of the Borrower or any Subsidiary, except in favor of the Domestic Lenders pursuant to the Domestic Loan Documents; or 10.21. OTHER REMEDIES. In addition to and cumulative of any rights or remedies expressly provided for in this Section 10, if any one or more Events of Default shall have occurred, the Bank may proceed to protect and enforce its rights hereunder by any appropriate proceedings and the Liens evidenced by the International Security Documents shall be subject to foreclosure in any manner provided for therein or provided for by law as the Bank may elect. The Bank may also proceed either by the specific performance of any covenant or agreement contained in this Agreement or the other International Loan Documents or by enforcing the payment of the Note or by enforcing any other legal or equitable right provided under this Agreement or the other International Loan Documents or otherwise existing under any law in favor of the holder of the Note. The Bank shall not, however, be under any obligation to marshall any assets in favor of the Borrower or against or in payment of any or all obligations under any International Loan Document. Upon the occurrence of an Event of Default, it is hereby acknowledged and agreed that the Eximbank shall have the right to (a) direct the Bank to make demand hereunder and under the other International Loan Documents and (b) request that the Bank accelerate the maturities of any of the Borrower's -25- 31 non-Eximbank loans, and the Bank shall have no liability to the Borrower for complying with such directions or requirements; or 10.22. COLLATERAL ACCOUNT. The Borrower hereby agrees that in the event of (a) the termination of the Commitment, or (b) the occurrence of an Event of Default, it shall, if requested by the Bank, pay to the Bank an amount in immediately available funds equal to 100% of the then aggregate amount of Letter of Credit Outstandings, which funds shall be held by the Bank in a collateral account to be maintained by the Bank. The Borrower hereby agrees to execute and deliver to the Bank such security agreements, pledges or other documents as the Bank may, from time to time, require to perfect the pledge, lien and security interest in and to any such funds provided for in this Section 10.23. Upon the payment or expiry of all Letter of Credit Outstandings, all such Collateral shall be promptly released to the Borrower in due form at Borrower's cost. 10.23. REMEDIES CUMULATIVE. No remedy, right or power conferred upon the Bank is intended to be exclusive of any other remedy, right or power given hereunder or now or hereafter existing at law, in equity, or otherwise, and all such remedies, rights and powers shall be cumulative. 10.24. DISTRIBUTIONS IN VIOLATION OF THE EXIMBANK GUARANTY. The Borrower shall request and the Bank shall make a Disbursement in violation of the Eximbank Guaranty. 10.25. MATERIAL LITIGATION. Any material litigation is filed against the Borrower and is not withdrawn within thirty (30) calendar days of filing. 11. MISCELLANEOUS. 11.1. REPRESENTATION BY THE BANK. The Bank represents that it is its present intention, as of the date of its acquisition of the Note, to acquire the Note for its account or for the account of its Affiliates, and not with a view to the distribution or sale thereof, and, subject to any applicable laws, the disposition of the Bank's Property shall at all times be within its control. The Note has not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be transferred, sold or otherwise disposed of except (a) in a registered offering under the Securities Act; (b) pursuant to an exemption from the registration provisions of the Securities Act; or (c) if the Securities Act shall not apply to the Note or the transactions contemplated by the International Loan Documents. Nothing in this Section 11.1 shall affect the characterization of the Loans and the transactions contemplated hereunder as commercial lending transactions. 11.2. WAIVERS, ETC. No failure or delay on the part of the Bank in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No course of dealing between the Borrower, any Subsidiary, the Guarantors and the Bank shall operate as a waiver of any right of the Bank. No modification or waiver of any provision of this Agreement, the Note or any other International Loan Document nor consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in writing, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Except as otherwise provided by any International Loan Document or applicable law, no notice to -26- 32 or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. 11.3. REIMBURSEMENT OF EXPENSES. WHETHER OR NOT THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT SHALL BE CONSUMMATED, THE BORROWER AGREES TO REIMBURSE THE BANK FOR ITS REASONABLE OUT-OF-POCKET EXPENSES, INCLUDING THE REASONABLE FEES AND EXPENSES OF COUNSEL TO THE BANK, IN CONNECTION WITH SUCH TRANSACTIONS, OR ANY OF THEM, OR OTHERWISE IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INTERNATIONAL LOAN DOCUMENT, INCLUDING (a) THE NEGOTIATION, PREPARATION, EXECUTION, ADMINISTRATION, MODIFICATION AND ENFORCEMENT OF THIS AGREEMENT OR ANY OTHER INTERNATIONAL LOAN DOCUMENT AND ALL FEES AND EXPENSES OF ATTORNEYS TO THE BANK, AND (b) COSTS AND EXPENSES OF THE BANK IN CONNECTION WITH DUE DILIGENCE, TRANSPORTATION AND DUPLICATION. THE BORROWER AGREES TO PAY ANY AND ALL STAMP AND OTHER TAXES WHICH MAY BE PAYABLE OR DETERMINED TO BE PAYABLE IN CONNECTION WITH THE EXECUTION AND DELIVERY OF THIS AGREEMENT, THE NOTE OR ANY OTHER INTERNATIONAL LOAN DOCUMENT, AND TO SAVE ANY HOLDER OF THE NOTE HARMLESS FROM ANY AND ALL LIABILITIES WITH RESPECT TO OR RESULTING FROM ANY DELAY OR OMISSION TO PAY ANY SUCH TAXES. THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION 11.3 SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT AND/OR THE PAYMENT OF THE NOTE. 11.4. NOTICES. All notices and other communications provided for herein shall be in writing (including facsimile or cable communication) and shall be mailed, telecopied, cabled or delivered, addressed as follows: -27- 33 (a) If to the Borrower, to it at: National Tank Company Brookhollow Central III 2950 North Loop West, Suite 750 Houston, Texas 77092 Attention: Mr. William B. Wiener III Telephone No.: (713) 685-8020 Telefax No.: (713) 683-7841 (b) If to the Bank, to it at: Texas Commerce Bank National Association 712 Main Street Houston, Texas 77002 Attention: Mrs. Mona M. Foch Vice President Telephone No.: (713) 216-5911 Telefax No.: (713) 216-4227 Attention: Mr. William L. McCollum International Banking Officer Telephone No.: (713) 216-8603 Telefax No.: (713) 216-4499 or to such other address as shall be designated by such party in a written notice to the other party. All such notices and communications shall, when mailed, telecopied, transmitted, or cabled, become effective when deposited in the mail, transmitted to the telecopier, or delivered to the cable company, except that notices and communications to the Bank shall not be effective until actually received by the Bank. 11.5. GOVERNING LAW. UNLESS OTHERWISE SPECIFIED THEREIN, EACH INTERNATIONAL LOAN DOCUMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA; provided, however, that Chapter 15 of Subtitle 3, Title 79, Revised Civil Statutes of Texas, 1925, as amended (Articles 5069-15.01 through 5069-15.11, Vernon's Texas Civil Statutes, as amended) shall not apply to this Agreement and the Note issued hereunder. 11.6. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations, warranties and covenants contained herein or made in writing by the Borrower in connection herewith shall survive the execution and delivery of this Agreement and the Note, and will bind and inure to the benefit of the respective successors and assigns of the parties hereto, whether so expressed or not. No investigation at any time made by or on behalf of the Bank shall diminish the Bank's right to rely thereon. -28- 34 11.7. COUNTERPARTS. This Agreement may be executed in several counterparts, and by the parties hereto on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original instrument, and all such separate counterparts shall constitute but one and the same instrument. 11.8. SEPARABILITY. Should any clause, sentence, paragraph or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision shall not have the effect of invalidating or voiding the remainder of this Agreement, and the parties hereto agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom and the remainder will have the same force and effectiveness as if such part or parts had never been included herein. 11.9. DESCRIPTIVE HEADINGS. The section headings in this Agreement have been inserted for convenience only and shall be given no substantive meaning or significance whatsoever in construing the terms and provisions of this Agreement. 11.10. ACCOUNTING TERMS. All accounting terms used herein which are not expressly defined in this Agreement, or the respective meanings of which are not otherwise qualified, shall have the respective meanings given to them in accordance with GAAP. 11.11. LIMITATION OF LIABILITY. No claim may be made by the Borrower or the Affiliates, directors, officers, employees, attorneys, or agents of the Borrower against the Bank or the Affiliates, directors, officers, employees, attorneys, or agents of the Bank for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract arising out of or related to the transactions contemplated by this Agreement, or any act, omission, or event occurring in connection herewith; and the Borrower hereby waives, releases, and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. 11.12. SET-OFF. If an Event of Default has occurred and is continuing, the Borrower hereby gives and confirms to the Bank a right of set-off of all moneys, securities and other property of the Borrower (whether special, general or limited) and the proceeds thereof, now or hereafter delivered to remain with or in transit in any manner to the Bank, its correspondents or its agents from or for the Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise or coming into possession of the Bank in any way, and also, any balance of any deposit accounts and credits of the Borrower with, and any and all claims of security for the payment of the Note and of all other liabilities and obligations now or hereafter owed by the Borrower to the Bank, contracted with or acquired by the Bank, whether such liabilities and obligations be joint, several, absolute, contingent, secured, unsecured, matured or unmatured, and the Borrower hereby authorizes the Bank at any time or times, without prior notice, to apply such money, securities, other property, proceeds, balances, credits of claims, or any part of the foregoing, to such liabilities in such amounts as it may select, whether such liabilities be contingent, unmatured or otherwise, and whether any collateral security therefor is deemed adequate or not. The rights described herein shall be in addition to any collateral security described in any separate agreement executed by the Borrower. -29- 35 11.13. SALE OR ASSIGNMENT. The Bank may assign its rights hereunder and under each other International Loan Document and the Liens granted pursuant to the International Security Documents only to the Eximbank in accordance with the terms and conditions of the Eximbank Guaranty. Notwithstanding the foregoing, the Bank may assign, transfer, negotiate, sell or participate all or part of its interests and rights in the Loans and Letters of Credit to an Affiliate or Subsidiary of the Bank, provided that the Bank retains all obligations under the Eximbank Guaranty with respect to the Eximbank. 11.14. INTEREST. All agreements between the Borrower, the Guarantors and the Bank, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand being made on the Note or otherwise, shall the amount paid, or agreed to be paid, to the Bank for the use, forbearance, or detention of the money to be loaned under this Agreement or otherwise or for the payment or performance of any covenant or obligation contained herein or in any other International Loan Document exceed the Highest Lawful Rate. If, as a result of any circumstances whatsoever, fulfillment of any provision hereof or of any of such documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by applicable usury law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if, from any such circumstance, the Bank shall ever receive interest or anything which might be deemed interest under applicable law which would exceed the Highest Lawful Rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of the Note or the amounts owing on other obligations of the Borrower or the Guarantors to the Bank under any International Loan Document and not to the payment of interest, or if such excessive interest exceeds the unpaid principal balance of the Note and the amounts owing on other obligations of the Borrower and the Guarantors to the Bank under any International Loan Document, as the case may be, such excess shall be refunded to the Borrower or the Guarantor, as applicable. All sums paid or agreed to be paid to the Bank for the use, forbearance, or detention of the indebtedness of the Borrower and the Guarantors to the Bank shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness until payment in full of the principal thereof (including the period of any renewal or extension thereof) so that the interest on account of such indebtedness shall not exceed the Highest Lawful Rate. Notwithstanding anything to the contrary contained in this Agreement or the Note, it is understood and agreed that if at any time the rate of interest which accrues on the outstanding principal balance of the Note shall exceed the Highest Lawful Rate, the rate of interest which accrues on the outstanding principal balance of the Note shall be limited to the Highest Lawful Rate, but any subsequent reductions in the rate of interest which accrues on the outstanding principal balance of the Note shall not reduce the rate of interest which accrues on the outstanding principal balance of the Note below the Highest Lawful Rate until the total amount of interest accrued on the outstanding principal balance of the Note equals the amount of interest which would have accrued if such interest rate had at all times been in effect. The terms and provisions of this Section 11.14 shall control and supersede every other provision of all agreements between the Borrower, the Guarantors and the Bank. 11.15. INDEMNIFICATION. THE BORROWER AGREES TO INDEMNIFY, DEFEND, AND SAVE HARMLESS THE BANK AND ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, AND ATTORNEYS, AND EACH OF THEM (THE "INDEMNIFIED PARTIES"), FROM AND AGAINST ALL CLAIMS, ACTIONS, SUITS, AND OTHER LEGAL -30- 36 PROCEEDINGS, DAMAGES, COSTS, INTEREST, CHARGES, TAXES (OTHER THAN THE BANK'S FRANCHISE TAXES OR TAXES ON INCOME), COUNSEL FEES, AND OTHER EXPENSES AND PENALTIES WHICH ANY OF THE INDEMNIFIED PARTIES MAY SUSTAIN OR INCUR BY REASON OF OR ARISING OUT OF (i) THE MAKING OF ANY LOAN HEREUNDER, THE EXECUTION AND DELIVERY OF THIS AGREEMENT, THE NOTE AND THE OTHER INTERNATIONAL LOAN DOCUMENTS AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY AND THE EXERCISE OF ANY OF THE BANK'S RIGHTS UNDER THIS AGREEMENT, THE NOTE AND THE OTHER INTERNATIONAL LOAN DOCUMENTS OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, DAMAGES, COSTS, AND EXPENSES INCURRED BY ANY OF THE INDEMNIFIED PARTIES IN INVESTIGATING, PREPARING FOR, DEFENDING AGAINST, OR PROVIDING EVIDENCE, PRODUCING DOCUMENTS, OR TAKING ANY OTHER ACTION IN RESPECT OF ANY COMMENCED OR THREATENED LITIGATION UNDER ANY FEDERAL SECURITIES LAW OR ANY SIMILAR LAW OF ANY JURISDICTION OR AT COMMON LAW OR (ii) ANY VIOLATIONS OF ANY LAW OR ANY ACTION TAKEN OR OMITTED TO BE TAKEN WHICH COULD RESULT IN A VIOLATION OF ANY ENVIRONMENTAL LAW, OR IMPOSE ANY LIABILITY ON THE INDEMNIFIED PARTIES FOR DAMAGE TO HEALTH OR THE ENVIRONMENT; AND PROVIDED FURTHER THAT NO INDEMNIFIED PARTY SHALL BE ENTITLED TO THE BENEFITS OF THIS SECTION 11.15 TO THE EXTENT ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT CONTRIBUTED TO ITS LOSS; AND PROVIDED FURTHER THAT IT IS THE INTENTION OF THE BORROWER TO INDEMNIFY THE INDEMNIFIED PARTIES AGAINST THE CONSEQUENCES OF THEIR OWN NEGLIGENCE. THIS AGREEMENT IS INTENDED TO PROTECT AND INDEMNIFY THE INDEMNIFIED PARTIES AGAINST ALL RISKS HEREBY ASSUMED BY THE BORROWER. THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION 11.15 SHALL SURVIVE ANY EXERCISE OF THE POWER OF SALE GRANTED IN ANY INTERNATIONAL SECURITY DOCUMENT TO WHICH THE BORROWER IS A PARTY, ANY FORECLOSURE OF THE LIENS CREATED BY ANY INTERNATIONAL SECURITY DOCUMENT TO WHICH THE BORROWER IS A PARTY, OR CONVEYANCE IN LIEU OF FORECLOSURE, THE REPAYMENT OF THE NOTE, THE DISCHARGE AND RELEASE OF ANY PERSON UNDER ANY INTERNATIONAL LOAN DOCUMENT AND ANY TERMINATION OF THIS AGREEMENT. 11.16. PAYMENTS SET ASIDE. To the extent that the Borrower makes a payment or payments to the Bank or the Bank enforces any security interest or exercises its right of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other Person under any Debtor Law or equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all rights and remedies therefor, shall be revived and shall continue in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 11.17. LOAN AGREEMENT CONTROLS. If there are any conflicts or inconsistencies between this Agreement and any of the other International Loan Documents, the provisions of this Agreement shall prevail and control. 11.18. FINAL AGREEMENT. THIS WRITTEN AGREEMENT AND THE INTERNATIONAL LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -31- 37 11.19. WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAWS, THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT OR INTERNATIONAL LOAN DOCUMENTS, OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY INTERNATIONAL LOAN DOCUMENT AND AGREE THAT ANY ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement effective as of June 30, 1997. NATIONAL TANK COMPANY By: /s/ WILLIAM B. WIENER, III ------------------------------------- Name: William B. Wiener III Title: Senior Vice President Commitment: TEXAS COMMERCE BANK NATIONAL ASSOCIATION $3,000,000.00 By: /s/ MONA M. FOCH ------------------------------------- Name: Mona M. Foch Title: Vice President By: /s/ WILLIAM L. MCCOLLUM ------------------------------------- Name: William L. McCollum Title: International Banking Officer -32- 38 EXHIBIT "A" CERTAIN DEFINITIONS As used herein, the following words and terms shall have the respective meanings indicated opposite each of them: "Accounts Receivable" shall have the meaning set forth in the Borrower Agreement. "Adjusted Indebtedness" shall mean, as to the Borrower, as at any date, Indebtedness minus Subordinated Debt. "Adjusted Tangible Net Worth" shall mean, as to the Borrower, as at any date, stockholder's equity in the Borrower minus goodwill, other intangible assets, loans and advances to equity holders and loans to Affiliates, plus Subordinated Debt. "Affiliate" shall have the meaning set forth in Section 5 of the Delegated Authority Letter Agreement. "Agreement" shall mean this International Revolving Loan Agreement, as the same may be amended, modified or supplemented from time to time. "Annual Audited Financial Statements" shall mean, as to any Person, the year-end financial statements of such Person (balance sheet, income statement, cash flow statement), all prepared in conformity with GAAP and audited by independent certified public accountants reasonably satisfactory to the Bank. "Application" shall mean an application, in such form as the Bank may specify from time to time, requesting the Bank to open a Letter of Credit. "Authorized Officer" shall have the meaning set forth in Section 4 of the Delegated Authority Letter Agreement. "Base Rate" shall mean, for any day, a rate per annum (rounded upward to the nearest 1/16 of 1%) equal to the greater of (a) the Prime Rate (computed on the basis of the actual number of days elapsed over a year of 360 days) in effect on such day and (b) the Federal Funds Rate in effect for such day. For purposes of this Agreement, any change in the Base Rate due to a change in the Federal Funds Rate shall be effective on the effective date of such change in the Federal Funds Rate. If for any reason the Bank shall have determined (which determination shall be conclusive and binding, absent manifest error) that it is unable to ascertain the Federal Funds Rate for any reason, including, without limitation, the inability or failure of the Bank to obtain sufficient binds or publications in accordance with the terms thereof, the Base Rate shall be the Prime Rate until the circumstances giving rise to such inability no longer exist. "Base Rate Loan" shall mean any Loan which bears interest at the Base Rate. -1- 39 "Borrower Agreement" shall mean the Borrower Agreement dated as of the Closing Date, executed and delivered by the Borrower, and acknowledged by the Bank. "Borrowing Date" shall have the meaning set forth in Section 2.1(c). "Business Day" shall mean a day when the Bank is open for business, provided that, if the applicable Business Day relates to any LIBOR Rate Loan, it shall mean a day when the Bank is open for business and on which commercial banks are open for international business (including dealings in Dollar deposits) in London. "Buyer" shall mean an entity which has entered into one or more Export Orders or Indirect Export Orders with the Borrower. "Change of Control" shall mean any change in the percentage ownership of the outstanding voting shares of the Borrower identified in Schedule 6.5. "Closing Date" shall mean June 30, 1997. "Code" shall mean the Internal Revenue Code of 1986, as amended, as now or hereafter in effect, together with all regulations, rulings and interpretations thereof or thereunder issued by the Internal Revenue Service. "Collateral" shall mean collectively the Domestic Collateral and the International Collateral. "Collateral Value" shall have the meaning set forth in the Borrower Agreement. "Commitment" shall have the meaning set forth in Section 2.1(a). "Controlling Affiliate" shall have the meaning set forth in Section 5 of the Delegated Authority Letter Agreement. "Conversion/Continuation Date" shall have the meaning set forth in Section 2.9(a). "Country Limitation Schedule" shall have the meaning set forth in the Borrower Agreement. "Debtor Laws" shall mean all applicable liquidation, conservatorship, bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization, or similar laws, or general equitable principles from time to time in effect affecting the rights of creditors generally. "Default" shall mean any of the events specified in Section 10, whether or not there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act. "Determination Date" shall have the meaning set forth in Section 2.2(c). -2- 40 "Delegated Authority Letter Agreement" shall mean the Delegated Authority Letter Agreement issued by Eximbank to the Bank "Direct Export Contract" shall mean each contract pursuant to which a Buyer under an Indirect Export Order exports goods incorporating the Items. "Dollars" and "$" shall mean lawful currency of the United States of America. "Domestic Collateral" shall have the meaning set forth in the International Security Agreement. "Domestic Credit Agreement" shall mean the Loan Agreement dated June 30, 1997 between the Borrower and the Domestic Lenders, as the same may be amended from time to time. "Domestic Lenders" shall mean the Bank, as agent and lender, and the other lenders who are a party to the Domestic Credit Agreement. "Domestic Loan Documents" shall mean the Domestic Credit Agreement, the Domestic Notes, and the Domestic Security Documents and, the agreements, documents, instruments and other writings related to or executed in connection with the foregoing documents, all other assignments, deeds, guaranties, pledges, instruments, certificates and agreements now or hereafter executed or delivered to the Domestic Lenders pursuant to any of the foregoing, and all amendments, modifications, renewals, extensions, increases and rearrangements of, and substitutions for, any of the foregoing. "Domestic Notes" shall mean all notes of the Borrower made in connection with the Domestic Credit Agreement, including the Revolving Notes and the Term Notes made to each of the Domestic Lenders, together with any and all renewals, extensions, modifications, rearrangements, increases and replacements thereof and substitutions therefor. "Domestic Obligations" shall mean the Borrower's obligations arising under the Domestic Loan Documents to repay the loans thereunder and all other indebtedness of the Borrower to the Bank under the Domestic Loan Documents of any nature and in any amount whatsoever, whether now or hereafter arising. "Domestic Security Documents" shall mean, collectively, as the same may be amended or modified from time to time, those certain security agreements executed by the Borrower in favor of the Domestic Lenders from time to time, and any and all other agreements, deeds of trust, mortgages, chattel mortgages, security agreements, pledges, guaranties, assignments of production or proceeds of production, assignments of income, assignments of contract rights, assignments of partnership interests, assignments of royalty interests, assignments of performance, completion or surety bonds, standby agreements, subordination agreements, undertakings and other instruments and financing statements now or hereafter executed and delivered by any Person in connection with, or as security for the payment or performance of indebtedness of the Borrower to the Domestic Lenders under or in connection with the Domestic Loan Documents. "Drawings" still have the meaning set forth in Section 2.5(b). -3- 41 "Eligible Accounts Receivable" shall mean Accounts Receivable of the Borrower meeting all of the following criteria as of the date of any determination of Eligible Accounts Receivable: (a) the account debtor is not, in the opinion of the Bank, unsatisfactory as to creditworthiness; (b) the account debtor's obligation to pay the account receivable is not conditional upon such account debtor's approval or the account receivable is not subject to any repurchase obligation or return right other than warranty obligations in the ordinary course of business; (c) the account receivable shall arise from the performance by the Borrower of services which have been fully and satisfactorily performed, or from the absolute sale by the Borrower of goods (i) in which the Borrower or any of its Subsidiaries had sole and complete ownership and (ii) which have been shipped and delivered to the account debtor, which shall evidence which such obligee has possession of shipping and delivery receipts; (d) the account receivable shall arise in the ordinary course of business of the Borrower thereon, and no notice of bankruptcy or insolvency of the account debtor (unless such account debtor's obligations are secured by a letter of credit or bond), nor any notice of such account debtor's inability to pay its debts as they become due, has been received by the Borrower of such account receivable; and (e) for which the account debtor is contractually obligated to pay. In addition, pursuant to the requirements of the Eximbank, the following criteria must be met as of such date: (a) the account receivable is payable in Dollars and is due and collected in the United States (unless Eximbank shall otherwise give its prior written consent); (b) the account receivable is not subject to set-off (other than commissions to salesmen in the normal course of business), counterclaim, defense, allowance or adjustment other than non-material claims for warranty, discounts for prompt payment shown on the invoice, or to dispute, objection or complaint by the account debtor concerning its liability on the account receivable, and the goods, the sale of which gave rise to the account receivable, have not been returned, rejected, lost or damaged; (c) the account receivable does not have a term in excess of one hundred eighty (180) days; (d) the Bank has a valid and perfected first priority Lien with respect thereto; (e) the account receivable is not more than sixty (60) calendar days past the original invoice due date, unless it is insured through Eximbank export credit insurance for comprehensive commercial and political risk, or through Eximbank approved private insurers for comparable coverage, in each case in form and substance satisfactory to the Bank in its sole discretion, in which case ninety (90) calendar days shall apply, (f) the account debtor is not a director, officer, employee or Affiliate of the Borrower; (g) if the account receivable arises under an Export Order, such account receivable is, at the option of the Bank: (i) fully supported by a letter of credit complying with the terms of Section 8.10 hereof; or (ii) insured by the Eximbank or private sector sources on terms and conditions acceptable to the Bank, including, without limitation, terms complying with Section 8.7 hereof or (iii) a result of a cash against documents, documentary collection or cash prior to shipment transaction which is acceptable to the Bank or (iv) on any other terms as approved by the Bank in its sole and absolute discretion; (h) the account receivable is supported by an Export Order or an Indirect Export Order complying with Section 7.2 hereof; (i) the account receivable is not in the name of a Buyer (or, if the account receivable arises under an Indirect Export Order, the name of a Person buying the Items from the Buyer pursuant to a Direct Export Contract) located or incorporated in one of those countries in which the Eximbank is prohibited from doing business (as those countries are identified in the Country Limitation Schedule); (j) the account receivable is not in the name of a Buyer (or, if the account receivable arises under an Indirect Export Order, the name of a Person buying the Items from the Buyer pursuant to a Direct Export Contract) located or incorporated in one of those countries in which the Eximbank coverage is not available for commercial reasons (as those countries are identified in the Country Limitation Schedule), unless and only to the extent that the Items were sold to such Buyer or such Person on terms of a Letter of Credit in form and substance satisfactory to the Bank and issued or confirmed by a bank acceptable to the Bank and the -4- 42 Eximbank; (k) the account receivable is not due pursuant to the sale of Items which were purchased by a military Buyer or a Person for military purposes; (l) if the account receivable arises under an Indirect Export Order, such account receivable must result from the sale of Items by a Borrower to the Buyer for export by the Buyer and (i) must be supported by documentation stating the name and address (including country) of the ultimate foreign buyer and the U.S.-based intermediary or (ii) on any other terms as approved by the Bank in its sole and absolute discretion; (m) the account receivable is not, in the reasonable opinion of the Bank or the Eximbank, uncollectible for any reason; (n) at least fifty percent (50%) of the Item which was sold to create the account receivable must be of U.S. Content; and (o) the account receivable shall not be generated by the sale of defense articles or defense services. In addition, "Eligible Accounts Receivable" shall also mean any account receivable of the Borrower which is approved in writing by the Bank and the Eximbank. As used in this definition, "Letter of Credit" shall mean an irrevocable letter of credit subject to the UCP 500, payable in the United States or at the issuing bank and issued for the benefit of the Borrower on behalf of a Buyer in connection with the purchase of Items. "Eligible Inventory" shall mean Inventory of the Borrower meeting all of the following criteria as of the date of determination of Eligible Inventory: (a) the Inventory has not been returned, repossessed or damaged; (b) the Inventory is not the subject of a canceled purchase order or otherwise not used for the purpose for which it was originally manufactured or purchased; and (c) the Inventory is not, in the opinion of the Bank exercising reasonable discretion, unacceptable due to age, type, category, and/or quantity. In addition, pursuant to the requirements of the Eximbank, the following criteria must be met as of such date: (a) the Bank has a valid and perfected first priority Lien with respect to such Inventory and such Inventory is in the possession of such Borrower or its bailee and is not evidenced by any negotiable or non-negotiable document of title; (b) the Inventory is not subject to a buyer's rights which would be superior to the Lien of the Bank evidenced by the International Security Documents; (c) the Inventory is located inside the United States of America; (d) the Inventory is not to be used in manufacturing or selling an Item to be purchased by a Buyer (or, if the Item is to be sold pursuant to an Indirect Export Order, a Person purchasing the Item pursuant to a Direct Export Contract) for a military purpose; (e) the Inventory is not to be incorporated into Items which are destined for shipment to countries in which the Eximbank is prohibited from doing business (as these countries are identified in the Country Limitation Schedule); (f) the Inventory is not destined for shipment to countries in which the Eximbank coverage is not available for commercial reasons (as those countries are identified in the Country Limitation Schedule), unless and only to the extent that the Items are to be sold to such countries on terms of a Letter of Credit in form and substance satisfactory to the Bank and issued or confirmed by a bank acceptable to the Bank and the Eximbank; (g) with respect to Inventory incorporated into Items sold under an Indirect Export Order and which, in turn, are to be incorporated into goods to be sold under a Direct Export Contract, said goods shall, in fact, be destined for export by the Buyer thereof; (h) at least fifty percent (50%) of such Inventory must be of U.S. Content; (i) the Inventory is not demonstration Inventory or Inventory sold on consignment; (j) the Inventory is not proprietary software; (k) the Inventory is not damaged, obsolete, returned, defective, recalled or unfit for further processing; (l) the Inventory has not been previously exported from the United States; (m) the Inventory does not constitute defense articles or defense services; or (n) the Inventory is not to be incorporated into Items whose sale would result in an account receivable which would not constitute an Eligible Account Receivable. For purposes of determining the value of Eligible Inventory to be included in the International Borrowing Base, the value thereof shall be the lower of actual cost or market value as determined in accordance with GAAP. As used in this definition, "Letter of Credit" shall mean an irrevocable letter of credit subject to the UCP 500, -5- 43 payable in the United States or at the issuing bank and issued for the benefit of the Borrower on behalf of a Buyer in connection with the purchase of Items. "Environmental Laws" shall mean any Governmental Requirement pertaining to health or the environment, including, but not limited to, CERCLA, the Toxic Substances Control Act, the Clean Water Act, the Safe Drinking Water Act or the Clean Air Act, the Resource Conservation and Recovery Act of 1976, the Texas Water Code, the Texas Solid Waste Disposal Act and the Texas Clean Air Act, each as amended from time to time. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and all rules, regulations, rulings and interpretations adopted by the Internal Revenue Service or the U.S. Department of Labor thereunder. "Event of Default" shall mean any of the events specified in Section 10, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act. "Eximbank" shall mean the Export-Import Bank of the United States. "Eximbank Guaranty" shall mean that certain Master Guaranty Agreement No. TX-MGA-96-004 dated as of June 24, 1996 between the Eximbank and the Bank, as the same may be amended, modified or supplemented from time to time. "Expiration Date" shall mean the last day of an Interest Period. "Export Order" shall have the meaning set forth in the Borrower Agreement. "Federal Funds Rate" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal fund transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, of the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Bank from three Federal funds brokers of recognized standing selected by it. "GAAP" shall mean Generally Accepted Accounting Principles as defined in the Borrower Agreement. "Governmental Approval" means any authorization, consent, approval, license or exemption of, registration or filing with, or report or notice to, any Governmental Authority. "Governmental Authority" shall mean any foreign governmental authority, the United States of America, any State of the United States of America and any political subdivision of any of the foregoing, and any agency, department, commission, board, bureau, court or other tribunal having jurisdiction over the Bank, any Guarantor or the Borrower, or any of their respective assets or Property. -6- 44 "Governmental Requirement" means any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, writ, edict, franchise, permit, certificate, license, award, authorization or other direction, guideline, or requirement of any Governmental Authority, including, without limitation, any requirement under common law. "Guarantors" shall mean, collectively, NATCO Holdings, Inc., and Cummings Point Industries, Inc. "Highest Lawful Rate" shall mean, with respect to the Bank, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged, or received with respect to the Note or on other amounts, if any, due to the Bank pursuant to this Agreement or any other International Loan Document, under laws applicable to the Bank which are presently in effect, or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. "Indebtedness" shall mean, without duplication, (a) all items which, in accordance with GAAP, would be included on the liability side of a balance sheet on the date as of which Indebtedness is to be determined (excluding capital stock, surplus, surplus reserves and deferred credits); (b) all guaranties, endorsements and other contingent obligations in respect of, or any obligations to purchase or otherwise acquire, Indebtedness of others; and (c) all Indebtedness secured by any Lien existing on any interest of the Person with respect to which indebtedness is being determined in Property owned subject to such Lien whether or not the Indebtedness secured thereby shall have been assumed. "Indemnified Parties" shall have the meaning set forth in Section 11.15. "Indirect Export Order" shall have the meaning set forth in the Borrower Agreement for the term "Export Order," shall relate to purchase orders and other contracts pursuant to which Items will be sold to a Buyer who will export the Items pursuant to a Direct Export Contract, and shall include the purchase order. "Initial Date" shall have the meaning set forth in Section 7.6. "Interest Period" shall mean the period of time for which the LIBOR Rate shall be in effect as to any LIBOR Rate Loan which shall be a 1, 2, 3 or 6 month period of time, commencing with the Borrowing Date or the Expiration Date of the immediately preceding Interest Period, as the case may be, applicable to and ending on the effective date of any rate change or rate continuation made as provided in Section 2.9 as the Borrower may specify in the Request for Borrowing or the Notice of Rate Change/Continuation; provided, however, that: (i) any Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (ii) the duration of any Interest Period which commences before any principal repayment installment date and otherwise ends after such date shall end on such date, (iii) Interest Periods commencing for Loans comprising part of the same borrowing shall be of the same duration and (iv) no Interest Period shall extend beyond the Maturity Date. -7- 45 "International Borrowing Base" shall mean (i) an amount equal to the sum of 90% of the Eligible Accounts Receivable of the Borrower which is supported by a firm Export Order or Indirect Export Order to which no party is in breach of any material provision thereof, and (ii) 75% of the Eligible Inventory of the Borrower supported by firm Export Orders or firm Indirect Export Orders. Notwithstanding anything herein to the contrary, the International Borrowing Base shall not include the amount of any receivable supported by a letter of credit prior to the date of shipment of the Items covered by the subject letter of credit. That is, an account receivable shall not be included in the International Borrowing Base until shipment of the Items, regardless of when the letter of credit is in effect. "International Borrowing Base Certificate" shall have the meaning set forth in Section 2.2(b). "International Collateral" shall have the meaning set forth in the International Security Agreement. "International Guaranties" shall mean the continuing guaranties dated as of the Closing Date executed by the Guarantors in favor of the Bank, as may be amended, modified or supplemented from time to time. "International Loan Documents" shall mean this Agreement, the Note, all International Security Documents, and all instruments, certificates and agreements now or hereafter executed or delivered to the Bank pursuant to any of the foregoing and the transactions connected therewith, and all amendments, modifications, renewals, extensions, increases and rearrangements of, and substitutions for, any of the foregoing; provided that "International Loan Documents" shall not include the Domestic Credit Agreement, the Domestic Notes, the Domestic Security Documents, the Eximbank Guaranty and the Borrower Agreement. "International Obligations" shall mean the Borrower's obligations arising under this Agreement, the Note and the other International Loan Documents to repay the Loans and all other indebtedness of the Borrower to the Bank under the International Loan Documents of any nature and in any amount whatsoever, whether now or hereafter arising. "International Security Agreement" shall mean that certain International Security Agreement dated as of even date herewith, executed by the Borrower for the benefit of the Bank, and any and all amendments, modifications, renewals and extensions thereof. "International Security Documents" shall mean this Agreement and the International Security Agreement, as each may be amended or modified from time to time. "Inventory" shall have the meaning set forth in the Borrower Agreement. "Items" shall have the meaning set forth in the Borrower Agreement. "Letter of Credit" shall have the meaning provided in Section 2.3(a). "Letter of Credit Fee" shall have the meaning specified in Section 4.2. -8- 46 "Letter of Credit Outstandings" shall mean, at any time, the sum of, without duplication, (a) the aggregate Stated Amount of all outstanding Letters of Credit and (b) the amount of all Unpaid Drawings in respect of all Letters of Credit. "Letter of Credit Request" shall have the meaning specified in Section 2.4(a). "LIBOR Rate" shall mean, for any Interest Period or portion thereof, a rate per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) equal to the LIBOR Rate (Unadjusted) divided by the difference between 1 and the LIBOR Reserve Percentage on the first day of such Interest Period. "LIBOR Rate Loan" shall mean any Loan which bears interest at the LIBOR Rate. "LIBOR Rate (Unadjusted)" shall mean, for each Interest Period, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) quoted by the Bank at or before 10:00 a.m., (Houston, Texas time) (or as soon thereafter as practicable), on the date two (2) Business Days prior to the first day of such Interest Period, for the offering to the Bank by prime banks in the London LIBOR interbank market, at the time of determination and in accordance with the then usual practice in such market, of deposits in Dollars for delivery on the first day of such Interest Period and having a maturity equal to the length of such Interest Period and in an amount equal (or as nearly equal as possible) to the LIBOR Rate Loan to which such Interest Period relates. Each determination by the Bank of the LIBOR Rate shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. "LIBOR Reserve Percentage" shall mean, with respect to any Interest Period or portion thereof, a percentage (expressed as a decimal) equal to the percentage in effect on the first day of such Interest Period as prescribed by the Board for determining the maximum reserve requirements applicable to "Eurocurrency Liabilities" pursuant to Regulation D or any other applicable regulation of the Federal Reserve Board (or any successor thereto) which prescribes reserve requirements applicable to "Eurocurrency Liabilities" as currently defined in Regulation D. "Lien" shall mean any claim, mortgage, deed of trust, pledge, security interest, encumbrance, lien, or charge of any kind (including, without limitation, any agreement to give any of the foregoing, any conditional sale or other title retention agreement or any lease in the nature thereof). "Loan" or "Loans" shall mean a loan or loans, respectively, from the Bank to the Borrower made under Section 2. "Material Adverse Effect" shall mean any material adverse effect on (a) the consolidated financial condition, business, properties, assets, prospects or operations of the Borrower or any Guarantor, or (b) the ability of the Borrower or any Guarantor to perform its obligations under this Agreement or any other International Loan Document to which it is a party on a timely basis. "Maturity Date" shall mean June 30, 1998. "Monthly Unaudited Financial Statements" shall mean the monthly financial statements of a Person, which statements shall include a balance sheet as of the end of such month -9- 47 and a statement of operations and retained earnings for such month, and for the fiscal year to date, subject to normal year-end adjustments, all setting forth in comparative form the corresponding figures for the corresponding month and year to date of the preceding year, prepared in accordance with GAAP and certified as true and correct by the president or chief financial officer of such Person. "Note" shall mean the promissory note of the Borrower, executed and delivered under this Agreement, as amended from time to time. "Notice of Rate Change/Continuation shall have the meaning provided in Section 2.9(a). "Officer's Certificate" shall mean a certificate signed in the name of the Borrower by either its President, its Chief Financial Officer, any Vice President or its Secretary. "Past Due Rate" shall mean the lower of (a) the Highest Lawful Rate, or (b) a rate per annum equal to the Prime Rate plus two percent (2%). "Permitted Liens" shall mean each of the following: (a) artisans' or mechanics' Liens arising in the ordinary course of business, and Liens for taxes, but only to the extent that payment thereof shall not at the time be due or if due, the payment thereof is being diligently contested in good faith and adequate reserves computed in accordance with GAAP have been set aside therefor; (b) Liens in effect on the date of this Agreement and disclosed to the Bank in Annual Audited Financial Statements delivered on or prior to the date of this Agreement or in a schedule hereto; (c) normal reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions and encumbrances which do not secure Indebtedness and which do not materially impair the value or utility of the applicable Property; (d) Liens incurred or deposits made in the ordinary course of business (1) in connection with workmen's compensation, unemployment insurance, social security and other like laws, or (2) to secure insurance in the ordinary course of business, the performance of bids, tenders, contracts, leases, licenses, statutory obligations, surety, appeal and performance bonds and other similar obligations incurred in the ordinary course of business, not, in any of the cases specified in this clause (2), incurred in connection with the borrowing of money, the obtaining of advances or the payment of the deferred purchase price of Property; (e) attachments, judgments and other similar Liens arising in connection with court proceedings, provided that the execution and enforcement of such Liens are effectively stayed and the claims secured thereby are being actively contested in good faith with adequate reserves made therefor in accordance with GAAP; (f) Liens imposed by law, such as landlords', carriers', warehousemen's, mechanics', materialmen's and vendors' liens, incurred in good faith in the ordinary course of business and securing obligations which are not yet due or which are being contested in good faith by appropriate proceedings if adequate reserves with respect thereto are maintained in accordance with GAAP; (g) zoning restrictions, easements, licenses, reservations, provisions, covenants, conditions, waivers, and restrictions on the use of Property, and which do not in any case singly or in the aggregate materially impair the present value or utility of the applicable Property; (h) Liens securing purchase money Indebtedness permitted under Section 9.6 hereof and covering the Property so purchased; (i) capital leases and sale/leaseback transactions permitted under the other provisions of this Agreement, and (j) extensions, renewals and replacements of Liens referred to in clauses (a) through (i) of this definition; provided that any such extension, renewal or replacement Lien shall be limited to the -10- 48 Property or assets covered by the Lien extended, renewed or replaced and that the Indebtedness secured by any such extension, renewal or replacement Lien shall be in an amount not greater than the amount of the Indebtedness secured by the Lien extended, renewed or replaced. "Person" shall mean an individual, partnership, joint venture, corporation, joint stock company, bank, trust, unincorporated organization and/or a government or any department or agency thereof. "Plan" shall mean any plan subject to Title IV of ERISA or Section 412 of the Code and maintained at any time since January 1, 1986 for employees of the Borrower or any Subsidiary thereof or of any member of a "controlled group of corporations" or "trade or business," as such terms are defined in Section 414(b) or (c) of the Code, of which the Borrower or any Subsidiary thereof is a member, or any plan subject to Title IV of ERISA or Section 412 of the Code to which the Borrower or any Subsidiary thereof is required to contribute, or has been required to contribute at any time since January 1, 1986, on behalf of its employees. "Prime Rate" shall mean the prime rate announced from time to time by the Bank, and thereafter entered in the minutes of the Bank's Loan and Discount Committee. Without notice to the Borrower or any other Person, the Prime Rate shall change automatically from time to time as and in the amount by which said Prime Rate shall fluctuate, with each such change to be effective as of the date of each change in such Prime Rate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. The Bank may make commercial or other loans at rates of interest at, above or below the Prime Rate. "Property" or "Properties" means any interest in any kind of property or assets, whether real, personal or mixed, and whether tangible or intangible. "Request for Borrowing" shall have the meaning set forth in Section 2.1(c). "Securities Act" shall have the meaning set forth in Section 11.1. "Stated Amount" shall mean, as to each Letter of Credit, at any time, the maximum amount then available to be drawn thereunder (without regard to whether any conditions to drawing could then be met). "Subordinated Debt" shall mean any Indebtedness subordinated to Indebtedness due the Bank on terms reasonably satisfactory to the Bank. "Subsidiary" means any corporation, joint venture or limited liability company of which the Borrower or any Subsidiary of the Borrower, either directly or indirectly, owns at the time more than 50% of the indicia of equity rights (whether outstanding capital stock or otherwise) of such Person, and shall include any such Person which shall become a Subsidiary of the Borrower after the date hereof, and shall further include any partnership of which the Borrower or any Subsidiary is a general partner thereof and any other entity of which the Borrower or any Subsidiary shall by virtue of its investment therein incur liability for the liabilities and obligations thereof. -11- 49 "Tax Dividends" shall mean, for each Subchapter "S" corporation or other entity which is, without regard to its income, statutorily exempt from the payment of income tax, dividends with respect to its estimated taxable income. "Type" shall mean, with respect to any Loan, any LIBOR Rate Loan or any Base Rate Loan. "Unpaid Drawing" shall have the meaning specified in Section 2.5(a). "U.S. Content" shall have the meaning set forth in the Borrower Agreement. The parties hereto hereby agree that in the event any dispute arises as to the U.S. Content of any good or service, the decision of the Eximbank shall be final and conclusive. -12- 50 Exhibit "G" NOTICE OF RATE CHANGE/CONTINUATION TO: TEXAS COMMERCE BANK NATIONAL ASSOCIATION (the "Bank") pursuant to that certain International Revolving Loan Agreement dated as of June 30, 1997 (as same may be amended, modified, increased, supplemented and/or restated from time to time, the "Credit Agreement"), entered into by and between National Tank Company (the "Borrower") and the Bank. Unless otherwise defined herein, terms defined in the Credit Agreement shall have the same meanings in this Notice. Pursuant to Section 2.9 of the Credit Agreement, this Notice of Rate Change/Continuation (the "Notice") represents the Borrower's election to [insert one or more of the following]: [1. Use if converting LIBOR Rate Loans to Base Rate Loans.] Convert $_____________ in aggregate principal amount of LIBOR Rate Loans with a current Interest Period ending on________, 19__, to Base Rate Loans on____________, 19__. [and] [1. Use if converting Base Rate Loans to LIBOR Rate Loans.] Convert $_____________ in aggregate principal amount of Base Rate Loans to LIBOR Rate Loans on _________________, 19__. The initial Interest Period for such LIBOR Rate Loans is requested to be a [one] [two] [three] [six] (_____) month period. [1. Use if continuing LIBOR Rate Loans.] Continue $__________ in aggregate principal amount of LIBOR Rate Loans with a current Interest Period ending on _____________, 19___. The initial Interest Period for such LIBOR Rate Loans is requested to be a [one] [two] [three] [six] (__) month period. 2. Borrower hereby certifies that no Default or Event of Default has occurred and is continuing under the Credit Agreement. 3. As of the date hereof, and as a result of the making of the requested Loans, there does not and will not exist any Default or Event of Default. 4. The representations and warranties contained in the Loan Documents (other than those by their terms limited to a specific date) are true and correct in all material respects as of the date hereof and shall be true and correct upon the making of the requested Loans, with the same force and effect as though made on and as of the date hereof and thereof. -1- 51 5. No event has occurred since the date of the most recent financial statements provided to the Bank dated as of ________, 19__ that has caused a Material Adverse Effect. Dated: __________, 19___. NATIONAL TANK COMPANY By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- -2- 52 FIRST AMENDMENT TO INTERNATIONAL REVOLVING LOAN AGREEMENT THIS FIRST AMENDMENT TO INTERNATIONAL REVOLVING LOAN AGREEMENT ("Amendment" or "First Amendment") dated as of August 8, 1997 ("Effective Date") is between NATIONAL TANK COMPANY, a Delaware corporation ("Borrower") and Texas Commerce Bank National Association, a national banking association (together with its successors and assigns, "Bank"). PRELIMINARY STATEMENT. Borrower and Bank are parties to that certain International Revolving Loan Agreement dated as of June 30, 1997 (as amended, "Loan Agreement" or "Agreement"). Each capitalized term defined in the Loan Agreement and not otherwise defined in this Amendment shall have the same meaning herein as in the Loan Agreement, and each Section and Exhibit reference is to the Loan Agreement as amended. Borrower and Bank have agreed to increase the face amount of the Commitment. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Bank hereby agree as follows: 1. Section 2.1(a)(i) of the Loan Agreement is amended by inserting "$5,000,000.00" in place of "$3,000,000.00" where the latter appears. 2. Borrower irrevocably agrees to pay to Bank a facility fee of $17,918.00, in respect of the increase in the amount of the Commitment evidenced by this Amendment (inclusive of amounts due to Exim Bank in respect of the transactions contemplated by this Amendment), in addition to all other fees and other amounts payable in the International Loan Documents. In no event shall such amount be refunded to Borrower, whether or not the transactions contemplated hereby are consummated. 3. The Loan Agreement is amended by replacing the existing "Exhibit B" with the new "Exhibit B" attached to this Amendment. 4. By its execution and delivery hereof, Borrower represents and warrants the following: (a) As of the date hereof and after giving effect to the amendments contemplated herein, (i) the representations and warranties contained in Section 6 of the International Loan Agreement, as amended by this Amendment, and the other International Loan Documents, are true and correct on and as of the date hereof as though made by Borrower on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date) and (ii) no Event of Default or other event which with the passage of time or the giving of notice or both would constitute an Event of Default has occurred and is continuing; and (b) The execution and delivery of this Amendment shall in no way release, diminish, impair, reduce or otherwise adversely affect the obligations of Borrower under the International Loan Agreement, as amended by this Amendment, the Note or any other International Loan Document, as each of the foregoing documents and instruments may be further amended or otherwise modified from time to time. 5. This Amendment shall become effective when and only when (a) Bank shall have received acknowledgment from the Eximbank, which acknowledgment is satisfactory to Bank, that the Eximbank Guaranty remains in full force and effect notwithstanding this Amendment and covers the Commitment in the amount established by this Amendment, (b) Bank shall have executed a counterpart of this Amendment and (c) Bank shall have received each of the following: (i) Counterparts of this Amendment executed by Borrower; (ii) An amended and restated International Revolving Note in the form of Exhibit B executed by Borrower; (iii) Such other documents and agreements as Bank may reasonably request, including without limitation, a new Loan Authorization Notice and new form of Borrower Agreement; and (iv) The facility fee agreed to in section 2 of this Amendment. 6. Borrower hereby ratifies (i) the International Loan Agreement, as amended by this Amendment, (ii) the Note and (iii) the other International Loan Documents to which Borrower is a party, and confirms that and of the rights and powers created under each of the foregoing documents and instruments shall be and remain in full force and effect. 7. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Bank under the International Loan Agreement, as amended by this Amendment, or under the Note or the other International Loan Documents, as each may be amended or modified from time to time, nor constitute a waiver of any other provision of the foregoing documents and instruments, as each may be amended or modified from time to time. Borrower agrees to do, execute, acknowledge and deliver all and every such further acts and instruments as Bank may request for the better assuring and confirming unto Bank all and singular the rights granted or intended to be granted hereby or hereunder. This Amendment 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 to be an original and all of which taken together shall constitute but one and the same instrument. 8. Pursuant to Section 11.3 of the International Loan Agreement, Borrower agrees to pay on demand all costs and expenses of Bank in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder (including, without limitation, the reasonable fees and out-of-pocket expenses of course for Bank with respect thereto and with respect to advising Bank as to its rights and responsibilities under the International Loan Agreement, as hereby amended). THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND SHALL BE BINDING UPON BORROWER, BANK AND THEIR SUCCESSORS AND ASSIGNS. THIS WRITTEN AMENDMENT AND THE OTHER INTERNATIONAL LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RESPECTING THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Amendment as of the day and year first above written.
BORROWER: NATIONAL TANK COMPANY BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: /s/ MONA M. FOCH ------------------------------------------- By: /s/ WILLIAM B. WIENER, III -------------------------------------- Name: Mona M. Foch ----------------------------------------- Name: William B. Wiener, III ------------------------------------ Title: Vice President ---------------------------------------- Title: Senior Vice President ----------------------------------- By: /s/ WILLIAM McCOLLUM ------------------------------------------- Name: William McCollum ----------------------------------------- Title: International Banking Officer ----------------------------------------
Page 1 53 EXHIBIT "B" FIRST AMENDED AND RESTATED INTERNATIONAL REVOLVING NOTE $5,000,000.00 August 8, 1997 FOR VALUE RECEIVED, the undersigned, NATIONAL TANK COMPANY, a corporation organized under the laws of the State of Delaware ("Borrower"), HEREBY PROMISES TO PAY to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association ("Bank"), on or before June 30, 1998 ("Maturity Date"), the principal sum of Five Million and 00/100 Dollars ($5,000,000.00), or, if less, the aggregate principal amount of Loans outstanding on the Maturity Date, in accordance with the terms and provisions of that certain International Revolving Loan Agreement dated as of June 30, 1997 by and among Borrower and Bank (as amended from time to time, the "International Loan Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the International Loan Agreement). The outstanding principal balance of this Note shall be due and payable as provided in the International Loan Agreement. Borrower promises to pay interest on the unpaid principal balance of this Note from the date of any Loan evidenced by this Note until the principal balance thereof is paid in full Interest shall accrue on the outstanding principal balance of this Note from and including the date of any Loan evidenced by this Note to but not including the Maturity Date at the rate or rates, and shall be due and payable on the dates, set forth in the International Loan Agreement. Any amount not paid when due with respect to principal (whether at stated maturity, by acceleration or otherwise), costs or expenses, or, to the extent permitted by applicable law, interest, shall bear interest from the date when due to and excluding the date the same is paid in full payable on demand, at the Past Due Rate. Payments of principal and interest, and all amounts due with respect to costs and expenses, shall be made in lawful money of the United States of America in immediately available funds, without deduction, set-off or counterclaim to Bank, or such other location as may be notified to Borrower by Bank, not later than 12:00 noon (Houston Time) on the dates on which such payments shall become due pursuant to the terms and provisions set forth in the International Loan Agreement. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday, or public holiday on which Bank is not open for business, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in computing interest in connection with such payment. All loans and advances and all payments and prepayments made hereon shall be recorded in the holder's records and such records shall be controlling. In addition to all principal and accrued interest on this Note, Borrower agrees to pay (a) all reasonable costs and expenses incurred by all owners and holders of this Note in collecting this Note through any probate, reorganization, or any other proceeding and (b) reasonable attorneys' fees when and if this Note is placed in the hands of an attorney for collection after default. All agreements among Borrower and Bank whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand being made on this Note or otherwise, shall the amount paid, or agreed to be paid, to Bank for the use, forbearance, or detention of the money to be loaned under the International Loan Agreement and evidenced by this Note or otherwise or for the payment or performance of any covenant or obligation contained in the International Loan Agreement, this Note or in any other International Loan Document exceed the Highest Lawful Rate. If, as a result of any circumstances whatsoever, fulfillment of any provision hereof or of any of such documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by applicable usury law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if, from any such circumstance, Bank shall ever receive interest or anything which might be deemed interest under applicable law which would exceed the Highest Lawful Rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of this Note or the amounts owing on other obligations of Borrower to Bank under any International Loan Document and not to the payment of interest, or if such excessive interest exceeds the unpaid principal balance of this Note and the amounts owing on other obligations of Borrower to Bank under any International Loan Documents, as the case may be, such excess shall be refunded to Borrower. All sums paid or agreed to be paid to Bank for the use, forbearance, or detention of the indebtedness of Borrower to Bank shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness until payment in full of the principal thereof (including the period of any renewal or extension thereof) so that the interest on account of such indebtedness shall not exceed the Highest Lawful Page 1 54 Rate. Notwithstanding anything to the contrary contained in the International Loan Agreement or this Note, it is understood and agreed that if at any time the rate of interest which accrues on the outstanding principal balance of this Note shall exceed the Highest Lawful Rate, the rate of interest which accrues on the outstanding principal balance of this Note shall be limited to the Highest Lawful Rate, but any subsequent reductions in the rate of interest which accrues on the outstanding principal balance of this Note shall not reduce the rate of interest which accrues on the outstanding principal balance of this Note below the Highest Lawful Rate until the total amount of interest accrued on the outstanding principal balance of this Note equals the amount of interest which would have accrued if such interest rate had at all times been in effect. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements among Borrower and Bank. This Note is entitled to the benefits of the International Loan Agreement, which International Loan Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events, for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions and with the effect therein specified, and provisions to the effect that no provision of the International Loan Agreement or this Note shall require the payment or permit the collection of interest in excess of the Highest Lawful! Rate. The obligations of Borrower hereunder are secured by the International Security Documents. It is contemplated that by reason of prepayments or repayments hereon prior to the Maturity Date, there may be times when no indebtedness is owing hereunder prior to such date, but notwithstanding such occurrences, this Note shall remain valid and shall be in full force and effect as to Loans made pursuant to the International Loan Agreement subsequent to each such occurrence. Except as otherwise specifically provided for in the International Loan Agreement, Borrower and any and all endorsers, guarantors and sureties severally waive grace, demand, presentment for payment, notice of dishonor or default, protest, notice of protest, notice of intent to accelerate, notice of acceleration and diligence in collecting and bringing of suit against any party hereto, and agree to all renewals, extensions or partial payments hereon, with or without notice, before or after maturity. This Note is the Note referred to in the International Loan Agreement and is given in amendment, restatement, replacement and increase, but not in extinguishment, of the International Revolving Note dated June 30, 1997 in the original principal amount of $3,000,000 made by Borrower and payable to the order of Bank. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW. THIS NOTE AND THE OTHER INTERNATIONAL LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES; AND THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF Borrower has caused this Note to be executed and delivered by its officer thereunto duly authorized effective as of the date first above written. NATIONAL TANK COMPANY By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- Page 2 55 FIRST AMENDED AND RESTATED INTERNATIONAL REVOLVING NOTE $5,000,000.00 August 8, 1997 FOR VALUE RECEIVED, the undersigned, NATIONAL TANK COMPANY, a corporation organized under the laws of the State of Delaware ("Borrower"), HEREBY PROMISES TO PAY to the order of TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association ("Bank"), on or before June 30, 1998 ("Maturity Date"), the principal sum of Five Million and 00/100 Dollars ($5,000,000.00), or, if less, the aggregate principal amount of Loans outstanding on the Maturity Date, in accordance with the terms and provisions of that certain International Revolving Loan Agreement dated as of June 30, 1997 by and among Borrower and Bank (as amended from time to time, the "International Loan Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the International Loan Agreement). The outstanding principal balance of this Note shall be due and payable as provided in the International Loan Agreement. Borrower promises to pay interest on the unpaid principal balance of this Note from the date of any Loan evidenced by this Note until the principal balance thereof is paid in full Interest shall accrue on the outstanding principal balance of this Note from and including the date of any Loan evidenced by this Note to but not including the Maturity Date at the rate or rates, and shall be due and payable on the dates, set forth in the International Loan Agreement. Any amount not paid when due with respect to principal (whether at stated maturity, by acceleration or otherwise), costs or expenses, or, to the extent permitted by applicable law, interest, shall bear interest from the date when due to and excluding the date the same is paid in full payable on demand, at the Past Due Rate. Payments of principal and interest, and all amounts due with respect to costs and expenses, shall be made in lawful money of the United States of America in immediately available funds, without deduction, set-off or counterclaim to Bank, or such other location as may be notified to Borrower by Bank, not later than 12:00 noon (Houston Time) on the dates on which such payments shall become due pursuant to the terms and provisions set forth in the International Loan Agreement. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday, or public holiday on which Bank is not open for business, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in computing interest in connection with such payment. All loans and advances and all payments and prepayments made hereon shall be recorded in the holder's records and such records shall be controlling. In addition to all principal and accrued interest on this Note, Borrower agrees to pay (a) all reasonable costs and expenses incurred by all owners and holders of this Note in collecting this Note through any probate, reorganization, or any other proceeding and (b) reasonable attorneys' fees when and if this Note is placed in the hands of an attorney for collection after default. All agreements among Borrower and Bank whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand being made on this Note or otherwise, shall the amount paid, or agreed to be paid, to Bank for the use, forbearance, or detention of the money to be loaned under the International Loan Agreement and evidenced by this Note or otherwise or for the payment or performance of any covenant or obligation contained in the International Loan Agreement, this Note or in any other International Loan Document exceed the Highest Lawful Rate. If, as a result of any circumstances whatsoever, fulfillment of any provision hereof or of any of such documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by applicable usury law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if, from any such circumstance, Bank shall ever receive interest or anything which might be deemed interest under applicable law which would exceed the Highest Lawful Rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of this Note or the amounts owing on other obligations of Borrower to Bank under any International Loan Document and not to the payment of interest, or if such excessive interest exceeds the unpaid principal balance of this Note and the amounts owing on other obligations of Borrower to Bank under any International Loan Documents, as the case may be, such excess shall be refunded to Borrower. All sums paid or agreed to be paid to Bank for the use, forbearance, or detention of the indebtedness of Borrower to Bank shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness until payment in full of the principal thereof (including the period of any renewal or extension thereof) so that the interest on account of such indebtedness shall not exceed the Highest Lawful Rate. Notwithstanding anything to the contrary contained in the International Loan Agreement or this Note, it is Page 1 56 understood and agreed that if at any time the rate of interest which accrues on the outstanding principal balance of this Note shall exceed the Highest Lawful Rate, the rate of interest which accrues on the outstanding principal balance of this Note shall be limited to the Highest Lawful Rate, but any subsequent reductions in the rate of interest which accrues on the outstanding principal balance of this Note shall not reduce the rate of interest which accrues on the outstanding principal balance of this Note below the Highest Lawful Rate until the total amount of interest accrued on the outstanding principal balance of this Note equals the amount of interest which would have accrued if such interest rate had at all times been in effect. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements among Borrower and Bank. This Note is entitled to the benefits of the International Loan Agreement, which International Loan Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events, for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions and with the effect therein specified, and provisions to the effect that no provision of the International Loan Agreement or this Note shall require the payment or permit the collection of interest in excess of the Highest Lawful! Rate. The obligations of Borrower hereunder are secured by the International Security Documents. It is contemplated that by reason of prepayments or repayments hereon prior to the Maturity Date, there may be times when no indebtedness is owing hereunder prior to such date, but notwithstanding such occurrences, this Note shall remain valid and shall be in full force and effect as to Loans made pursuant to the International Loan Agreement subsequent to each such occurrence. Except as otherwise specifically provided for in the International Loan Agreement, Borrower and any and all endorsers, guarantors and sureties severally waive grace, demand, presentment for payment, notice of dishonor or default, protest, notice of protest, notice of intent to accelerate, notice of acceleration and diligence in collecting and bringing of suit against any party hereto, and agree to all renewals, extensions or partial payments hereon, with or without notice, before or after maturity. This Note is the Note referred to in the International Loan Agreement and is given in amendment, restatement, replacement and increase, but not in extinguishment, of the International Revolving Note dated June 30, 1997 in the original principal amount of $3,000,000 made by Borrower and payable to the order of Bank. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW. THIS NOTE AND THE OTHER INTERNATIONAL LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES; AND THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF Borrower has caused this Note to be executed and delivered by its officer thereunto duly authorized effective as of the date first above written. NATIONAL TANK COMPANY By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- Page 2 57 SECOND AMENDMENT TO INTERNATIONAL REVOLVING LOAN AGREEMENT THIS SECOND AMENDMENT TO INTERNATIONAL REVOLVING LOAN AGREEMENT (this "Amendment" or "Second Amendment") dated as of June 30, 1998 ("Effective Date") is between NATIONAL TANK COMPANY, a Delaware corporation ("Borrower") and Chase Bank of Texas, National Association, a national banking association, formerly Texas Commerce Bank National Association (together with its successors and assigns, "Bank"). PRELIMINARY STATEMENT. Borrower and Bank are parties to that certain International Revolving Loan Agreement dated as of June 30, 1997, amended by a First Amendment dated August 8, 1997 (as amended, "Loan Agreement" or "Agreement"). Each capitalized term defined in the Loan Agreement and not otherwise defined in this Amendment shall have the same meaning herein as in the Loan Agreement, and each Section and Exhibit reference is to the Loan Agreement as amended. Borrower and Bank have agreed to a short term extension of the Commitment as provided further herein. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Bank hereby agree as follows: 1. Borrower irrevocably agrees to pay to Bank a facility fee of $8,333.00, in respect of the extension of the Commitment evidenced by this Amendment (inclusive of amounts due to Exim Bank in respect of the transactions contemplated by this Amendment), in addition to all other fees and other amounts payable in the International Loan Documents. In no event shall such amount be refunded to Borrower, whether or not the transactions contemplated hereby are consummated. 2. The Loan Agreement is amended by replacing the existing "Exhibit B" with the new "Exhibit B" attached to this Amendment. 3. By its execution and delivery hereof, Borrower represents and warrants the following: (a) As of the date hereof and after giving effect to the amendments contemplated herein, (i) the representations and warranties contained in Section 6 of the International Loan Agreement, as amended by this Amendment, and the other International Loan Documents, are true and correct on and as of the date hereof as though made by Borrower on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date) and (ii) no Event of Default or other event which with the passage of time or the giving of notice or both would constitute an Event of Default has occurred and is continuing; and (b) The execution and delivery of this Amendment shall in no way release, diminish, impair, reduce or otherwise adversely affect the obligations of Borrower under the International Loan Agreement, as amended by this Amendment, the Note or any other International Loan Document, as each of the foregoing documents and instruments may be further amended or otherwise modified from time to time. 4. This Amendment shall become effective when and only when (a) Bank shall have received acknowledgment from the Eximbank, which acknowledgment is satisfactory to Bank, that the Eximbank Guaranty remains in full force and effect notwithstanding this Amendment and covers the Commitment in the amount established by this Amendment, (b) Bank shall have executed a counterpart of this Amendment and (c) Bank shall have received each of the following: (i) Counterparts of this Amendment executed by Borrower; (ii) An amended and restated International Revolving Note in the form of Exhibit B executed by Borrower; (iii) Such other documents and agreements as Bank may reasonably request, including without limitation, a new Loan Authorization Notice and new form of Borrower Agreement; and (iv) The facility fee agreed to in section 1 of this Amendment. 5. Borrower hereby ratifies (i) the International Loan Agreement, as amended by this Amendment, (ii) the Note and (iii) the other International Loan Documents to which Borrower is a party, and confirms that and of the rights and powers created under each of the foregoing documents and instruments shall be and remain in full force and effect. 6. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Bank under the International Loan Agreement, as amended by this Amendment, or under the Note or the other International Loan Documents, as each may be amended or modified from time to time, nor constitute a waiver of any other provision of the foregoing documents and instruments, as each may be amended or modified from time to time. Borrower agrees to do, execute, acknowledge and deliver all and every such further acts and instruments as Bank may request for the better assuring and confirming unto Bank all and singular the rights granted or intended to be granted hereby or hereunder. This Amendment 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 to be an original and all of which taken together shall constitute but one and the same instrument. 7. Pursuant to Section 11.3 of the International Loan Agreement, Borrower agrees to pay on demand all costs and expenses of Bank in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder (including, without limitation, the reasonable fees and out-of-pocket expenses of course for Bank with respect thereto and with respect to advising Bank as to its rights and responsibilities under the International Loan Agreement, as hereby amended). THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND SHALL BE BINDING UPON BORROWER, BANK AND THEIR SUCCESSORS AND ASSIGNS. THIS WRITTEN AMENDMENT AND THE OTHER INTERNATIONAL LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RESPECTING THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Amendment as of the day and year first above written. BORROWER: NATIONAL TANK COMPANY BANK: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION By: By: /s/ WILLIAM B. WIENER, III --------------------------------- -------------------------- Name: Name: William B. Wiener, III --------------------------------- -------------------------- Title: Title: Senior Vice President --------------------------------- -------------------------- By: --------------------------------- Name: --------------------------------- Title: --------------------------------- Page 1 58 EXHIBIT "B" FIRST AMENDED AND RESTATED INTERNATIONAL REVOLVING NOTE $5,000,000.00 June 30, 1998 FOR VALUE RECEIVED, the undersigned, NATIONAL TANK COMPANY, a corporation organized under the laws of the State of Delaware ("Borrower"), HEREBY PROMISES TO PAY to the order of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association ("Bank," formerly Texas Commerce Bank National Association), on or before August 31, 1998 ("Maturity Date"), the principal sum of Five Million and 00/100 Dollars ($5,000,000.00), or, if less, the aggregate principal amount of Loans outstanding on the Maturity Date, in accordance with the terms and provisions of that certain International Revolving Loan Agreement dated as of June 30, 1997 by and among Borrower and Bank (as amended from time to time, the "International Loan Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the International Loan Agreement). The outstanding principal balance of this Note shall be due and payable as provided in the International Loan Agreement. Borrower promises to pay interest on the unpaid principal balance of this Note from the date of any Loan evidenced by this Note until the principal balance thereof is paid in full Interest shall accrue on the outstanding principal balance of this Note from and including the date of any Loan evidenced by this Note to but not including the Maturity Date at the rate or rates, and shall be due and payable on the dates, set forth in the International Loan Agreement. Any amount not paid when due with respect to principal (whether at stated maturity, by acceleration or otherwise), costs or expenses, or, to the extent permitted by applicable law, interest, shall bear interest from the date when due to and excluding the date the same is paid in full payable on demand, at the Past Due Rate. Payments of principal and interest, and all amounts due with respect to costs and expenses, shall be made in lawful money of the United States of America in immediately available funds, without deduction, set-off or counterclaim to Bank, or such other location as may be notified to Borrower by Bank, not later than 12:00 noon (Houston Time) on the dates on which such payments shall become due pursuant to the terms and provisions set forth in the International Loan Agreement. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday, or public holiday on which Bank is not open for business, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in computing interest in connection with such payment. All loans and advances and all payments and prepayments made hereon shall be recorded in the holder's records and such records shall be controlling. In addition to all principal and accrued interest on this Note, Borrower agrees to pay (a) all reasonable costs and expenses incurred by all owners and holders of this Note in collecting this Note through any probate, reorganization, or any other proceeding and (b) reasonable attorneys' fees when and if this Note is placed in the hands of an attorney for collection after default. All agreements among Borrower and Bank whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand being made on this Note or otherwise, shall the amount paid, or agreed to be paid, to Bank for the use, forbearance, or detention of the money to be loaned under the International Loan Agreement and evidenced by this Note or otherwise or for the payment or performance of any covenant or obligation contained in the International Loan Agreement, this Note or in any other International Loan Document exceed the Highest Lawful Rate. If, as a result of any circumstances whatsoever, fulfillment of any provision hereof or of any of such documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by applicable usury law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if, from any such circumstance, Bank shall ever receive interest or anything which might be deemed interest under applicable law which would exceed the Highest Lawful Rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of this Note or the amounts owing on other obligations of Borrower to Bank under any International Loan Document and not to the payment of interest, or if such excessive interest exceeds the unpaid principal balance of this Note and the amounts owing on other obligations of Borrower to Bank under any International Loan Documents, as the case may be, such excess shall be refunded to Borrower. All sums paid or agreed to be paid to Bank for the use, forbearance, or detention of the indebtedness of Borrower to Bank shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness until payment in full of the principal thereof (including the period of any renewal or extension thereof) so that the interest on account of such indebtedness shall not exceed the Highest Lawful Page 1 59 Rate. Notwithstanding anything to the contrary contained in the International Loan Agreement or this Note, it is understood and agreed that if at any time the rate of interest which accrues on the outstanding principal balance of this Note shall exceed the Highest Lawful Rate, the rate of interest which accrues on the outstanding principal balance of this Note shall be limited to the Highest Lawful Rate, but any subsequent reductions in the rate of interest which accrues on the outstanding principal balance of this Note shall not reduce the rate of interest which accrues on the outstanding principal balance of this Note below the Highest Lawful Rate until the total amount of interest accrued on the outstanding principal balance of this Note equals the amount of interest which would have accrued if such interest rate had at all times been in effect. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements among Borrower and Bank. This Note is entitled to the benefits of the International Loan Agreement, which International Loan Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events, for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions and with the effect therein specified, and provisions to the effect that no provision of the International Loan Agreement or this Note shall require the payment or permit the collection of interest in excess of the Highest Lawful! Rate. The obligations of Borrower hereunder are secured by the International Security Documents. It is contemplated that by reason of prepayments or repayments hereon prior to the Maturity Date, there may be times when no indebtedness is owing hereunder prior to such date, but notwithstanding such occurrences, this Note shall remain valid and shall be in full force and effect as to Loans made pursuant to the International Loan Agreement subsequent to each such occurrence. Except as otherwise specifically provided for in the International Loan Agreement, Borrower and any and all endorsers, guarantors and sureties severally waive grace, demand, presentment for payment, notice of dishonor or default, protest, notice of protest, notice of intent to accelerate, notice of acceleration and diligence in collecting and bringing of suit against any party hereto, and agree to all renewals, extensions or partial payments hereon, with or without notice, before or after maturity. This Note is the Note referred to in the International Loan Agreement and is given in amendment, restatement and replacement, but not in extinguishment, of the International Revolving Note dated August 8, 1997 in the original principal amount of $5,000,000 made by Borrower and payable to the order of Bank. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW. THIS NOTE AND THE OTHER INTERNATIONAL LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES; AND THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF Borrower has caused this Note to be executed and delivered by its officer thereunto duly authorized effective as of the date first above written. NATIONAL TANK COMPANY By: /s/ WILLIAM B. WIENER, III -------------------------------------- Name: William B. Wiener, III ------------------------------------ Title: Senior Vice President ----------------------------------- Page 2 60 EXHIBIT 10.23 THIRD AMENDMENT TO INTERNATIONAL REVOLVING LOAN AGREEMENT THIS THIRD AMENDMENT TO INTERNATIONAL REVOLVING LOAN AGREEMENT (this "Amendment" or "Third Amendment") dated as of August 31, 1998 ("Effective Date") is between NATIONAL TANK COMPANY, a Delaware corporation ("Borrower") and Chase Bank of Texas, National Association, a national banking association, formerly Texas Commerce Bank National Association (together with its successors and assigns, "Bank"). PRELIMINARY STATEMENT. Borrower and Bank are parties to that certain International Revolving Loan Agreement dated as of June 30, 1997, amended by a First Amendment dated August 8, 1997 and a Second Amendment dated June 30, 1998 (as amended, "Loan Agreement" or "Agreement"). Each capitalized term defined in the Loan Agreement and not otherwise defined in this Amendment shall have the same meaning herein as in the Loan Agreement, and each Section and Exhibit reference is to the Loan Agreement as amended. Borrower and Bank have agreed to a renew the Commitment as provided further herein. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Bank hereby agree as follows: 1. The definition of "Maturity Date" in Exhibit A is amended to read: "`Maturity Date' shall mean August 31, 1999." 2. Borrower irrevocably agrees to pay to Bank a facility fee of $50,000.00, in respect of the renewal of the Commitment evidenced by this Amendment (inclusive of amounts due to Exim Bank in respect of the transactions contemplated by this Amendment), in addition to all other fees and other amounts payable in the International Loan Documents. In no event shall such amount be refunded to Borrower, whether or not the transactions contemplated hereby are consummated. 3. The Loan Agreement is amended by replacing the existing "Exhibit B" with the new "Exhibit B" attached to this Amendment. "Note" shall refer to the note executed in connection herewith substantially in the form of Exhibit B, and all extensions, renewals, replacements and other rearrangements. 4. By its execution and delivery hereof, Borrower represents and warrants the following: (a) As of the date hereof and after giving effect to the amendments contemplated herein, (i) the representations and warranties contained in Section 6 of the International Loan Agreement, as amended by this Amendment, and the other International Loan Documents, are true and correct on and as of the date hereof as though made by Borrower on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date) and (ii) no Event of Default or other event which with the passage of time or the giving of notice or both would constitute an Event of Default has occurred and is continuing; and (b) The execution and delivery of this Amendment shall in no way release, diminish, impair, reduce or otherwise adversely affect the obligations of Borrower under the International Loan Agreement, as amended by this Amendment, the Note or any other International Loan Document, as each of the foregoing documents and instruments may be further amended or otherwise modified from time to time. 5. This Amendment shall become effective when and only when (a) Bank shall have received acknowledgment from the Eximbank, which acknowledgment is satisfactory to Bank, that the Eximbank Guaranty remains in full force and effect notwithstanding this Amendment and covers the Commitment in the amount established by this Amendment, (b) Bank shall have executed a counterpart of this Amendment and (c) Bank shall have received each of the following: (i) Counterparts of this Amendment executed by Borrower; (ii) An amended and restated International Revolving Note in the form of Exhibit B executed by Borrower; (iii) Such other documents and agreements as Bank may reasonably request, including without limitation, a new Loan Authorization Notice and new form of Borrower Agreement; and (iv) The facility fee agreed to in section 1 of this Amendment. 6. Borrower hereby ratifies (i) the International Loan Agreement, as amended by this Amendment, (ii) the Note and (iii) the other International Loan Documents to which Borrower is a party, and confirms that and of the rights and powers created under each of the foregoing documents and instruments shall be and remain in full force and effect. 7. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Bank under the International Loan Agreement, as amended by this Amendment, or under the Note or the other International Loan Documents, as each may be amended or modified from time to time, nor constitute a waiver of any other provision of the foregoing documents and instruments, as each may be amended or modified from time to time. Borrower agrees to do, execute, acknowledge and deliver all and every such further acts and instruments as Bank may request for the better assuring and confirming unto Bank all and singular the rights granted or intended to be granted hereby or hereunder. This Amendment 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 to be an original and all of which taken together shall constitute but one and the same instrument. 8. Pursuant to Section 11.3 of the International Loan Agreement, Borrower agrees to pay on demand all costs and expenses of Bank in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder (including, without limitation, the reasonable fees and out-of-pocket expenses of course for Bank with respect thereto and with respect to advising Bank as to its rights and responsibilities under the International Loan Agreement, as hereby amended). THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND SHALL BE BINDING UPON BORROWER, BANK AND THEIR SUCCESSORS AND ASSIGNS. THIS WRITTEN AMENDMENT AND THE OTHER INTERNATIONAL LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RESPECTING THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Amendment as of the day and year first above written. BORROWER: NATIONAL TANK COMPANY BANK: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION By: By: ------------------------------- -------------------------------- Name: Name: ----------------------------- ------------------------------ Title: Title: ---------------------------- ----------------------------- By: -------------------------------- Name: ------------------------------ Title: ----------------------------- Page 1 61 EXHIBIT "B" THIRD AMENDED AND RESTATED INTERNATIONAL REVOLVING NOTE $5,000,000.00 August 31, 1998 FOR VALUE RECEIVED, the undersigned, NATIONAL TANK COMPANY, a corporation organized under the laws of the State of Delaware ("Borrower"), HEREBY PROMISES TO PAY to the order of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association ("Bank," formerly Texas Commerce Bank National Association), on or before August 31, 1999 ("Maturity Date"), the principal sum of Five Million and 00/100 Dollars ($5,000,000.00), or, if less, the aggregate principal amount of Loans outstanding on the Maturity Date, in accordance with the terms and provisions of that certain International Revolving Loan Agreement dated as of June 30, 1997 by and among Borrower and Bank (as amended from time to time, the "International Loan Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the International Loan Agreement). The outstanding principal balance of this Note shall be due and payable as provided in the International Loan Agreement. Borrower promises to pay interest on the unpaid principal balance of this Note from the date of any Loan evidenced by this Note until the principal balance thereof is paid in full Interest shall accrue on the outstanding principal balance of this Note from and including the date of any Loan evidenced by this Note to but not including the Maturity Date at the rate or rates, and shall be due and payable on the dates, set forth in the International Loan Agreement. Any amount not paid when due with respect to principal (whether at stated maturity, by acceleration or otherwise), costs or expenses, or, to the extent permitted by applicable law, interest, shall bear interest from the date when due to and excluding the date the same is paid in full payable on demand, at the Past Due Rate. Payments of principal and interest, and all amounts due with respect to costs and expenses, shall be made in lawful money of the United States of America in immediately available funds, without deduction, set-off or counterclaim to Bank, or such other location as may be notified to Borrower by Bank, not later than 12:00 noon (Houston Time) on the dates on which such payments shall become due pursuant to the terms and provisions set forth in the International Loan Agreement. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday, or public holiday on which Bank is not open for business, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in computing interest in connection with such payment. All loans and advances and all payments and prepayments made hereon shall be recorded in the holder's records and such records shall be controlling. In addition to all principal and accrued interest on this Note, Borrower agrees to pay (a) all reasonable costs and expenses incurred by all owners and holders of this Note in collecting this Note through any probate, reorganization, or any other proceeding and (b) reasonable attorneys' fees when and if this Note is placed in the hands of an attorney for collection after default. All agreements among Borrower and Bank whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand being made on this Note or otherwise, shall the amount paid, or agreed to be paid, to Bank for the use, forbearance, or detention of the money to be loaned under the International Loan Agreement and evidenced by this Note or otherwise or for the payment or performance of any covenant or obligation contained in the International Loan Agreement, this Note or in any other International Loan Document exceed the Highest Lawful Rate. If, as a result of any circumstances whatsoever, fulfillment of any provision hereof or of any of such documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by applicable usury law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if, from any such circumstance, Bank shall ever receive interest or anything which might be deemed interest under applicable law which would exceed the Highest Lawful Rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of this Note or the amounts owing on other obligations of Borrower to Bank under any International Loan Document and not to the payment of interest, or if such excessive interest exceeds the unpaid principal balance of this Note and the amounts owing on other obligations of Borrower to Bank under any International Loan Documents, as the case may be, such excess shall be refunded to Borrower. All sums paid or agreed to be paid to Bank for the use, forbearance, or detention of the indebtedness of Borrower to Bank shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness until payment in full of the principal thereof (including the period of any renewal or extension thereof) so that the interest on account of such indebtedness shall not exceed the Highest Lawful Page 1 62 Rate. Notwithstanding anything to the contrary contained in the International Loan Agreement or this Note, it is understood and agreed that if at any time the rate of interest which accrues on the outstanding principal balance of this Note shall exceed the Highest Lawful Rate, the rate of interest which accrues on the outstanding principal balance of this Note shall be limited to the Highest Lawful Rate, but any subsequent reductions in the rate of interest which accrues on the outstanding principal balance of this Note shall not reduce the rate of interest which accrues on the outstanding principal balance of this Note below the Highest Lawful Rate until the total amount of interest accrued on the outstanding principal balance of this Note equals the amount of interest which would have accrued if such interest rate had at all times been in effect. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements among Borrower and Bank. This Note is entitled to the benefits of the International Loan Agreement, which International Loan Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events, for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions and with the effect therein specified, and provisions to the effect that no provision of the International Loan Agreement or this Note shall require the payment or permit the collection of interest in excess of the Highest Lawful Rate. The obligations of Borrower hereunder are secured by the International Security Documents. It is contemplated that by reason of prepayments or repayments hereon prior to the Maturity Date, there may be times when no indebtedness is owing hereunder prior to such date, but notwithstanding such occurrences, this Note shall remain valid and shall be in full force and effect as to Loans made pursuant to the International Loan Agreement subsequent to each such occurrence. Except as otherwise specifically provided for in the International Loan Agreement, Borrower and any and all endorsers, guarantors and sureties severally waive grace, demand, presentment for payment, notice of dishonor or default, protest, notice of protest, notice of intent to accelerate, notice of acceleration and diligence in collecting and bringing of suit against any party hereto, and agree to all renewals, extensions or partial payments hereon, with or without notice, before or after maturity. This Note is the Note referred to in the International Loan Agreement and is given in amendment, restatement and replacement, but not in extinguishment, of the First [sic: should have been titled "Second"] Amended and Restated International Revolving Note dated June 30, 1998 in the original principal amount of $5,000,000 made by Borrower and payable to the order of Bank. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW. THIS NOTE AND THE OTHER INTERNATIONAL LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES; AND THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF Borrower has caused this Note to be executed and delivered by its officer thereunto duly authorized effective as of the date first above written. NATIONAL TANK COMPANY By: /s/ WILLIAM B. WIENER, III -------------------------------------- Name: William B. Wiener, III ------------------------------------ Title: Senior Vice President ----------------------------------- Page 2 63 FOURTH AMENDMENT TO INTERNATIONAL REVOLVING LOAN AGREEMENT THIS FOURTH AMENDMENT TO INTERNATIONAL REVOLVING LOAN AGREEMENT (this "Amendment" or "Fourth Amendment") dated as of November 16, 1998 ("Effective Date") is between NATIONAL TANK COMPANY, a Delaware corporation ("NATCO") and TOTAL ENGINEERING SERVICES TEAM, INC., a Louisiana corporation ("TEST") (jointly and severally, "Borrower") and Chase Bank of Texas, National Association, a national banking association (formerly Texas Commerce Bank National Association, together with its successors and assigns, "Bank"). R E C I T A L S WHEREAS, NATCO and Bank are parties to that certain International Revolving Loan Agreement dated as of June 30, 1997 (as amended from time to time, the "Loan Agreement"); and WHEREAS, NATCO and TEST have requested that TEST be added as a Borrower, jointly and severally with NATCO, as a party to the Loan Agreement; and WHEREAS, NATCO has agreed to acquire The Cynara Company, a Delaware corporation ("Cynara") subsidiary of NATCO, and has requested that Bank provide certain waivers and modifications of the Loan Agreement appropriate to permitting such acquisition; and WHEREAS, the parties desire to make certain other modifications and other agreements pursuant to this Amendment as provided herein; and WHEREAS, pursuant to the terms and conditions hereof Bank has agreed to so amend the Loan Agreement, subject to the condition precedent that Bank shall have in hand the approval(s) of the Exim Bank requisite to continuing coverage under the Working Capital Guarantee program; NOW, THEREFORE, for and in consideration of the premises and the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrowers and Bank hereby agree as follows: 1. Definitions generally; references. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Loan Agreement. All references to Section numbers in this Amendment shall be references to the corresponding Section of the International Loan Agreement. On and after the date hereof, each reference in the International Loan Agreement to "this Agreement," "hereunder," "herein," or words of like import shall mean and be a reference to the Loan Agreement, as amended hereby. 2. Exhibit A to the Loan Agreement is hereby amended by inserting therein in proper alphabetical order the following new definitions: "Borrowers" means NATIONAL TANK COMPANY and TOTAL ENGINEERING SERVICES TEAM, INC., jointly and severally. "Borrower" shall refer to each and both Borrowers, jointly and severally. "Borrowers Agreement" shall mean Borrower Agreement executed as of the date of this Amendment and any amendment, modification and replacement thereof. "International Security Agreement" shall mean and include each and both of (a) the International Security Agreement executed and delivered by NATCO for the benefit of the Bank effective as of June 30, 1997; and (b) the International Security Agreement dated as of even date with the Fourth Amendment, executed by TEST for the benefit of the Bank; and any and all amendments, modifications, renewals and extensions of the foregoing. "Note" shall refer to the Fourth Amended and Restated International Revolving Note executed by NATCO and TEST, jointly and severally, as of the Fourth Amendment Effective Date (form attached to the Fourth Amendment as Exhibit B, replacing existing Exhibit B), and each renewal, extension, replacement, modification and other rearrangement thereof. 3. The parties agree that notwithstanding anything to the contrary in any International Loan Document, (1) either Borrower shall be entitled to request a Loan or Letter of Credit and the obligation thereby created shall be the joint and several liability of the Borrowers (and Exhibits C (request for loan), G (rate change notice) and I (request for letter of credit) are deemed modified accordingly); and (2) each compliance certificate, borrowing base certificate and similar certificate and representation of Borrowers shall be executed and delivered by both Borrowers (a modified Exhibit D, borrowing base certificate, attached to this Amendment replacing existing Exhibit D). 4. Bank hereby consents, in keeping with Section 9.2, to NATCO's acquisition of Cynara as a subsidiary of NATCO, on substantially the terms and conditions reflected in written materials provided to Bank prior to the execution of this Amendment. Schedule 6.1 is amended to add the name of Cynara as a 100% owned subsidiary of National Tank Company. 5. Borrower has requested and Bank has agreed to waive, on a one time basis, the agreement in Section 9.9 that Borrower not change its fiscal year, so that Borrower may change its fiscal year to years ending December 31. No other waiver of such section or any other section has been promised by Bank or will be relied upon by Borrower as forthcoming from Bank. 6. The definition of "Domestic Credit Agreement" refers to the Loan Agreement dated June 30, 1997 between Borrower and the Domestic Lenders, as the same may be amended from time to time. The parties hereby agree that the Loan Agreement among NATCO, NATCO Canada Ltd., Bank (as U.S. Agent), The Bank of Nova Scotia (as Canadian Agent) and certain other lenders, providing for a $25,000,000 US revolving loan facility, $10,000,000 Canadian revolving loan facility and a $32,500,000 term loan facility, which the parties expect to be executed (subject to adjustments in the approximate amounts of such facilities) on or about the Fourth Amendment Effective Date, shall be deemed an amendment of the Domestic Credit Agreement for purposes of the Loan Agreement. 7. By its execution and delivery hereof, Borrower represents and warrants the following: (a) As of the date hereof and after giving effect to the amendments contemplated herein, (i) the representations and warranties contained in Section 6 of the International Loan Agreement, as amended by this Amendment, the other International Loan Documents and the Domestic Loan Documents to which Borrower is a party, are true and correct on and as of the date hereof as though made by Borrower on and as of such date (except to the extent that such representations and warranties relate solely Page 1 64 to an earlier date) and (ii) no Event of Default or other event which with the passage of time or the giving of notice or both would constitute an Event of Default has occurred and is continuing; and (b) The execution and delivery of this Amendment shall in no way release, diminish, impair, reduce or otherwise adversely affect the obligations of Borrower under the International Loan Agreement, as amended by this Amendment, the Note or the Amended and Restated Note (as hereinafter defined), the other International Loan Documents and the Domestic Loan Documents, as each of the foregoing documents and instruments may be further amended or otherwise modified from time to time. 8. This Amendment shall become effective when and only when (a) with respect to providing credit to TEST and on the security of TEST receivables only, Bank shall have received acknowledgment from the Eximbank, which acknowledgment is satisfactory to Bank, that the Eximbank Guaranty remains in full force and effect notwithstanding this Amendment and covers the Commitment in the amount established by this Amendment, (b) Bank shall have executed a counterpart of this Amendment and (c) Bank shall have received each of the following: (i) Counterparts of this Amendment executed by Borrower; an International Security Agreement executed and delivered by TEST; Amendments to Guaranty executed and delivered by NATCO Group Inc., formerly known as Cummings Point Industries, Inc.; (ii) A Fourth Amended and Restated International Revolving Note in the principal amount of $5,000,000.00 executed by Borrowers ("Amended and Restated Note"); and (iii) Such other documents and agreements as Bank may reasonably request, including without limitation, a new Loan Authorization Notice and new form of Borrower Agreement. 9. Borrower hereby ratifies (i) the International Loan Agreement, as amended by this Amendment, (ii) the Note, (iii) the other International Loan Documents to which Borrower is a party and (iv) the Domestic Loan Documents to which Borrower is a party, and confirms that and of the rights and powers created under each of the foregoing documents and instruments shall be and remain in full force and effect. 10. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Bank under the International Loan Agreement, as amended by this Amendment, or under the Note, the other International Loan Documents or the Domestic Loan Documents to which Borrower is a party, as each may be amended or modified from time to time, nor constitute a waiver of any other provision of the foregoing documents and instruments, as each may be amended or modified from time to time. 11. Borrower agrees to do, execute, acknowledge and deliver all and every such further acts and instruments as Bank may request for the better assuring and confirming unto Bank all and singular the rights granted or intended to be granted hereby or hereunder. 12. Pursuant to Section 11.3 of the International Loan Agreement, Borrower agrees to pay on demand all costs and expenses of Bank in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder (including, without limitation, the reasonable fees and out-of-pocket expenses of course for Bank with respect thereto and with respect to advising Bank as to its rights and responsibilities under the International Loan Agreement, as hereby amended). In addition, Borrower shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder and agrees to save Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees. 13. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND SHALL BE BINDING UPON BORROWER AND BANK AND THEIR SUCCESSORS AND ASSIGNS. 14. This Amendment 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 to be an original and all of which taken together shall constitute but one and the same instrument. 15. THIS WRITTEN AMENDMENT, THE INTERNATIONAL LOAN AGREEMENT, THE NOTE, THE AMENDED AND RESTATED NOTE, THE OTHER INTERNATIONAL LOAN DOCUMENTS, THE DOMESTIC LOAN DOCUMENTS AND THE OTHER DOCUMENTS EXECUTED IN CONNECTION THEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RESPECTING THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the undersigned, by their officers duly authorized, have executed this Amendment as of the day and year first above written. BORROWER: NATIONAL TANK COMPANY BANK: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION By: /s/ WILLIAM B. WIENER, III By: ---------------------------------------------- -------------------------------------------- Name: William B. Wiener, III Name: -------------------------------------------- ------------------------------------------ Title: Senior Vice President Title: ------------------------------------------- ----------------------------------------- Address: ----------------------------------------- By: -------------------------------------------- BORROWER: TOTAL ENGINEERING SERVICES TEAM, INC. By: /s/ WILLIAM B. WIENER, III Name: ---------------------------------------------- ------------------------------------------ Name: William B. Wiener, III Title: -------------------------------------------- ----------------------------------------- Title: Senior Vice President ------------------------------------------- Address: -----------------------------------------
Page 2 65 EXHIBIT "B" FOURTH AMENDED AND RESTATED INTERNATIONAL REVOLVING NOTE $5,000,000.00 November 16, 1998 FOR VALUE RECEIVED, the undersigned, NATIONAL TANK COMPANY, a corporation organized under the laws of the State of Delaware ("NATCO") and TOTAL ENGINEERING SERVICES TEAM, INC., a corporation organized under the laws of the State of Louisiana ("TEST") (whether one or more, jointly and severally, "Borrower"), HEREBY PROMISE TO PAY to the order of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association ("Bank", formerly Texas Commerce Bank National Association), on or before August 31, 1999 ("Maturity Date"), the principal sum of Five Million and 00/100 Dollars ($5,000,000.00), or, if less, the aggregate principal amount of Loans outstanding on the Maturity Date, in accordance with the terms and provisions of that certain International Revolving Loan Agreement dated as of June 30, 1997 by and among Borrower and Bank (as amended from time to time, the "International Loan Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the International Loan Agreement). The outstanding principal balance of this Note shall be due and payable as provided in the International Loan Agreement. Borrower promises to pay interest on the unpaid principal balance of this Note from the date of any Loan evidenced by this Note until the principal balance thereof is paid in full Interest shall accrue on the outstanding principal balance of this Note from and including the date of any Loan evidenced by this Note to but not including the Maturity Date at the rate or rates, and shall be due and payable on the dates, set forth in the International Loan Agreement. Any amount not paid when due with respect to principal (whether at stated maturity, by acceleration or otherwise), costs or expenses, or, to the extent permitted by applicable law, interest, shall bear interest from the date when due to and excluding the date the same is paid in full payable on demand, at the Past Due Rate. Payments of principal and interest, and all amounts due with respect to costs and expenses, shall be made in lawful money of the United States of America in immediately available funds, without deduction, set-off or counterclaim to Bank, or such other location as may be notified to Borrower by Bank, not later than 12:00 noon (Houston Time) on the dates on which such payments shall become due pursuant to the terms and provisions set forth in the International Loan Agreement. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday, or public holiday on which Bank is not open for business, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in computing interest in connection with such payment. All loans and advances and all payments and prepayments made hereon shall be recorded in the holder's records and such records shall be controlling. In addition to all principal and accrued interest on this Note, Borrower agrees to pay (a) all reasonable costs and expenses incurred by all owners and holders of this Note in collecting this Note through any probate, reorganization, or any other proceeding and (b) reasonable attorneys' fees when and if this Note is placed in the hands of an attorney for collection after default. Page 1 66 All agreements among Borrower and Bank whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand being made on this Note or otherwise, shall the amount paid, or agreed to be paid, to Bank for the use, forbearance, or detention of the money to be loaned under the International Loan Agreement and evidenced by this Note or otherwise or for the payment or performance of any covenant or obligation contained in the International Loan Agreement, this Note or in any other International Loan Document exceed the Highest Lawful Rate. If, as a result of any circumstances whatsoever, fulfillment of any provision hereof or of any of such documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by applicable usury law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if, from any such circumstance, Bank shall ever receive interest or anything which might be deemed interest under applicable law which would exceed the Highest Lawful Rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of this Note or the amounts owing on other obligations of Borrower to Bank under any International Loan Document and not to the payment of interest, or if such excessive interest exceeds the unpaid principal balance of this Note and the amounts owing on other obligations of Borrower to Bank under any International Loan Documents, as the case may be, such excess shall be refunded to Borrower. All sums paid or agreed to be paid to Bank for the use, forbearance, or detention of the indebtedness of Borrower to Bank shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness until payment in full of the principal thereof (including the period of any renewal or extension thereof) so that the interest on account of such indebtedness shall not exceed the Highest Lawful Rate. Notwithstanding anything to the contrary contained in the International Loan Agreement or this Note, it is understood and agreed that if at any time the rate of interest which accrues on the outstanding principal balance of this Note shall exceed the Highest Lawful Rate, the rate of interest which accrues on the outstanding principal balance of this Note shall be limited to the Highest Lawful Rate, but any subsequent reductions in the rate of interest which accrues on the outstanding principal balance of this Note shall not reduce the rate of interest which accrues on the outstanding principal balance of this Note below the Highest Lawful Rate until the total amount of interest accrued on the outstanding principal balance of this Note equals the amount of interest which would have accrued if such interest rate had at all times been in effect. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements among Borrower and Bank. This Note is entitled to the benefits of the International Loan Agreement, which International Loan Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events, for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions and with the effect therein specified, and provisions to the effect that no provision of the International Loan Agreement or this Note shall require the payment or permit the collection of interest in excess of the Highest Lawful Rate. The obligations of Borrower hereunder are secured by the International Security Documents. It is contemplated that by reason of prepayments or repayments hereon prior to the Maturity Date, there may be times when no indebtedness is owing hereunder prior to such date, but notwithstanding such occurrences, this Note shall remain valid and shall be in full force and effect as to Loans made pursuant to the International Loan Agreement subsequent to each such occurrence. Except as otherwise specifically provided for in the International Loan Agreement, Borrower and any and all endorsers, guarantors and sureties severally waive grace, demand, presentment for payment, notice of dishonor or default, protest, notice of protest, notice of intent to accelerate, notice of acceleration and diligence in collecting and bringing of suit against any party hereto, and agree to all renewals, extensions or partial payments hereon, with or without notice, before or after maturity. Page 2 67 This Note is the Note referred to in the International Loan Agreement and is given in amendment, restatement and replacement, and add Borrower TEST as a co-maker to, but not in extinguishment, of the Third Amended and Restated International Revolving Note dated August 31, 1998 in the original principal amount of $5,000,000 made by Borrower and payable to the order of Bank. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW. THIS NOTE AND THE OTHER INTERNATIONAL LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES; AND THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF each Borrower has caused this Note to be executed and delivered by its officer thereunto duly authorized effective as of the date first above written. BORROWER: NATIONAL TANK COMPANY By: /s/ WILLIAM B. WIENER, III --------------------------------------------- Name: William B. Wiener, III ------------------------------------------- Title: Senior Vice President ------------------------------------------ BORROWER: TOTAL ENGINEERING SERVICES TEAM, INC. By: /s/ WILLIAM B. WIENER, III --------------------------------------------- Name: William B. Wiener, III ------------------------------------------- Title: Senior Vice President ------------------------------------------ Page 3 68 EXHIBIT "D" INTERNATIONAL BORROWING BASE CERTIFICATE As of period ended ________________, 19 Reference is made to that certain International Revolving Loan Agreement dated as of June 30, 1997 (as amended, modified and supplemented and in effect from time to time, the "International Loan Agreement") by and between NATIONAL TANK COMPANY, a corporation duly organized and validly existing under the laws of the State of Texas and TOTAL ENGINEERING SERVICES TEAM, INC., a corporation duly organized and validly existing under the laws of the State of Louisiana (jointly and severally, "Borrowers") and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association ("Bank"). Terms defined in the International Loan Agreement are used herein as defined therein. Pursuant to Section 8.1(c) of the International Loan Agreement, the undersigned, the President(s) or Chief Financial Officer(s) of Borrowers, hereby certify that, to the best of their knowledge and belief after reasonable and due investigation and review, (i) attached hereto as Annex 1 is a true and accurate calculation of the International Borrowing Base as of _______________________, 19 __ in accordance with the requirements set forth in the International Loan Agreement and (ii) attached hereto as Annex 2 is a true and accurate schedule which specifically identifies the Eligible Accounts Receivable and Eligible Inventory in accordance with the requirements of the Eximbank. IN WITNESS WHEREOF, the undersigned have caused this International Borrowing Base Certificate to be duly executed as of the day of ________________, 19__ . BORROWER: NATIONAL TANK COMPANY By: /s/ WILLIAM B. WIENER, III --------------------------------------------- Name: William B. Wiener, III ------------------------------------------- Title: Senior Vice President ------------------------------------------ BORROWER: TOTAL ENGINEERING SERVICES TEAM, INC. By: /s/ WILLIAM B. WIENER, III --------------------------------------------- Name: William B. Wiener, III ------------------------------------------- Title: Senior Vice President ------------------------------------------ 1 69 ANNEX 1 International Borrowing Base Calculation 1.A. Total Eligible Accounts Receivable of NATCO and TEST -------------- B. Advance Rate: 90% -------------- C. Total Eligible Inventory of NATCO and TEST -------------- D. Advance Rate: 75% -------------- 2. Line 1B plus 1D equals: International Borrowing Base as of ---------------------- -------------- 3. Lesser of No. 2 above or the Commitment -------------- 4. Less the International Exposure [Loans outstanding plus Letters of Credit (Face Value x collateral requirement) -------------- under this facility]* -------------- 5. Borrowing Availability -------------- A. If a negative number, the amount of paydown and/or additional collateral required -------------- B. If a positive number, the amount of borrowing availability -------------- 7. Requested Action: A. Paydown. -------------- B. Drawdown -------------- C. Letter of Credit (Face Value) -------------- * The face value of Letters of Credit issued under this facility plus Loans outstanding under this facility cannot exceed the amount of the Commitment * Subject to review of the transaction, Bank may allow the inclusion of L/C so that are less than 100% collateralized. 1 70 ANNEX 2 International Borrowing Base Detailed Schedule Report 1.Eligible Accounts Receivable. Borrowers represent and warrant that all of the accounts receivable outlined below meet the requirements set forth in the definition of "Eligible Accounts Receivables." [SCHEDULE TO BE USED IF ACCOUNTS RECEIVABLE ARISE UNDER AN EXPORT ORDER: A. Receivables covered by letters of credit issued and/or confirmed in accordance with Section 8.10 of the International Loan Agreement. Copies of such letters of credit and assignments of proceeds of such letters of credit are attached hereto or have already been provided to Bank.
Invoice Customer Country Amount Date L/C Bank ---------------- ------ ---- -------- 1. 2. 3.
B. Receivables insured by export insurance in accordance with Section 8.7 of the International Loan Agreement. True and correct copies of such insurance policies together with all endorsements' declarations, amendments and renewals thereto have been delivered to Bank. True and correct copies of the notification of assignment of insurance claims under such policies have been delivered to Bank.
Invoice Customer Country Amount Date SBCL of DCL ---------------- ------ ---- ----------- 1. 2. 3.
C. Receivables arising from documentary collections, cash against documents transactions and other receivables otherwise approved in writing by Bank and Eximbank.
Invoice Customer Country Amount Date Payment Terms ---------------- ------ ---- ------------- 1. 2. 3.
2. Eligible Inventory A. Borrowers represent and warrant that all of the inventory outlined below meets the requirements set forth in the definition of "Eligible Inventory." Without limitation of the foregoing, Borrowers represent and warrant that all such inventory contains at least 50% U. S. content and that all of such inventory is supported by an Export Order or an Indirect Export Order on file with Borrowers. Inventory Supported by Purchase Order: Finished Goods ------------------------------------- Work-in-Process ------------------------------------ Raw Materials -------------------------------------- Inventory Not Supported by Purchase Order: Finished Goods ------------------------------------- Work-in-Process ------------------------------------ Raw Materials -------------------------------------- Total: ====================================================== Note: Describe any large or special inventory items. 1 71 ADDITIONAL COLLATERAL 1. Export-related receivables and inventory no longer Eligible-which have previously been included in an International Borrowing Base Certificate and which remain as Collateral for the International Obligations. [List] ATTACHMENTS 1. Export Orders In accordance with Section 7.2 of the International Loan Agreement attached hereto are copies of all new executed Export Orders, as outlined below:
Invoice Customer Country Amount Date Payment Terms - -------- ------- ------ ---- ------------- 1. 2. 3.
2. Export Insurance In accordance with Section 8.7 of the International Loan Agreement attached hereto are duly executed copies of the export insurance policies, together with endorsements, declarations, amendments and renewals which have not been previously provided to Bank: 3. Other Information or Special Requests 2 72 FIFTH AMENDMENT TO INTERNATIONAL REVOLVING LOAN AGREEMENT Dated as of July 23, 1999 This Fifth Amendment to International Revolving Loan Agreement (this "Amendment") is entered into as of July 23, 1999, by and among NATIONAL TANK COMPANY, a Delaware corporation ("NATCO"), TOTAL ENGINEERING SERVICES TEAM, INC., a Louisiana corporation ("TEST") (jointly and severally, NATCO and TEST, the "Borrower" or the "Borrowers"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association (formerly Texas Commerce Bank National Association, together with its successors and assigns, the "Bank"). RECITALS: WHEREAS, NATCO and the Bank are parties to that certain International Revolving Loan Agreement, dated as of June 30, 1997; as amended by that certain First Amendment to International Revolving Loan Agreement, dated as of August 8, 1997; as further amended by that certain Second Amendment to International Revolving Loan Agreement, dated as of June 30, 1998; as further amended by that certain Third Amendment to International Revolving Loan Agreement, dated as of August 31, 1998; and as further amended by that certain Fourth Amendment to International Revolving Loan Agreement, dated as of November 16, 1998, which Fourth Amendment is between NATCO, TEST, and the Bank (as amended to the date hereof, the "Original International Loan Agreement"); and WHEREAS, the Borrowers have requested that the Bank modify the Original International Loan Agreement to, among other things, (a) increase the Commitment to Ten Million Dollars ($10,000,000), (b) extend the Maturity Date from August 31, 1999 to July 23, 2002, and (c) to comply with the new Eximbank Guaranty; and WHEREAS, pursuant to the terms and conditions hereof, the Bank has agreed to amend the Original International Loan Agreement, on the terms and conditions and as set forth herein; NOW, THEREFORE, for good and valuable consideration, the Original International Loan Agreement is hereby amended as hereinafter set forth, subject to the conditions precedent set forth in this Amendment. SECTION 1. Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Original International Loan Agreement. - 1 - 73 SECTION 2. Amendments to Original International Loan Agreement. The Original International Loan Agreement is, effective as of the date hereof, hereby amended as follows: a. Exhibit A to the Original International Loan Agreement is hereby amended by amending the following definitions in their entirety as follows: "Borrower Agreement" shall mean the Borrower Agreement executed by the Borrowers as of July 23, 1999, and any amendment, modification and replacement thereof. "Eximbank Guaranty" shall mean that certain Master Guaranty Agreement No. TX-________-MGA-99 dated as of July 23, 1999 between the Eximbank and the Bank, as the same may be amended, modified or supplemented from time to time. "Maturity Date" shall mean July 23, 2002. "Note" shall mean that certain Fifth Amended and Restated International Revolving Note executed and delivered by NATCO and TEST, jointly and severally, as of July 23, 1999, and each renewal, extension, amendment, replacement, modification or other rearrangement thereof. b. Exhibit B to the Original International Loan Agreement is hereby replaced with Exhibit B attached hereto. c. Section 2.1(a) of the Original International Loan Agreement is hereby amended in its entirety as follows: (a) Upon the terms and conditions and relying upon the representations and warranties herein set forth, the Bank agrees to make Loans to the Borrower on any one or more Business Days prior to the Maturity Date, up to an aggregate principal amount of Loans not exceeding at any one time outstanding the lesser of (i) $10,000,000.00 (such amount, as it may be reduced from time to time pursuant to Section 3.6, being the Bank's "Commitment") or (ii) the International Borrowing Base. Subject to the terms and conditions of this Agreement, the Borrower may borrow, repay and reborrow hereunder. As of July 23, 1999, after giving effect to the Fifth Amendment, the unused Commitment is $6,893,301.00. d. Section 2.3(iv) of the Original International Loan Agreement is hereby amended in its entirety as follows: (iv) unless the Bank shall give its prior written consent in its sole discretion, the expiry date is later than twelve (12) months from the date of issuance of such Letter of Credit. - 2 - 74 e. Section 4.1 of the Original International Loan Agreement is hereby amended in its entirety as follows: The Borrower shall pay to the Bank on July 23, 1999 and on each Loan Facility Anniversary Date a non-refundable facility fee in an amount equal to the product of (x) the Commitment, (y) the Annual Facility Fee Percentage, and (z) a fraction, the numerator of which is the number of months or a portion thereof remaining in the Loan Facility Term (not to exceed twelve (12) months), and the denominator of which is twelve (12). Notwithstanding the foregoing sentence, if the criteria set forth in Exhibit 1 to the Eximbank Guaranty and in all amendments, supplements and replacements of such Exhibit delivered to the Bank at least ten (10) days prior to the effectiveness thereof (the "Criteria For Reduced Facility Fee") are satisfied, the Annual Facility Fee Percentage shall be reduced to 1.00%; provided, however, if the Loan Facility Term exceeds (12) months or is subject to an Extension, the Criteria For Reduced Facility Fee must be met on each Loan Facility Anniversary Date or the date of such Extension. For purposes of the facility fee payment due July 23, 1999, the Annual Facility Fee Percentage is 1.00%. f. Article 6 of the Original International Loan Agreement is hereby amended by inserting at the end thereof the following new section: 6.15. YEAR 2000. Any reprogramming required to permit the proper functioning, in and following the year 2000, of (i) the Borrowers' computer systems and (ii) equipment containing embedded microchips (including systems and equipment supplied by others or with which Borrowers' systems interface) and the testing of all such systems and equipment, as so reprogrammed, will be completed by July 12, 1999. The cost to the Borrowers of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to the Borrowers (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Default or a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Borrowers and their respective Subsidiaries are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit the Borrowers to conduct their respective business without Material Adverse Effect. g. The definition of "Eligible Accounts Receivable" is hereby amended by inserting at the end thereof the following: The value of each Eligible Accounts Receivable shall be, at the date of determination thereof, the aggregate face amount of such Eligible Accounts - 3 - 75 Receivable less taxes, discounts, credits, allowances and Retainages, except to the extent otherwise permitted by the Bank in writing. h. Exhibit A to the Original Loan Agreement is hereby amended by inserting therein in proper alphabetical order the following: "Annual Facility Fee Percentage" shall mean one and one-half percent (1.50%), subject to reduction as set forth in Section 4.1. "Criteria For Reduced Facility Fee" shall have the meaning set forth in Section 4.1. "Extension" shall have the meaning set forth in the Eximbank Guaranty. "Final Disbursement Date" shall have the meaning set forth in the Eximbank Guaranty. "Loan Facility Anniversary Date" shall mean each one (1) year anniversary of July 23, 1999. "Loan Facility Term" shall mean the number of months from July 23, 1999 to the Final Disbursement Date as originally set forth in the Loan Authorization Agreement. i. Borrower acknowledges and agrees that the International Loan Documents shall be monitored and serviced by the domestic asset-based lending division of the Lender or its affiliate. SECTION 3. Conditions of Effectiveness. The effectiveness of this Amendment is subject to the conditions precedent that on or before the date hereof: a. The Bank shall have received the following, each in form and substance and dated as of a date satisfactory to the Bank: (i) a fully executed copy of the new Eximbank Guaranty; (ii) a minimum of three counterparts of this Amendment executed by each party hereto; (iii) an original Note executed and delivered by the Borrowers, jointly and severally (promptly after this Amendment becomes effective, the Bank shall return to the Borrowers the Fourth Amended and Restated International Revolving Note, dated as of November 16, 1998); (iv) two (2) completed originals of the new Borrower Agreement executed by the Borrowers and the Guarantor; - 4 - 76 (v) a new fully executed Delegated Authority Letter Agreement; (vi) payment of the facility fee due on July 23, 1999; (vii) a letter from Eximbank in the form of Exhibit A attached hereto; (viii) the consent of the Guarantor to this Amendment and the previous amendments to the Original International Loan Agreement; and (ix) such other information and documents as may be requested by the Bank or its counsel. b. The Bank shall be satisfied that the applicable conditions set forth in Section 6 of the Delegated Authority Letter Agreement have been satisfied. SECTION 4. Representations and Warranties of the Borrowers. Each Borrower represents and warrants to the Bank that, at the time of execution hereof: a. As of the date hereof and after giving effect to the amendments contemplated herein, (i) the representations and warranties contained in Section 6 of the International Loan Agreement, as amended by this Amendment, the other International Loan Documents and the Domestic Loan Documents to which Borrower is a party, are true and correct on and as of the date hereof as though made by Borrower on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date) and (ii) no Event of Default or other event which with the passage of time or the giving of notice or both would constitute an Event of Default has occurred and is continuing; and b. The execution and delivery of this Amendment shall in no way release, diminish, impair, reduce or otherwise adversely affect the obligations of Borrower under the International Loan Agreement, as amended by this Amendment, the Note, the other International Loan Documents and Domestic Loan Documents, as each of the foregoing documents and instruments may be further amended or otherwise modified from time to time. SECTION 5. Ratification. Each Borrower hereby ratifies (i) the International Loan Agreement, as amended by this Amendment, (ii) the Note, (iii) the other International Loan Documents to which Borrower is a party and (iv) the Domestic Loan Documents to which Borrower is a party, and confirms that and of the rights and powers created under each of the foregoing documents and instruments shall be and remain in full force and effect. SECTION 6. Reference to and Effect on the International Loan Documents. Upon the effectiveness of this Amendment, on and after the date hereof each reference in the Original International Loan Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Original International Loan Agreement, and each reference in the other International Loan Documents to the "International Loan Agreement", "thereunder", "thereof" or words of like import referring to the Original International Loan Agreement, shall mean and be a reference to the Original International Loan Agreement as amended hereby. - 5 - 77 SECTION 7. Payment of Expenses. Pursuant to Section 11.3 of the International Loan Agreement, each Borrower agrees to pay on demand all costs and expenses of Bank in connection with the preparation, reproduction, execution and delivery of this Amendment and other instruments and documents to be delivered hereunder (including, without limitation, the reasonable fees and out-of-pocket expenses of course for Bank with respect thereto and with respect to advising Bank as to its rights and responsibilities under the International Loan Agreement, as hereby amended). In addition, Borrower shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder and agrees to save Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees. SECTION 8. Governing Law. THIS AMENDMENT HAS BEEN NEGOTIATED, AND IS BEING EXECUTED AND DELIVERED IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF ALL OF THE LOAN DOCUMENTS. SECTION 9. Invalid Provisions. If any provision of this Amendment is held to be illegal, invalid or unenforceable, such provision shall be fully severable; this Amendment shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Amendment; and the remaining provisions of this Amendment shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Amendment. SECTION 10. Survival. All representations, warranties, conditions and covenants made herein shall survive the execution and delivery of this Amendment and the other International Loan Documents and the making of the Loans, and no investigation by the Bank, nor any closing shall affect the representations, warranties, conditions and covenants of the Borrowers or the right of the Bank to rely on and enforce them. SECTION 11. Waiver. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Bank under the International Loan Agreement, as amended by this Amendment, the Note, or any other International Loan Documents or the Domestic Loan Documents to which Borrower is a party, as each may be amended or modified from time to time, nor constitute a waiver of any other provision of the foregoing documents and instruments, as each may be amended or modified from time to time. SECTION 12. Further Assurances. Borrower agrees to do, execute, acknowledge and deliver all and every such further acts and instruments as Bank may request for the better assuring and confirming unto Bank all and singular the rights granted or intended to be granted hereby or hereunder. SECTION 13. Multiple Counterparts. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement, and any of the parties hereto may execute this Amendment by signing any such counterpart. - 6 - 78 SECTION 14. Assignment. The Bank may assign any of its rights and interests in any of the International Loan Documents or Domestic Loan Documents to Eximbank at any time, or from time to time, in the Bank's sole discretion and without notice to the Borrowers. SECTION 15. Entirety. THIS WRITTEN AMENDMENT, THE INTERNATIONAL LOAN AGREEMENT, THE NOTE, THE OTHER INTERNATIONAL LOAN DOCUMENTS, THE DOMESTIC LOAN DOCUMENTS AND THE OTHER DOCUMENTS EXECUTED IN CONNECTION THEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RESPECTING THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. - 7 - 79 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. NATIONAL TANK COMPANY By: /s/ STEPHEN J. GOODLAND ------------------------------------------- Name: Stephen J. Goodland ----------------------------------------- Title: Vice President - Finance and Accounting ---------------------------------------- TOTAL ENGINEERING SERVICES TEAM, INC. By: /s/ STEPHEN J. GOODLAND ------------------------------------------- Name: Stephen J. Goodland ----------------------------------------- Title: Assistant Secretary ---------------------------------------- CHASE BANK OF TEXAS, NATIONAL ASSOCIATION By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- THE UNDERSIGNED HEREBY CONSENTS TO THIS AND ALL PRIOR AMENDMENTS TO THE INTERNATIONAL LOAN DOCUMENTS AND CONFIRMS THAT ITS INTERNATIONAL GUARANTY IS AND REMAINS IN FULL FORCE AND EFFECT NATCO GROUP, INC. (formerly known as Cummings Point Industries, Inc.) By: /s/ STEPHEN J. GOODLAND ------------------------------------------- Name: Stephen J. Goodland ----------------------------------------- Title: Vice President - Finance and Accounting ---------------------------------------- - 8 - 80 AGREEMENT TO SATISFY EXIM "JUNIOR LIEN" REQUIREMENT THIS AGREEMENT TO SATISFY EXIM "JUNIOR LIEN" REQUIREMENT (this "Agreement") dated as of August 31, 1998, ("Effective Date") is made by and between NATIONAL TANK COMPANY, a Delarware corporation (whether one or more, jointly and severally, "Borrower"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association ("Bank," formerly Texas Commerce Bank National Association). PRELIMINARY STATEMENTS. Borrower and Bank have entered into an International Revolving Loan Agreement dated June 30, 1997 (as it may be amended or otherwise modified from time to time, the "International Loan Agreement"), providing for loans by Bank to Borrower under the Working Capital Guaranty Program ("WCGP") of the Export-Import Bank of the United States ("the Eximbank"). Bank has and/or may from time to time in its future discretion extend other loans and other credit to Borrower (no commitment to extend any such credit being evidenced by this Agreement) apart from the Eximbank guaranteed loans under the International Loan Agreement ("Other Obligations"). All capitalized terms used but not otherwise defined in this Agreement shall have the same meanings as in the International Loan Agreement. The International Obligations and the Other Bank Obligations of Borrower to Bank are secured by the International Security Agreements; and may also be secured by one or more other security agreements, collateral assignments and similar agreements executed and delivered by Borrower prior to and/or in connection with this Agreement; and may also be secured by other such documents and collateral executed and delivered by Borrower in the future ("Other Collateral"); so that from time to time some or all collateral securing the International Obligations may also secure the Other Obligations, and vice versa. Bank has advised Borrower that it is a condition of the WCGP that loans under the WCGP "be collateralized by a junior lien on all of the Borrower's assets securing the non-Eximbank guaranteed credit facility(ies)" extended by Bank to Borrower. The WCGP contemplates that upon Borrower's default with respect to the International Obligations, the Eximbank's guaranty of such obligations if called upon by Bank shall be honored by the Eximbank's acceptance of assignment of such obligations from Bank, together with such rights in collateral securing such obligations as provided for in the WCGP, in exchange for the Eximbank's payment of the guaranteed portion of such obligations to Bank (the "Assignment"); but in any event Bank also retaining after such Assignment its own rights in all collateral securing Other Obligations and the unguaranteed portion of the International Obligations, the priorities between the Eximbank and Bank being determined in accordance with the requirements of the WCGP. The parties therefore agree as follows: 1. Borrower agrees that in connection with the Assignment, Bank shall be entitled to assign (whether by outright assignment, grant of a beneficial interest or otherwise as Bank and Eximbank may mutually agree), and the Eximbank shall be entitled to accept, receive and enforce, such interests in the International Collateral and in the Other Collateral securing the International Obligations immediately prior to such Assignment, as may be agreed between the Eximbank and Bank subject to the requirements of the WCGP, Bank's retained interests in such collateral, and such other agreements and priorities as may be agreed by the Eximbank and Bank in connection with the Assignment or otherwise. 2. Borrower will execute such other and further agreements, certificates, filings, financing statements and other documents, and so such other acts and things, as Bank and Eximbank (following any Assignment) may request to assure all benefits contemplated by this Agreement are realized by Bank and Eximbank. 3. Borrower acknowledges and agrees that Bank's commitment to make Loans under the International Loan Agreement; the making of each Loan thereunder; and Bank's willingness in its discretion to extend credit creating Other Obligations of Borrower from time to time, are and shall be premised on Bank's continuing reliance on the guaranty of the International Obligations by Eximbank under the WCGP; and that the agreements herein are in furtherance and fulfillment of the requirements of the WCGP relied upon by the Eximbank in providing such guaranty; so that the all of the Loans made under the International Loan Agreement, and creation of any Other Bank Obligations from time to time prior to any Assignment, are and shall continue to be understood to be conditioned upon the execution and continued effectiveness of this Agreement, and the full and timely performance of all of its terms. 4. No security interest, lien, or other interest granted by Borrower, any guarantor or other person to Bank is released or limited in connection with the execution of this Agreement. Borrower confirms and ratifies each of the liens, security interests and other interests granted in each and all security agreements executed in connection with, related to, or securing the International Loan Agreement and each of the Other Obligations, each in accordance with its stated terms. 5. This Agreement shall become effective as of its Effective Date upon execution and delivery by each of the parties named in the signature lines below. This Amendment shall be included within the definition of "International Loan Documents" as used in the International Loan Agreement. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute but one and the same agreement. 6. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES OF AMERICA. THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS & COMMERCE CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective as of its Effective Date.
BORROWER: NATIONAL TANK COMPANY BANK: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION By: By: -------------------------------------------- -------------------------------------------- Name: Name: ------------------------------------------ ------------------------------------------ Title: Title: ----------------------------------------- ----------------------------------------- Address: ---------------------------------------
1 81 AMENDED AND RESTATED INTERNATIONAL REVOLVING NOTE $10,000,000.00 July 23, 1999 FOR VALUE RECEIVED, the undersigned, NATIONAL TANK COMPANY, a corporation organized under the laws of the State of Delaware and TOTAL ENGINEERING SERVICES TEAM, INC., a Louisiana corporation (collectively, the "Borrower"), HEREBY PROMISES TO PAY, jointly and severally, to the order of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce Bank National Association, a national banking association) (the "Bank"), on or before July 23, 2002 (the "Maturity Date"), the principal sum of Ten Million and 00/100 Dollars ($10,000,000.00), or, if less, the aggregate principal amount of Loans outstanding on the Maturity Date, in accordance with the terms and provisions of that certain International Revolving Loan Agreement dated as of June 30, 1997 by and between the Borrower and the Bank (as amended from time to time, the "International Loan Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the International Loan Agreement). The outstanding principal balance of this Note shall be due and payable as provided in the International Loan Agreement. The Borrower promises to pay interest on the unpaid principal balance of this Note from the date of any Loan evidenced by this Note until the principal balance thereof is paid in full. Interest shall accrue on the outstanding principal balance of this Note from and including the date of any Loan evidenced by this Note to but not including the Maturity Date at the rate or rates, and shall be due and payable on the dates, set forth in the International Loan Agreement. Any amount not paid when due with respect to principal (whether at stated maturity, by acceleration or otherwise), costs or expenses, or, to the extent permitted by applicable law, interest, shall bear interest from the date when due to and excluding the date the same is paid in full, payable on demand, at the Past Due Rate. Payments of principal and interest, and all amounts due with respect to costs and expenses, shall be made in lawful money of the United States of America in immediately available funds, without deduction, set-off or counterclaim to the Bank, or such other location as may be notified to the Borrower by the Bank, not later than 12:00 noon (Houston time) on the dates on which such payments shall become due pursuant to the terms and provisions set forth in the International Loan Agreement. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday, or public holiday on which the Bank is not open for business, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in computing interest in connection with such payment. All loans and advances and all payments and prepayments made hereon shall be recorded in the holder's records and such records shall be controlling, absent manifest error. -1- 82 In addition to all principal and accrued interest on this Note, the Borrower agrees to pay (a) all reasonable costs and expenses incurred by all owners and holders of this Note in collecting this Note through any probate, reorganization, bankruptcy or any other proceeding and (b) reasonable attorneys' fees when and if this Note is placed in the hands of an attorney for collection after default. All agreements among the Borrower and the Bank, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand being made on this Note or otherwise, shall the amount paid, or agreed to be paid, to the Bank for the use, forbearance, or detention of the money to be loaned under the International Loan Agreement and evidenced by this Note or otherwise or for the payment or performance of any covenant or obligation contained in the International Loan Agreement, this Note or in any other International Loan Document exceed the Highest Lawful Rate. If, as a result of any circumstances whatsoever, fulfillment of any provision hereof or of any of such documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by applicable usury law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if, from any such circumstance, the Bank shall ever receive interest or anything which might be deemed interest under applicable law which would exceed the Highest Lawful Rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of this Note or the amounts owing on other obligations of the Borrower to the Bank under any International Loan Document and not to the payment of interest, or if such excessive interest exceeds the unpaid principal balance of this Note and the amounts owing on other obligations of the Borrower to the Bank under any International Loan Documents, as the case may be, such excess shall be refunded to the Borrower. All sums paid or agreed to be paid to the Bank for the use, forbearance, or detention of the indebtedness of the Borrower to the Bank shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness until payment in full of the principal thereof (including the period of any renewal or extension thereof) so that the interest on account of such indebtedness shall not exceed the Highest Lawful Rate. Notwithstanding anything to the contrary contained in the International Loan Agreement or this Note, it is understood and agreed that if at any time the rate of interest which accrues on the outstanding principal balance of this Note shall exceed the Highest Lawful Rate, the rate of interest which accrues on the outstanding principal balance of this Note shall be limited to the Highest Lawful Rate, but any subsequent reductions in the rate of interest which accrues on the outstanding principal balance of this Note shall not reduce the rate of interest which accrues on the outstanding principal balance of this Note below the Highest Lawful Rate until the total amount of interest accrued on the outstanding principal balance of this Note equals the amount of interest which would have accrued if such interest rate had at all times been in effect. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between the Borrower and the Bank. This Note is entitled to the benefits of the International Loan Agreement, which International Loan Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events, for prepayments on account of principal -2- 83 hereof prior to the maturity hereof upon the terms and conditions and with the effect therein specified, and provisions to the effect that no provision of the International Loan Agreement or this Note shall require the payment or permit the collection of interest in excess of the Highest Lawful Rate. The obligations of the Borrower hereunder are secured by the International Security Documents. It is contemplated that by reason of prepayments or repayments hereon prior to the Maturity Date, there may be times when no indebtedness is owing hereunder prior to such date, but notwithstanding such occurrences, this Note shall remain valid and shall be in full force and effect as to Loans made pursuant to the International Loan Agreement subsequent to each such occurrence. Except as otherwise specifically provided for in the International Loan Agreement, the Borrower and any and all endorsers, guarantors and sureties severally waive grace, demand, presentment for payment, notice of dishonor or default, protest, notice of protest, notice of intent to accelerate, notice of acceleration and diligence in collecting and bringing of suit against any party hereto, and agree to all renewals, extensions or partial payments hereon, with or without notice, before or after maturity. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW. THIS NOTE AND THE OTHER INTERNATIONAL LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES; AND THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF, the Borrower has caused this Note to be executed and delivered by its officer thereunto duly authorized effective as of the date first above written. NATIONAL TANK COMPANY By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- TOTAL ENGINEERING SERVICES TEAM, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- -3- EX-10.24 14 STOCK OPTION AGREEMENT 1 EXHIBIT 10.24 NONSTATUTORY STOCK OPTION AGREEMENT AGREEMENT made as of the ____ day of _____, 19__, between NATCO GROUP INC., a Delaware corporation (the "Company" and ________________ ("Employee"). To carry out the purposes of the NATCO GROUP INC. EMPLOYEE STOCK INCENTIVE PLAN (the "Plan"), by affording Employee the opportunity to purchase shares of common stock of the Company ("Stock"), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Employee hereby agree as follows: 1. SURRENDER AND EXCHANGE OF PRIOR OPTION. Pursuant to a Nonstatutory Stock Option Agreement between Employee and the Company dated JUNE 30,1998 (the "PRIOR OPTION AGREEMENT"), Employee was granted an option (the "PRIOR OPTION") to purchase a number of shares of Stock equal to the number listed in Paragraph 2 below under the Plan at an exercise price per share as indicated in the Prior Option Agreement. Employee and the Company agree that the Prior Option Agreement and the Prior Option shall be void and of no further force and effect and will be surrendered and relinquished by Employee and canceled by the Company. In exchange for the surrender, relinquishment and cancellation of the Prior Option, the Company has granted Employee an option under the Plan which shall be governed by the Plan and the terms and conditions set forth in this Agreement. 2. GRANT OF OPTION. The Company hereby irrevocably grants to Employee the right and option ("Option") to purchase all or any part of an aggregate of 40,000 shares of Stock, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement. This Option shall not be treated as an incentive stock option within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code). 3. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the exercise of this Option shall be $8.81. 4. EXERCISE OF OPTION. Subject to the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company at its principal executive office addressed to the attention of its Chief Executive Officer, at any time and from time to time after the date of grant hereof, but, except as otherwise provided below, this Option shall not be exercisable for more than a percentage of the aggregate number of shares offered by this Option determined by the number of full years from the date of the Prior Option Agreement to the date of such exercise, in accordance with the following schedule: 2
PERCENTAGE OF SHARES NUMBER OF FULL YEARS BEGINNING 6/30/98 THAT MAY BE PURCHASED -------------------------------------- --------------------- Less than 1 year 0% 1 year 25% 2 years 50% 3 years 75% 4 years or more 100%
This Option may be exercised only while Employee remains an employee of the Company and will terminate and cease to be exercisable upon Employee's termination of employment with the Company, except that: (a) If Employee's employment with the Company terminates by reason of disability (within the meaning of section 22(e)(3) of the Code), this Option may be exercised in full by Employee (or Employee's estate or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) at any time during the period of one year following such termination. (a) If Employee dies while in the employ of the Company, Employee's estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee, may exercise this Option in full at any time during the period of one year following the date of Employee's death. (a) If Employee's employment with the Company terminates for any reason other than as described in (a) or (b) above, unless Employee voluntarily terminates such employment or such employment is terminated for cause, this Option may be exercised by Employee at any time during the period of three months following such termination, or by Employee's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) during a period of one year following Employee's death if Employee dies during such three-month period, but in each case only as to the number of shares Employee was entitled to purchase hereunder upon exercise of this Option as of the date Employee's employment so terminates. The Committee appointed by the Board of Directors of the Company to administer the Plan (the "Committee") may, in its sole discretion, advise Employee in writing, prior to a voluntary termination of Employee's employment, that such termination will be treated for purposes of this paragraph as an involuntary termination for a reason other than cause. As used in this paragraph, the term "cause" shall mean Employee's gross negligence or willful misconduct in performance of the duties of Employee's employment, or Employee's final conviction of a felony or of a misdemeanor involving moral turpitude. -2- 3 This Option shall not be exercisable in any event after the expiration of ten years from the date of grant hereof. Except as provided in Paragraph 4, the purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise (a) in cash (including check, bank draft or money order payable to the order of the Company), (b) by delivering to the Company shares of Stock having a fair market value equal to the purchase price, (c) any combination of cash or Stock, or (d) in a broker-financed "cashless exercise" pursuant to the procedures established by the Committee. No fraction of a share of Stock shall be issued by the Company upon exercise of an Option or accepted by the Company in payment of the purchase price thereof, rather, Employee shall provide a cash payment for such amount as is necessary to effect the issuance and acceptance of only whole shares of Stock. Unless and until a certificate or certificates representing such shares shall have been issued by the Company to Employee, Employee (or the person permitted to exercise this Option in the event of Employee's death) shall not be or have any of the rights or privileges of a shareholder of the Company with respect to shares acquirable upon an exercise of this Option. 5. WITHHOLDING OF TAX. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Employee for federal or state income tax purposes, Employee shall deliver to the Company at the time of such exercise or disposition such amount of money or shares of Stock as the Company may require to meet its obligation under applicable tax laws or regulations, and, if Employee fails to do so, the Company is authorized to withhold from any cash or Stock remuneration then or thereafter payable to Employee any tax required to be withheld by reason of such resulting compensation income. Upon an exercise of this Option, the Company is further authorized in its discretion to satisfy any such withholding requirement out of any cash or shares of Stock distributable to Employee upon such exercise. 6. STATUS OF STOCK. Employee understands that at the time of the execution of this Agreement the shares of Stock to be issued upon exercise of this Option have not been registered under the Securities Act of 1933, as amended (the "Act), or any state securities law, and that the Company does not currently intend to effect any such registration. Until the shares of Stock acquirable upon the exercise of the Option have been registered for issuance under the Act, the Company will not issue such shares unless the holder of the Option provides the Company with a written opinion of legal counsel, who shall be satisfactory to the Company, addressed to the Company and satisfactory in form and substance to the Company's counsel, to the effect that the proposed issuance of such shares to such Option holder may be made without registration under the Act. In the event exemption from registration under the Act is available upon an exercise of this Option, Employee (or the person permitted to exercise this Option in the event of Employee's death), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws. -3- 4 Employee agrees that the shares of Stock which Employee may acquire by exercising this Option shall be acquired for investment without a view to distribution, within the meaning of the Act, and shall not be sold, transferred, assigned, pledged or hypothecated in the absence of an effective registration statement for the shares under the Act and applicable state securities laws or an applicable exemption from the registration requirements of the Act and any applicable state securities laws. Employee also agrees that the shares of Stock which Employee may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. In addition, Employee agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Committee deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option. 7. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of either the Company, a parent or subsidiary corporation (as defined in section 424 of the Code) of the Company, or a corporation or a parent or subsidiary of such corporation assuming or substituting a new option for this Option. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee, and its determination shall be final. 8. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee. 9. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. -4- 5 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Employee has executed this Agreement, all as of the day and year first above written. NATCO GROUP INC. BY: ------------------------------------- TITLE: ------------------------------------- EMPLOYEE -5- EX-21.1 15 LIST OF SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 The following companies will constitute all of the subsidiaries of the Registrant as of the consummation of this offering:
- -------------------------------------------------------------------------------- STATE OR OTHER JURISDICTION OF SUBSIDIARY INCORPORATION OR ORGANIZATION - -------------------------------------------------------------------------------- National Tank Company (1) Delaware - -------------------------------------------------------------------------------- NTC Technical Services, Inc. (1) Delaware - -------------------------------------------------------------------------------- NATCO (U.K.) Ltd. (2) United Kingdom - -------------------------------------------------------------------------------- The Cynara Company (3) Delaware - -------------------------------------------------------------------------------- NATCO Oilfield Construction, Inc. (3) California - -------------------------------------------------------------------------------- Oilfield Construction Company, Inc. (4) California - -------------------------------------------------------------------------------- NATCO Japan Company, Ltd. (5) Japan - -------------------------------------------------------------------------------- National Tank Company S.A. (3) Venezuela - -------------------------------------------------------------------------------- NATCO Canada, Ltd. (3) Canada - -------------------------------------------------------------------------------- NATCO London, Inc. (3) Delaware - -------------------------------------------------------------------------------- Total Engineering Services Team, Inc. (3) Louisiana - -------------------------------------------------------------------------------- TEST, Inc. (6) Louisiana - -------------------------------------------------------------------------------- TEST International (6) Cayman Islands - -------------------------------------------------------------------------------- TPS Nigeria Ltd. (7) Nigeria - -------------------------------------------------------------------------------- TEST Saudi Arabia Ltd. (7) Saudi Arabia - --------------------------------------------------------------------------------
(1) Wholly-owned subsidiary of the Registrant (2) 99%-owned subsidiary of [NATCO Holdings, Inc. (3) Wholly-owned subsidiary of National Tank Company (4) Wholly-owned subsidiary of NATCO Oilfield Construction, Inc. (5) 85%-owned subsidiary of National Tank Company (6) Wholly-owned subsidiary of Total Engineering Services Team, Inc. (7) 50%-owned subsidiary of Total Engineering Services Team, Inc. EX-23.1 16 CONSENT OF KPMG LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors NATCO Group Inc. We consent to the use of our report dated March 5, 1999, related to the consolidated financial statements of NATCO Group Inc. as of March 31, 1998 and December 31, 1998, and for each of the years in the two year period ended March 31, 1998, and the nine month period ended December 31, 1998, included herein, and the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG LLP Houston, Texas September 30, 1999 EX-23.2 17 CONSENT OF KPMG LLP 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors Engineering Specialties, Inc. and Engineering Specialties FSC, Inc. We consent to the use of our report dated September 24, 1999, related to the combined financial statements of Engineering Specialties, Inc. and Engineering Specialties FSC, Inc. (ESI) as of and for the year ended December 31, 1998, included herein, and the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG LLP New Orleans, Louisiana September 30, 1999 EX-23.3 18 CONSENT OF KPMG LLP 1 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT The Board of Directors Porta-Test International Inc. We consent to the use of our reports dated September 17, 1999, related to the financial statements of Porta-Test International Inc. as of and for the year ended June 30, 1999, included herein, and the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG LLP Houston, Texas September 30, 1999 EX-23.4 19 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 27, 1998, except for Note 15, as to which the date is May 29, 1998, with respect to the financial statements of The Cynara Company included in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-48851) and related Prospectus of NATCO Group Inc. for the registration of its common stock. /s/ Ernst & Young LLP Houston, Texas September 28, 1999 EX-27.1 20 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS 9-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 APR-01-1998 JUN-30-1999 DEC-31-1998 1,428 3,263 0 0 35,768 43,164 560 579 19,731 22,254 62,873 74,602 29,948 28,282 11,828 9,988 105,468 118,412 32,701 43,136 39,065 41,777 0 0 0 0 91 91 24,247 24,099 105,468 118,412 86,175 145,611 86,175 145,611 65,821 115,521 65,821 115,521 0 0 0 0 1,574 1,988 625 1,260 479 608 146 652 0 0 0 0 0 0 146 652 0.02 0.08 0.01 0.07
-----END PRIVACY-ENHANCED MESSAGE-----