-----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, AbP8lljgLxhQbnjM43MS0bOBCcviFBFcHybeY8sVrN4fWmMpSIcEw9zHtyF7mmo6 tpD1bj6XuePMfbN56fMHfA== 0000912057-00-018122.txt : 20000427 0000912057-00-018122.hdr.sgml : 20000427 ACCESSION NUMBER: 0000912057-00-018122 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED PRODUCTS CORP /DE/ CENTRAL INDEX KEY: 0000003941 STANDARD INDUSTRIAL CLASSIFICATION: 3523 IRS NUMBER: 380292230 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05530 FILM NUMBER: 601476 BUSINESS ADDRESS: STREET 1: 10 S RIVERSIDE PLZ STREET 2: SUITE 400 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3124541020 10-K 1 10-K - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) ------- OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) ------- OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-5530 ALLIED PRODUCTS CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 38-0292230 - - -------------------------------------------- -------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606 - - -------------------------------------------- -------------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 454-1020 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered - - -------------------------------------------- -------------------------------------------- COMMON STOCK--$.01 PAR VALUE NEW YORK AND PACIFIC
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ As of March 31, 2000, 11,869,664 shares of common stock were outstanding, and the aggregate market value of the shares of common stock (based upon the closing price on the New York Stock Exchange) held by nonaffiliates of the Company was approximately $29,255,115. Determination of common stock ownership by affiliates was made solely for the purpose of responding to this requirement, and the Registrant is not bound by this determination for any other purpose. The Company's definitive Proxy Statement (which will be filed at a later date) for the Annual Meeting of Stockholders scheduled to be held May 24, 2000 and Annual Report to security holders for the year ended December 31, 1999 are incorporated by reference in Part III and Part IV herein. The Exhibit Index is located on page 55. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Allied Products Corporation ("Company") was organized under Delaware law in 1967 as the successor to a Michigan corporation which was formed in 1928. Its principal executive offices are at 10 South Riverside Plaza, Chicago, Illinois 60606 and its telephone number is (312) 454-1020. During 1999, the Company's operations were divided into two business segments--the Agricultural Products Group (which consisted of the Bush Hog and Great Bend divisions) and the Industrial Products Group. On March 7, 2000, the Company (i) transferred to a newly organized limited liability company ("New Bush Hog") substantially all of the assets and certain liabilities of the Bush Hog and Great Bend divisions constituting its Agricultural Products Group in exchange for all of the outstanding membership interests of New Bush Hog (ii) sold membership interests representing 80.1% of the total outstanding membership interests of New Bush Hog to a limited liability company owned by members of the Henry Crown family of Chicago ("Bush Hog Investors") for a purchase price of approximately $126,500,000 subject to post closing adjustments. On March 23, 2000, the Company agreed to sell its remaining New Bush Hog membership interest to Bush Hog Investors on or before June 30, 2000 for a purchase price of $31,426,134, less net balance sheet adjustments of New Bush Hog from March 7 through the closing. The Company anticipates that the purchase price as adjusted will be approximately $28,000,000. The operations of the former Agricultural Products Group are reflected in the accompanying financial statements as discontinued operations. Allied Products Corporation manufactures large metal stamping presses through its Industrial Products Group which consists of the Verson, Precision Press Industries, Verson Pressentechnik and the Verson Standard Products Division operations. The Company's Agricultural Products Group, which manufactured implements and machinery used in agriculture, landscaping and ground maintenance businesses, was sold subsequent to the end of 1999--see Note 3 of Notes to Consolidated Financial Statements. The Company's Coz division, which was part of the Industrial Products Group and supplied thermoplastic compounds and additives, was sold in the fourth quarter of 1997. All manufacturing operations are within the United States. Approximately 13%, 4% and 8% of the Company's net sales from continuing operations in 1999, 1998 and 1997, respectively, were exported principally to Canada and Mexico. INDUSTRIAL PRODUCTS GROUP PRODUCTS. The Verson division manufactures a broad line of both medium and large technologically advanced mechanical and hydraulic metal forming presses. These products are used in the manufacture of components for the automotive, appliance, office equipment, farm equipment, ordnance, aerospace and general metal working industries. A transfer press is a specialized mechanical press that combines a series of operations by transferring a work piece from one station to another inside of a single press. Each station in the press has a separate die that is individually adjustable. This process allows all operations, from initial draw to finished product, to take place in one press, resulting in increased output and reduced labor expense. Prices vary by type and size. Size categories for transfer presses range from "A" (largest) to "D" (smallest). An "A" transfer press is generally 13 to 15 feet wide, 80 to 90 feet long and stands four stories tall. By comparison, a "B" transfer press is approximately 10 feet wide, 60 feet long and four stories tall. The difference between these machines is the component part size they stamp. Investment in a large transfer press can range from $15-$35 million. Approximately 10-15% of Verson's revenue was generated by customer special services. Items included in the special services area are: repair parts, complete remanufacturing of used presses, contract machining and manufacturing, die consultation and training. In addition to the fabrication and machining of components, Verson provides complete tooling and engineering services necessary for turnkey systems. Complimenting the manufacturing of presses by Verson, a new division of Allied Products, Precision Press Industries ("PPI"), began operation in November 1997. PPI is engaged in the fabrication of large components weighing up to 240,000 pounds and is located in a 40,000 square foot facility in Hobart, Indiana. The Company believes PPI uses some of the most sophisticated welding machinery and processes available. Supplier agreements, production scheduling and control methods enable PPI to work in a just-in-time format. Extensive employee training and ongoing process documentation activities are intended to provide that PPI operates in accordance with ISO9000 guidelines. The division currently does work exclusively for the Verson division, but retains the capability to perform custom fabrication work for third party customers. 2 During the fourth quarter of 1998, the Company formed a joint venture with Theodor Grabener GmbH & Co. KG of Germany and Automatic Feed Company of Napoleon, Ohio, that will help the two American companies more effectively penetrate the European market for large stamping presses and related systems. The new entity, Verson Pressentechnik GmbH, is located in Netphen-Werthenbach, Germany, and is expected to benefit from the resources of the Grabener group of companies. The joint venture, in which Verson holds a 60% stake, will act as the main commercial and technical support arm for the activities of both Verson and Automatic Feed in Europe. Its European staff will have the responsibility of marketing Verson and Automatic Feed products to customers throughout Europe. Drawing on the strengths of the Grabener group of companies, the joint venture also will assist in customizing Verson and Automatic Feed equipment to meet the requirements of European customers, and it will provide on-going training and service support once the equipment is up and running at a customer's plant. During the first quarter of 2000, the Company formed the Verson Standard Products Division. The new division is located in Williamsville, New York and will compete in the low tonnage press market offering standard designs. Manufacturing activities will be primarily outsourced. On October 14, 1997, the Company sold its Coz division. Coz provided a complete line of thermoplastic resins and related services to the plastic molding and extrusion industry. MARKETING. Verson's marketing group department is headed by a Vice President of Marketing and Sales, with responsibility for all Verson products and services. Verson sells and promotes its products by using a direct sales force that concentrates in strategically significant markets and contract representatives which focus on lower volume potential markets. Verson's major customers are the U.S. automobile manufacturers (both U.S. and foreign owned) and first and second tier automotive parts producing companies, which, on average, account for approximately 85-90% of Verson's annual revenue. The other major market served by Verson is the appliance industry where the division's customers include major brand names. The Company believes Verson is the technology leader, having designed the world's first transfer press in 1939, the world's first electronic feed in 1981, a cross bar feed in 1992 which significantly improves production, and more recently, a Dynamic Orientation-Registered Trademark- system which further improves production and saves space. COMPETITION. There are only a few companies in the world that supply large transfer press systems similar to those provided by Verson. Verson is now the only American owned company competing in this upper end segment. Principal competition comes from German and Japanese manufacturers. Press manufacturers compete on the basis of technology, capability, reliability and price. The barriers to entry for new competitors are high due to the large capital expenditures required. INDUSTRY. Domestic automobile manufacturers are seeking to become more cost-effective by requiring quality parts, implementing just-in-time concepts, obtaining price reductions from suppliers, redesigning cost out of automobiles, and restructuring and automating their manufacturing processes. In response to these market factors and an unprecedented incoming order rate in 1994, the Verson division completed a 40,000 square foot expansion of its assembly facilities in 1995. An additional 117,000 square foot expansion of its assembly facilities was completed at the end of 1998. These additions have significantly expanded the division's capacity for manufacturing large transfer presses and have increased the divisions's fixed costs. SALES BACKLOG Sales backlog associated with continuing operations as of December 31, 1999 was $51,401,000 compared to $145,268,000 at December 31, 1998. Over 90% of the backlog orders are expected to be filled prior to the end of 2000. EMPLOYEES The Company's continuing operations currently employ approximately 800 individuals, including approximately 500 employees at the Verson division who are represented by a union. While the Company considers its relations with its Verson division employees to be satisfactory, the Company suffered a strike during the summer of 1997 at the expiration of the last union contract. The contract agreed to upon settlement of the strike expires in June 2000. RAW MATERIALS AND SOURCES OF SUPPLY The principal raw materials used by all of the Company's manufacturing operations include steel and other metals and purchased components. During 1999 the materials needed by Allied Products generally were available from a variety of sources in adequate quantities and at prevailing market prices. No one supplier is responsible for supplying more than 10% of the principal raw materials used by Allied Products. 3 PATENTS, TRADEMARKS AND LICENSES Allied Products owns the federally registered trademarks "Verson," which is used on its metal forming presses, and "ETF", "MultiMode" and "Dynamic Orientation" which are used on the electronically controlled transfer feeds manufactured by the Verson division. Allied Products considers each of the above registered trademarks to be material to its business. While Allied Products believes that the other trademarks used by each of its operations are important, none of the patents, licenses, franchises or such other trademarks are considered material to the operations of its business. MAJOR CUSTOMERS Approximately 66%, 52% and 55% of the Company's net sales from continuing operations in 1999, 1998 and 1997, respectively, were derived from sales by the Industrial Products Group to the three major U.S. automobile manufacturers. During 1999, Daimler-Chrysler and General Motors accounted for approximately 44% and 18%, respectively, of net sales from continuing operations and Ford accounted for less than 10% of net sales from continuing operations. In addition, Magna Corporation accounted for approximately 13% of net sales from continuing operations in 1999. With the exception of the customers noted above, no material part of the Company's business is dependent upon a single customer. SEASONALITY Sales and cash receipts for the Company's continuing operations are not generally affected by seasonality. ENVIRONMENTAL FACTORS Reference is made to Note 10 of Notes to Consolidated Financial Statements regarding environmental factors and matters. DISCONTINUED OPERATIONS--AGRICULTURAL PRODUCTS GROUP The Company's former Agricultural Products Group consisted principally of two divisions, the Bush Hog division and the Great Bend division. The Bush Hog division offered a comprehensive line of implements and machinery used by farmers, ranchers, large estate owners, commercial turf mowing and landscape contractors, golf courses and municipalities. Implements and machinery sold by Bush Hog include rotary cutters, tractor mounted loaders, hay mowers, tillers, cultivators, backhoes, zero-turn mowers, landscape tools, and turf and golf course mowing equipment. Bush Hog rotary cutters are used to shred stalks after the crop has been harvested, to mow pasture, for land maintenance and for governmental right-of-way mowing. Front end loaders are used by farmers and ranchers for material handling Cultivators are used for weed control after crops have been planted. The Great Bend division was a manufacturer of front end loaders with significant geographical marketing emphasis in the Midwest, Southwest and high plains areas of the United States. Like Bush Hog, Great Bend offered a complete line of quality front end loaders, with particular emphasis on high lift loaders which adapt to higher horsepower tractors. FORWARD-LOOKING STATEMENTS Some of the information contained in the above discussion may contain forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate," "expect," "estimate," "objective," "possible" and similar expressions. Actual results may vary. Reference is made to the "Safe Harbor Statement" contained under Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations. 4 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the names and ages of the Company's Executive Officers, together with all positions and offices held with the Company by such officers as of March 17, 2000.
NAME POSITION WITH ALLIED PRODUCTS AGE - - ---- ----------------------------- -------- Richard A. Drexler.......... Chairman, President and Chief Executive and Financial Officer 52 Robert J. Fleck............. Vice President--Accounting, Chief Accounting and Administrative Officer 52 Mark C. Standefer........... Vice President, General Counsel and Secretary 45
No family relationships exist among the executive officers, however, Mr. Richard A. Drexler is the son of Lloyd A. Drexler, a director of the Company. In conjunction with the sale of an 80.1% interest in the Agricultural Products Group, Bobby Middlebrooks, formerly a Senior Vice President of the Company, resigned from the Company on March 7, 2000. Each executive officer has been employed by Allied Products for over 10 years. Pursuant to Allied Products' By-laws, each officer is elected annually by the Board of Directors. Mr. Drexler, who became Chairman in 1993, has been President and a Director of Allied Products since 1982 and has been Chief Executive Officer since 1986 and Chief Financial Officer since 1998. Mr. Drexler served as Acting Chief Financial Officer from 1991 to 1992, Chief Financial Officer from 1989 to 1990 and Chief Operating Officer from 1981 to 1986. He was also Chief Financial Officer from 1977 to 1987. Prior to becoming President, Mr. Drexler served as Executive Vice President, Senior Vice President of Administration, Vice President of Administration, Staff Vice President--Development, and Director of Planning. Mr. Drexler is also acting Chairman and Chief Executive Officer of the Verson division of the Industrial Products Group. Mr. Fleck has been Vice President--Accounting since 1985, Chief Accounting Officer since 1986 and Chief Administrative Officer since 1997. From 1983 to 1985 he was Staff Vice President--Accounting and prior to that he served as Corporate Controller and in various other accounting positions for Allied Products. Prior to joining Allied Products in 1974, he was an internal auditor with Marquette Cement Company, a national cement manufacturing company. Mr. Standefer was elected Vice President, General Counsel and Secretary in 1997. From 1995 to 1997 he was Staff Vice President, Assistant General Counsel and Assistant Secretary, and from 1986 to 1995 Assistant General Counsel and Assistant Secretary. Mr. Standefer joined Allied Products in 1984 as Staff Attorney. Prior to joining Allied Products, he was Staff Attorney for Sun Electric Corporation. SIGNIFICANT EMPLOYEES OF THE COMPANY The following table sets forth the name and age of a significant employee of the Company, together with all positions and offices held with the Company by such employee as of March 17, 2000.
NAME POSITION WITH ALLIED PRODUCTS AGE - - ---- ----------------------------- -------- David J. Nelson............. Executive Vice President and Chief Operating Officer of the Verson Division 39
Mr. Nelson has been Executive Vice President and Chief Operating Officer of the Verson Division since 1999. From 1997 to 1999 he was Vice President of Operations. Mr. Nelson joined the Verson Division in 1984 as a Project Engineer in Tooling, then moved to the Marketing Group in which he held various positions including Vice President of Sales & Marketing. 5 ITEM 2. PROPERTIES Manufacturing operations of the Industrial Products Group are conducted in Chicago, Illinois and Hobart, Indiana in owned facilities containing approximately 561,000 square feet. In addition, small offices located in Detroit, Michigan, Williamsville, New York and Netphen-Werthenbach, Germany are being leased by the Industrial Products Group. The Corporate Offices, located in Chicago, Illinois, are also leased. Management is of the opinion that all facilities are of sound construction, in good operating condition and are adequately equipped for carrying on the business of the Company. ITEM 3. LEGAL PROCEEDINGS Reference is made to Note 10 of Notes to Consolidated Financial Statements with respect to the Company's involvement in legal proceedings as a defending party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 6 PART II ITEM 5. MARKET PRICE OF THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock is listed on the New York and Pacific Stock Exchanges. The price range of the common stock on the New York Stock Exchange is as follows:
- - ----------------------------------------------------------------------------------------------------------------------------- BEGINNING OF 1999 YEAR END OF YEAR 1999 QTR. HIGH LOW - - ----------------------------------------------------------------------------------------------------------------------------- Common $ 6 5/16 $3 9/16 1 $ 7 1/2 $ 2 15/16 - - ----------------------------------------------------------------------------------------------------------------------------- 2 5 7/8 2 1/2 - - ----------------------------------------------------------------------------------------------------------------------------- 3 5 5/8 3 - - ----------------------------------------------------------------------------------------------------------------------------- 4 4 7/8 3 3/16 - - ----------------------------------------------------------------------------------------------------------------------------- - - ------------------------------------- ------------------- 1999 DIVIDEND - - ------------------------------------- ------------------- Common $.0400 - - ------------------------------------- .0400 - - ------------------------------------- .0400 - - ------------------------------------- .0400 - - -------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------- BEGINNING OF 1998 YEAR END OF YEAR 1998 QTR. HIGH LOW - - ----------------------------------------------------------------------------------------------------------------------------- Common $24 $6 5/16 1 $25 3/16 $20 1/4 - - ----------------------------------------------------------------------------------------------------------------------------- 2 24 3/4 20 1/16 - - ----------------------------------------------------------------------------------------------------------------------------- 3 22 7/8 6 3/16 - - ----------------------------------------------------------------------------------------------------------------------------- 4 8 7/8 5 7/8 - - ----------------------------------------------------------------------------------------------------------------------------- - - ------------------------------------- ------------------- 1998 DIVIDEND - - ------------------------------------- ------------------- Common $.0400 - - ------------------------------------- .0400 - - ------------------------------------- .0400 - - ------------------------------------- .0400 - - -------------------------------------
As of March 17, 2000, the approximate number of holders of record of the Company's common stock ($.01 par value) was 2,200. The Company paid no dividends from 1982 until 1995. Restrictions from paying dividends were removed in 1995. Subsequent to the end of 1995, the Company increased its quarterly dividend from $.0167 per share to $.0333 per share. During the third quarter of 1997, the Company increased its quarterly dividend to $.04 per share. Subsequent to the end of 1998, dividend payments were limited to $2,000,000 per year under the Second Amended and Restated Credit Agreement and the First Amendment and Waiver to the Credit Agreement. On March 16, 2000, the Company announced that it had suspended the payment of quarterly dividends. The payment of cash dividends is not permitted under a loan agreement entered into effective March 29, 2000--see Note 5 of Notes to Consolidated Financial Statements. ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------- ------------- Net sales from continuing operations (C)....................... $143,775,000 $137,020,000 $151,091,000 $166,060,000 $150,757,000 Income (loss) from continuing operations (C)....................... $(34,340,000) $(29,786,000) $ 4,840,000 $ 9,210,000 $ 27,642,000 Earnings (loss) per common share (diluted) from continuing operations (A)(B)(C)................. $(2.90) $(2.51) $.39 $.67 $1.89 Total assets........................... $256,611,000 $275,804,000 $195,064,000 $172,509,000 $167,303,000 Long-term debt (including capitalized leases and redeemable preferred stock) (D)........................... $ 2,351,000 $ 2,298,000 $ 670,000 $ 489,000 $ 315,000 Cash dividend declared per common share (A)............................ $.16 $.16 $.147 $.133 $.05
- - -------------------------- (A) Restated prior to 1997 to reflect the effect of a three-for-two stock split in 1997. (B) Restated prior to 1997 to reflect the effect of adopting SFAS 128--Earnings per Share--in 1997. (C) Restated prior to 1999 to reflect the effects of discontinued operations--see Note 3 of Notes to Consolidated Financial Statements. (D) Includes debt associated with discontinued operations. The accompanying Notes to Consolidated Financial Statements are an integral part of this summary. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW SUBSEQUENT EVENT: SALE OF AGRICULTURAL PRODUCTS GROUP On March 7, 2000, the Company (i) transferred to a newly organized limited liability company ("New Bush Hog") substantially all of the assets and certain liabilities of the Bush Hog and Great Bend divisions constituting its Agricultural Products Group in exchange for all of the outstanding membership interests of New Bush Hog and (ii) sold membership interests representing 80.1% of the total outstanding membership interests of New Bush Hog to a limited liability company owned by members of the Henry Crown family of Chicago ("Bush Hog Investors") for a purchase price of approximately $126,500,000 subject to post closing adjustments. The estimated pretax gain on the sale of approximately $39,900,000 will be recorded in the first quarter of 2000. Immediately following the closing, New Bush Hog borrowed approximately $18,000,000 and distributed the proceeds to its members, including approximately $3,600,000 to the Company. In contemplation of the transaction and to help finance the build up of receivables and inventories in the Agricultural Products Group during December 1999 and January and February 2000, the Company borrowed $5,000,000 from an affiliate of Bush Hog Investors. The loan was repaid on the closing of the transaction on March 7, 2000. Simultaneously with the closing, the Company borrowed $18,000,000 from LaSalle Bank, N.A. secured by its 19.9% membership interest in New Bush Hog. The Company applied a portion of these new borrowings, together with the distribution from New Bush Hog and the cash proceeds received from Bush Hog Investors, net of fees and expenses, to repay the Company's current outstanding bank indebtedness and amounts due to the Bush Hog Investors affiliate. On March 23, 2000, the Company agreed to sell its remaining New Bush Hog membership interest to Bush Hog Investors on or before June 30, 2000 for a purchase price of $31,426,134, less net balance sheet adjustments of New Bush Hog from March 7, 2000 through the closing. The Company anticipates that the purchase price as adjusted will be approximately $28,000,000. This sale was driven, in part, by the Company's need for additional liquidity and, in part, as a pre-condition to obtaining further credit. The Company will repay its $18,000,000 loan with a portion of the proceeds of the sale of its remaining New Bush Hog interest. On March 29, 2000, the Company entered into a credit agreement with Foothill Capital Corporation which provides the Company with a line of credit of up to approximately $30,000,000 subject to borrowing base limitations. With the above described disposition of the Agricultural Products Group, the Company has included the operations of the Agricultural Products Group, an allocation of all direct financing, administrative, other expenses and income taxes and a pro rata allocation of interest expense (based upon the group's proportionate share of consolidated invested capital) under the caption "Discontinued operations, net of tax" in the accompanying Consolidated Statements of Income (Loss). Previously issued Consolidated Statements of Income (Loss) have been revised to reflect the effect of the discontinued operations. The Company's remaining operations consist of the operations of the Industrial Products Group. VERSON'S OPERATING PROBLEMS In August 1996 and April 1997, the Company's Verson division received major orders from Ford and General Motors, respectively, for the design and manufacture of a total of six automated, multi-station stamping presses. Ford ordered two and General Motors ordered four of the presses. All six of the presses incorporated a new state-of-the-art "three-slide" design which was considered superior in speed and efficiency to any transfer press previously manufactured. Verson believes that it was the first manufacturer to design and manufacture a stamping press incorporating this design. These orders were to be completed over a three-year period from 1997 through 1999. The contracts for the two presses to be manufactured for Ford specified delivery in January and April of 1998, while the contracts for the four presses to be manufactured for General Motors specified delivery in February, April, August, and October of 1999. By agreement, the specified delivery dates were revised to May, August, September, and December of 1999 shortly after the orders were accepted. In June 1997 and May 1998, Verson received orders from Chrysler Corporation for four identical large automated multi-station stamping presses with two slides only, but incorporating other new design features. The orders called for completion of these presses during 1998 and 1999. Projected revenues from these major orders for a total of ten presses approximated $195,000,000. While Verson was designing and building these multi-slide presses described above, the division also accepted orders to manufacture and deliver approximately 15 smaller presses. Most of these presses were to be delivered between November of 1998 and September of 1999. While these presses were of a less complicated 8 design, the combined impact on engineering and production was significant. In hindsight, it appears that when added to Verson's other press business, the orders for the ten large, newly designed multi-slide presses severely strained Verson's then existing press manufacturing capacity. During 1997 and 1998 the Company took steps to expand Verson's facility, hire more engineering and manufacturing staff and increase its total capacity. The cost of the physical expansion at Verson was approximately $30,000,000, and included the addition of approximately 117,000 square feet to the Verson assembly building plus other infrastructure improvements. The expansion was not completed early enough to alleviate production scheduling difficulties, however. The expansion in fixed assets together with significant increases in indirect labor increased Verson's overhead costs. In addition, Verson experienced significant difficulties during 1998 in the manufacture of the multi-slide and other presses under the above-described orders in a timely and cost effective manner. The decline in manufacturing efficiency was traceable in part to overcrowded conditions and in part to the inefficiencies which can occasionally arise in the manufacture of new products. These manufacturing delays in turn caused delays and additional costs in the manufacture of virtually all presses in 1998 and led Verson to rely heavily on subcontractors for the manufacture of certain components in order to meet delivery commitments. As described in more detail below, difficulties primarily associated with the manufacture of presses under the major orders described above and the resulting stresses on manufacturing capacity caused Verson and the Company to incur losses in 1998 and 1999. These difficulties, along with a decline in new press orders during 1999 and an increased cost structure which has adversely affected margins on new orders are expected to continue to have a negative impact on earnings in 2000. Verson began work in 1997 on the two presses covered by the Ford order. Verson revised its cost estimates on these presses by $3,700,000 in February 1998 and at the same time increased its cost estimates on other presses by $1,600,000. During the third quarter of 1998, Verson experienced difficulties in the manufacture of the two Ford presses, and significantly revised its cost estimates on all six of the three-slide presses (the Ford and GM orders), as well as on other presses. As a consequence, the Company announced the recognition of a pretax charge of approximately $16,000,000. Approximately $5,300,000 of this charge was subsequently recorded in 1997. In the fourth quarter of 1998, events of the third quarter continued to have a significant negative impact on costs to complete projects. Given these ongoing circumstances and concern over further escalation of costs, Verson undertook a comprehensive review of the compilation of costs and revenue recognition associated with each press in relation to revised delivery schedules, current estimated costs to complete the presses in production and available manufacturing capacity. Verson recorded additional changes to cost estimates of approximately $21,000,000 to reflect the recognition of estimated losses on certain orders in process and a revision of estimated costs on other orders. Verson's increased workload translated into the need for additional manufacturing, office and hourly personnel and to increases in recruitment costs and exempt and hourly wages along with related fringe benefits. The pressure to meet delivery schedules resulted in increased shop overtime and the new facility added higher depreciation costs. A prolonged computer system implementation and the lower productivity associated with recently hired employees altered the historical relationship between direct and indirect hours. The Company believes that the reduction in gross margins for the ten large presses described above as well as its standard press business during 1998 and 1999 was attributable primarily to unanticipated subcontracting costs associated with the overload in the Verson factory and increases in overhead costs. Verson's backlog as of December 31, 1999, composed of revenues totaling $51,401,000 to be recorded in future years on orders received which had a total sales value of approximately $211,000,000. The backlog included revenues of approximately $26,000,000 on orders for which estimated losses were recorded in 1998 and 1999 and on which no gross margin is expected to be recognized in 2000 and 2001. The December 31, 1999 backlog for Verson also included future revenue of approximately $3,000,000 to be recorded principally in 2000 for which Verson anticipates gross margins lower than levels realized prior to 1998. The remaining backlog at December 31, 1999 (approximately $22,000,000) included future press revenues as well as orders for parts and field services with anticipated pre-1998 historical gross margins. The total backlog of $51,401,000 compares to a backlog of $145,268,000 a year earlier. The low level of Verson's backlog at December 31, 1999 reflects the relatively low level of new press orders booked in 1999--approximately $24,000,000, compared to in excess of $100,000,000 in 1998. In view of the low backlog and the portion of the backlog representing no margin work, the Company anticipates that revenues from continuing operations will decline significantly in 9 2000 and the Company will continue to incur operating losses. In view of the difficulties in estimating costs encountered by Verson in 1998 and the first half of 1999, the Company during 1999 did not recognize any gross profit margin on press orders until the particular press in process reached a point in production where the gross profit margin could be reasonably estimated--see Note 1 of Notes to Consolidated Financial Statements--Revenue Recognition. This method of accounting for gross margins on presses will be continued until such time as Verson is satisfied that its methods of estimating costs have been validated. The deferral of the recognition of gross margins until the later stages of the production of a press may result in fluctuations in quarter-to-quarter and year-to-year results. The Company's difficulties in completing orders during 1998 and 1999 could adversely affect its relationships with one or more of its customers and therefore could have a negative impact on the Company's ability to obtain future business from such customers. In particular, the Company experienced delays in completing presses for each of the three major auto manufacturers during 1998 and 1999. Together these customers accounted for approximately 52% and 66% of the Company's sales from continuing operations in 1998 and 1999, respectively. The Company also experienced delays in completing many of its smaller presses. In response to General Motors' concerns that the Company's cash flow problems would further delay or preclude the Company from completing four presses that were in various stages of production, the Company recently entered into amendments to purchase orders with General Motors. Under the terms of the amendments, the Company and General Motors agreed to revised shipping, payment and testing schedules. Most of the components of the first two presses were shipped in the fall of 1999 and the first quarter of 2000. Delivery dates (and related payments) for the third and fourth presses have been extended so that the components of the last press will not be shipped until the fourth quarter of 2000 and final payment will not be received until the first quarter of 2002, following completion of assembly and testing at the General Motors facility. The third press must be assembled and tested at Verson by the end of January 2001. Upon fulfillment of certain conditions set forth in the amendments, General Motors will waive and release the Company from all claims arising from or attributable to the Company's alleged late delivery defaults on all presses and will accept delivery of the last two presses covered by this order. However, General Motors has reserved the right to cancel its order for the last two presses, if the Company at any time fails to provide reasonable assurances regarding its financial condition and continuing ability to complete the presses pursuant to the revised schedule. Such cancellation could have a material adverse effect on the Company. The Company's work-in-process inventories at December 31, 1999 included costs of components for the last two presses totaling $21,357,000. In addition, the Company also has had discussions with some of its suppliers who have expressed concern that the Company's financial condition has caused increasingly slower payment on invoices. To date, the Company has been able to negotiate with its major suppliers to continue to supply the Company with the raw materials necessary for the Company to fulfill its press orders, but there can be no assurance that such deliveries will continue if the Company is unable to timely pay its suppliers. OPERATING RESULTS The Company's operations consist of one business segment--the Industrial Products Group--plus the Corporate Office. Since the sale of the Company's Coz division in 1997, the Industrial Products Group consists of the Company's Verson, Precision Press Industries ("PPI") and Verson Pressentechnik operations. PPI was established in the fourth quarter of 1997 and is engaged in the fabrication of large components and the assembly of small presses for the Verson division. In October 1998, the Company's Verson division formed a joint venture with Theodor Grabener GmbH & Co., KG of Germany and Automatic Feed Company of Napoleon, Ohio, that will help the two American companies more effectively penetrate the European market for large stamping presses and related systems. The new entity, Verson Pressentechnik GmbH, is located in Netphen-Werthenbach, Germany. 1999 COMPARED TO 1998 CONTINUING OPERATIONS Net sales from continuing operations for 1999 were $143,775,000 compared to net sales from continuing operations of $137,020,000 reported in 1998. Loss before taxes from continuing operations was $34,340,000 in 1999 compared to the loss before taxes from continuing operations of $35,999,000 in the prior year. The relatively modest reduction in the loss in 1999 was primarily attributable to an improvement in gross margins, offset in part by an increase in interest expense. The net loss for 1999 was $26,765,000 ($2.26 per common share-diluted) compared to a net loss of $14,113,000 ($1.19 per common share-diluted) in 1998. The increase in net sales was attributable to increased revenues recognized on the production of 10 larger presses (size B and higher) in the current year. During 1999 the Company substantially completed production on orders for four large presses from Chrysler and continued production on the General Motors order for four large presses. Net sales of smaller presses as well as other products (parts, rebuilding of presses, etc.) in 1999 did not change significantly from levels of the prior year. In both 1999 and 1998, the Company reported a gross loss (i.e., cost of goods sold exceeded revenues). In 1999, the cost of goods sold exceeded revenues by $4,186,000, while in 1998 the amount was $10,094,000. Two factors which affected the negative margins reported in 1998 continued to affect margins in 1999. First, the Industrial Products Group's sales backlog at December 31, 1998 included revenues of approximately $50,000,000 on loss jobs. Additional losses were recorded on those jobs in 1999. The December 31, 1998 backlog also included future revenues of approximately $95,000,000, including approximately $92,000,000 recognized in 1999, for which anticipated gross margins were lower than historical levels prior to 1998. The Company recorded cumulative contract losses of $22,079,000 and $12,079,000 (including reserves of $5,142,000 and $8,813,000 for estimated future losses expected to be incurred on jobs in process) associated with jobs in process having a total sales value of $103,430,000 and $104,734,000 at December 31, 1999 and 1998, respectively. Second, the Industrial Products Group reported no gross profit on any press manufactured during 1999 until a point in production when all manufacturing costs could be reasonably estimated. In 1999 that point was when the press reached the final assembly stage. Reference is made to Note 1 of Notes to Consolidated Financial Statements--Revenue Recognition. The gross losses recorded in 1999 and 1998 reflect the positive effect ($2,900,000 and $5,000,000, respectively) of payments relating to the recovery of a claim associated with a prior period. The Company does not expect any additional recoveries relating to this claim. Because of the difficulties the Verson division encountered in 1998, Verson failed to meet delivery date requirements provided in several press orders. Verson recorded charges for penalties of approximately $600,000 and $1,200,000 in 1998 and 1999, respectively. The division may receive additional claims for significant penalty payments or damages in 2000 and 2001. At December 31, 1999, the division has reserves of approximately $1,800,000 for these potential claims. Selling and administrative expenses increased by $862,000 in 1999 compared to 1998. Increases in other administrative expenses more than offset a reduction in compensation expense related to exercises of stock options ($0 in 1999 compared to $1,119,000 in 1998), lower professional service costs related to the installation of new systems (approximately $425,000) and decreased employment costs following the curtailment of new hires in 1999 (approximately $275,000). Major factors in the increase in 1999 over 1998 were increases in Verson's bad debt provision (approximately $1,200,000), the full year effect of the Company's matching contributions under its 401(k) retirement plans which began in the fourth quarter of 1998 (approximately $700,000), expenses related to the Verson Pressentechnik division formed in the last quarter of 1998 (approximately $300,000) and increased professional, legal and bank fees related to several loan agreement amendments and other matters (approximately $1,100,000). Interest expense for both continuing and discontinuing operations in 1999 was $11,383,000 compared to interest expense of $6,201,000 in 1998. Interest expense in 1998 was partially offset by the capitalization of $979,000 of interest costs relating to the Company's building expansion project at the Verson division. The increase in interest expense in 1999 over 1998 was the result of a combination of an increase in average borrowings and an increase in average interest rates. At year end average interest rates on borrowings outstanding under new and amended credit agreements were 10.2% in 1999 compared to 7.2% in 1998. Reference is made to Note 12 of Notes to Consolidated Financial Statements in relation to an analysis of other (income) expense in 1999 and 1998. Reference is made to Note 4 of Notes to Consolidated Financial Statements for an analysis and explanation of the current and deferred provision (benefit) for income taxes in 1999 and 1998. DISCONTINUED OPERATIONS Discontinued operations for 1999 and 1998 include the operations of the Agricultural Products Group, an allocation of all direct financing, administrative, other expenses and income taxes and a pro rata allocation of interest expense. Net sales associated with discontinued operations in 1999 totaled $143,897,000 compared to net sales of $136,814,000 in 1998. Increases in net sales were primarily related to turf/landscape products (approximately $5,500,000) and improved loader sales (approximately $6,000,000). In the past few years, the Company's Bush Hog division has concentrated on its turf and landscape product line through the development of new products and the acquisition in April 1998 of Universal Turf. Improvements in the loader product 11 line sales were also associated with product development and the acquisition of the Great Bend Manufacturing Company in April 1998. The increases were partially offset by the effects of lower sales of cutter and disc mower products (approximately $6,000,000) in 1999. Sales of these products have been impacted by the effect of lower commodity prices for a majority of major crops and for most livestock segments. Livestock prices improved in the last quarter of 1999. Gross profit margins decreased by approximately 2.0 percentage points in 1999 due primarily to the effects of increased cash discounts, unfavorable labor variances and shipping costs. Additional cash discounts have been offered to dealers in 1999 to help reduce the amount of dealer inventory levels and to remain competitive in the market place. Unfavorable labor variances were the result of increased labor rates and the mix of products produced during the year. The increase in shipping costs was primarily associated with freight cost concessions granted to dealers. Similar concessions were offered by competing agricultural products manufacturers. Increases in selling and administrative expenses in 1999 over 1998 (approximately $1,650,000) were related to the acquisition of the Great Bend division and Universal Turf operations as noted above and to an increased pension accrual ($400,000). Income net of taxes from discontinued operations was $7,575,000 in 1999, a decrease of approximately $8,100,000 from income net of taxes from discontinued operations of $15,673,000 in 1998. In addition to the decline in gross profits and the increase in selling and administrative expenses noted above, allocated interest expense was approximately $2,700,000 higher in 1999 and litigation and product liability expenses increased by approximately $1,600,000 in 1999. There was an income tax benefit of $1,317,000 in 1998, none in 1999. 1998 COMPARED TO 1997 CONTINUING OPERATIONS Net sales from continuing operations for 1998 were $137,020,000 compared to net sales from continuing operations of $151,091,000 in 1997. The loss before taxes from continuing operations was $35,999,000 in 1998 compared to income before taxes from continuing operations of $7,681,000 in the prior year. The net loss for 1998 was $14,113,000 ($1.19 per common share-diluted) compared to net income of $15,646,000 ($1.27 per common share-diluted) in 1997. The decrease in net sales from continuing operations in 1998 was related to the loss of revenue from the Coz division which was sold in the early part of the fourth quarter of 1997. Revenue and profits are recognized on a percentage of completion basis at the Verson division. As described above, difficulties primarily associated with the manufacture of presses under major orders and the resulting stresses on manufacturing capacity caused Verson to incur losses in 1998. Operating results in 1998 and 1997 were favorably affected by the Company's recovery of a claim associated with prior periods of $5,000,000 in 1998 and $2,500,000 in1997. Selling and administrative expenses decreased modestly in 1998 compared to the prior year with decreases in corporate office administrative expenses offsetting higher selling and administrative expenses at the Verson division. Staff expansions and the establishment of an international sales and marketing department resulted in an increase in salaries and travel costs of approximately $1,800,000 at the Verson division. These increases were partially offset by the effect of the sale of the Coz division in the last quarter of 1997. Corporate administrative expenses decreased by approximately $1,350,000 in 1998 compared to the prior year due to the impact of reduction in staffing levels, the subleasing of a portion of the corporate office during 1998 and decreased compensation expenses related to stock option exercises. Interest expense from continuing and discontinued operations in 1998 totaled $6,201,000 compared to interest expense of $3,306,000 in the prior year. A portion of interest expense in 1998 ($2,469,000) and 1997 ($1,417,000) was allocated to discontinued operations based upon the discontinued operation's proportionate share of consolidated invested capital. The overall increase in interest expense before allocation was associated with increased borrowing needs related to higher consolidated receivable levels (associated with increases at all manufacturing operations of the Company) and increased inventory levels (primarily associated with the Verson division where orders for a total of 9 multi-station transfer presses were in production at December 31, 1998 and shipment and production delays had occurred). Other borrowing needs included fixed asset additions during 1998 (primarily including the Verson plant expansion), the acquisitions of Great Bend and Universal Turf in the second quarter of 1998 and the impact of the stock buyback program from prior years. Interest expense in 1998 was partially offset by the capitalization of $979,000 of interest costs relating to the Company's building expansion project at the Verson division. Reference is made to Note 12 of Notes to Consolidated Financial Statements for an analysis of other (income) expense in 1998 and 1997. 12 Reference is made to Note 4 of Notes to Consolidated Financial Statements for an analysis and explanation of the current and deferred provision (benefit) for income taxes in 1998 and 1997. DISCONTINUED OPERATIONS Discontinued operations for 1998 and 1997 include the operations of the Agricultural Products Group, an allocation of all direct financing, administrative, other expenses and income taxes and a pro rata allocation of interest expense. Net sales associated with discontinued operations in 1998 totaled $136,814,000 compared to net sales of $119,471,000 in 1997. Approximately half of the increase was related to the acquisitions of the Great Bend and Universal Turf operations in the second quarter of 1998. The remainder of the increase was principally associated with increased cutter sales by the Bush Hog division to cattle ranchers, particularly in the first half of the year. Cattle ranchers use the cutters for grazing pasture maintenance. Cutter sales in 1998 were also favorably affected by new/redesigned products for the turf and landscaping market for utilization by commercial turf (sod) growers and by golf courses for maintenance. During the last half of 1998, sales were negatively affected by lower prices for major crops (corn, wheat, soybeans) and livestock commodities (cattle and hogs), which reduced farm income. Income before taxes decreased by approximately $2,800,000 in 1998 compared to the prior year. Gross profit margins decreased in 1998. Decreases were principally related to increased discounts offered to dealers and the impact of the mix of products sold. These decreases were partially offset by favorable manufacturing variances resulting from increased facility utilization and increased labor efficiencies at the Bush Hog division in 1998 and the effect of increased sales volume noted above from the acquisitions of Great Bend and Universal Turf. Selling and administrative expenses increased in 1998 in the Agricultural Products Group compared to the prior year. The majority of the increase related to the acquired operations of Great Bend and Universal Turf. Other increases were associated with increased commissions (due to increased sales volume) and advertising costs in 1998. FINANCIAL CONDITION DECEMBER 31, 1999 Working capital associated with a combination of continuing operations and discontinued operations at December 31, 1999 was $(43,432,000) and the current ratio was .79 to 1.00. Net accounts receivable from continuing operations declined during 1999 by $5,241,000, reflecting an increase in the reserve for doubtful accounts and the lower level of billings in the Verson division in the last quarter of 1999 compared to the fourth quarter of the prior year. A decrease of $20,542,000 in inventory levels of continuing operations during 1999 was attributable in part to a larger amount in 1999 ($36,580,000) compared to 1998 ($25,902,000) of customer payments accounted for as a reduction of inventories. Fixed asset additions associated with continuing operations in 1999 totaled $7,085,000 including approximately $3,600,000 relating to completion of the assembly building addition at Verson. There were no major fixed asset dispositions in 1999. The net decrease in accounts payables associated with continuing operations in 1999 ($13,901,000) reflects the effect of reduced production levels in the Industrial Products Group and the reduction in customer deposits accounted for as accounts payable. Verson initially accounts for customer deposits received against orders as accounts payable. As production continues on such orders, the division reduces the amount classified as a liability and credits the amount as a reduction in work in process inventory. The increase in accrued expenses ($3,298,000) was primarily associated with increased accruals for legal matters as discussed in Note 10 of Notes to Consolidated Financial Statements and the accrual of costs related to the sale of an 80.1% interest in the Agricultural Products Group subsequent to the end of 1999. Net borrowing under the revolving credit agreement increased by $11,400,000 in 1999. Current and noncurrent assets and current and noncurrent liabilities associated with discontinued operations consist of assets and liabilities of the former Agricultural Products Group. The assets and liabilities of that Group were transferred to a new entity and the Company recorded a gain on the sale of an 80.1% interest in the entity on March 7, 2000. DECEMBER 31, 1998 Working capital associated with a combination of continuing operations and discontinued operations at December 31, 1998 was $(14,955,000) and the current ratio was .92 to 1.00. Net accounts receivable from continuing operations increased by $5,162,000, attributable largely to the shipment of a large press in the last quarter of 1998. Net inventory levels increased by $16,270,000 during 1998. Increases in inventory levels reflecting the large number of presses in production at the end of 1998 ($25,083,000) were partially offset by inventory valuation reductions in 1998 of $8,813,000. Fixed asset additions ($31,459,000) included construction costs associated with an assembly building expansion project at the Verson division. The project approximately doubled the size of Verson's assembly 13 facility and is expected to increase the division's assembly capacity by approximately 30%. Funds to finance these additions include borrowings under the Amended and Restated Credit Agreement. Other than the sale of the former White-New Idea facility in Coldwater, Ohio (which had been leased to the purchaser of the operation since 1994), there were no major asset dispositions in 1998. Accounts payable and accrued expenses increased by $29,324,000 during 1998. The increase was consistent with the increase in accounts receivable and inventories for the year, before taking into account an inventory valuation reduction. LIQUIDITY AND CAPITAL RESOURCES Net cash used in the operating activities related to the Company's continuing operations totaled $12,361,000, $26,451,000, and $14,944,000 during 1999, 1998 and 1997 respectively, a total in excess of $53,000,000 over three years. Cash used in 1999 and 1998 ($38,812,000) included losses from continuing operations for the two years ($64,126,000). Cash used in 1997 included increased inventory levels. Net cash used in investing activities related to continuing operations amounted to $7,011,000 in 1999 and $27,142,000 in 1998. Net cash provided by investing activities in 1997 was $4,638,000, reflecting proceeds from the sale of the Company's Coz division, net of additions at Verson. Investing activities in 1999 and 1998 primarily related to the expansion of Verson's assembly capacity. Net cash provided by the operating activities related to discontinued operations was $12,790,000, $7,862,000 and $12,929,000 in 1999, 1998 and 1997, respectively, a total of $33,581,000 over three years. Cash flow used for investing activities for discontinued operations related primarily to plant additions and acquisitions. No significant cash was used in financing activities. At December 31, 1999, the Company's sales backlog associated with continuing operations was $51,401,000 compared to $145,268,000 at December 31, 1998. All of the backlog was related to the Verson division, and consisted of revenue not yet recorded representing the uncompleted portion of presses currently being manufactured, press equipment, the manufacturing of which has been subcontracted to outside sources, unearned revenue associated with the installation of presses and unfilled orders for part sales. Approximately 90% of the production against these orders will be completed in 2000. In general, accumulated production costs of these press orders are not invoiced until shipment of the related press or press component. As indicated earlier, the Company believes that its relatively low backlog will translate into significantly lower revenues from continuing operations in 2000. The Company recently reduced the manufacturing workforce at the Verson division by approximately 50 individuals. Additional manufacturing (direct and indirect) reductions as well as reductions in the non manufacturing areas are likely in the near future depending on the level of new orders received. Other cost reduction measures are being reviewed so as to reduce future cash needs and increase profitability. The potential cost reductions could lead to a restructuring charge in 2000. Reference is made to Note 4 of Notes to Consolidated Financial Statements for a discussion of income taxes and deferred tax assets. Reference is made to Note 10 of Notes to Consolidated Financial Statements for a discussion of outstanding environmental and legal issues and other contingent liabilities. To the extent that any of these claims are not covered by insurance or are ultimately resolved for amounts in excess of the Company's applicable insurance coverage, they could have a significant negative impact on the Company's cash flow and its ability to finance its operations. Reference is made to Note 5 of Notes to Consolidated Financial Statements for a discussion of changes in the Company's loan agreements during 1999. As of December 31, 1999, the Company had cash and cash equivalents of $1,054,000 and additional funds of $3,421,000 available under its Second Amended and Restated Credit Agreement. In addition, the Company had the capacity to borrow up to $5,000,000 under a loan agreement with Henry Crown and Company. See Note 5 to Notes to Consolidated Financial Statements. SUBSEQUENT EVENTS Simultaneous with the transfer of assets and liabilities to New Bush Hog and the sale of an 80.1% membership interest in New Bush Hog to Bush Hog Investors on March 7, 2000, the Company repaid all of its outstanding bank indebtedness and the Company's banks released their security interests in the assets transferred to New Bush Hog, as well as in all of the Company's other assets. The Company funded this repayment with the net proceeds received from Bush Hog Investors, a distribution from New Bush Hog of approximately $3,600,000 plus new borrowings described below. See Note 5 of Notes to Consolidated Financial Statements. On March 7, 2000, the Company entered in a Loan and Security Agreement with LaSalle Bank N.A. ("LaSalle"). Under the terms of the agreement, the Company borrowed $18,000,000 at a floating prime 14 (prime less 100 basis points) rate. Amounts outstanding under the agreement are due September 7, 2002. Prepayment is allowed without penalty. The loan is secured by a first lien on the Company's 19.9% interest in New Bush Hog. The Company also entered into a new $30,000,000 credit facility with Foothill Capital Corporation (Foothill) effective March 29, 2000. The new credit facility has a three year term, maturing in March 2003, and consists of a term loan sub-line of $10,600,000 and a revolving credit facility which may be drawn upon from time to time up to the lower of $19,400,000 and an amount based upon a percentage of eligible accounts receivable and eligible inventories relating to presses which are within 60 days of shipment, as determined by Foothill subject to reserves as determined by Foothill (the "Borrowing Base"). The amount available under the term loan sub-line is reduced by $176,667 monthly commencing in September 2000. The maximum remaining amount due at maturity in March 2003 is $5,123,323. All amounts due under the facility become immediately due and payable in the event of a material adverse change. Interest is payable monthly at a floating prime rate (prime plus 200 basis points on the term loan, prime plus 125 basis points on the revolver and prime plus 150 basis points on letter of credit financing). In the event of a default, the interest rate increases by 300 basis points. Foothill received a closing fee of $300,000 and will also receive a monthly fee of $50,000 for each month an advance against special projects accounts receivable is outstanding under the revolving credit facility. With certain exceptions, the penalty for prepayment is $900,000 (3% of the maximum credit available) in the first year, declining to 2% and 1% in the second and third years. Certain portions of the Borrowing Base will be determined in June, following Foothill's review and determination of eligible receivables. In connection with the Foothill loan, the Company granted a lien upon and security interests in substantially all of its assets. The loan agreement requires that the Company sell its remaining interest in New Bush Hog on or before June 30, 2000. Restrictions in the Foothill loan agreement include, among other things, limitations on capital expenditures, liens and guaranties and restrictions on acquisitions, investments and dividends without Foothill's consent. Financial covenants include a covenant that earnings before interest, taxes, depreciation and amortization (EBITDA), exclusive of extraordinary gains, exceed the amounts listed below as of the dates and for the periods indicated: June 30, 2000 last three months ($1,300,000) September 30, 2000 last six months ($3,500,000) December 31, 2000 last nine months ($4,600,000) March 31, 2001 last twelve months ($3,900,000) June 30, 2001 last twelve months ($3,000,000) September 30, 2001 last twelve months $1,300,000 December 31, 2001 last twelve months $7,600,000
While the Company projects that it will be able to comply with this covenant, the Company's EBITDA for future periods cannot be predicted with a reasonable degree of certainty. The Company's future operating results depend, among other things, upon the receipt in the next several months and continuing thereafter of new press orders in appropriate sequences and bearing appropriate margins. Because the Borrowing Base is limited solely to a percentage of eligible accounts receivable and inventories relating to presses which are within 60 days of shipment (and not to a percentage of total inventories as well), the credit facility is not a source of financing for the substantial work-in-process inventories frequently required in the Company's business. This will limit the number and magnitude of press orders without customer deposits which the Company may accept. On March 23, 2000, the Company agreed to sell its New Bush Hog membership interest to Bush Hog Investors for $31,426,134, less 19.9% of net balance sheet adjustments of New Bush Hog through the closing date. On March 7, 2000, New Bush Hog reduced its net worth by approximately $18,000,000 by making distributions to its members including approximately $3,600,000 to the Company. The Company therefore expects to receive from the sale approximately $28,000,000 plus the Company's pro rata share of New Bush Hog's undistributed income through the closing. The sale is scheduled to close on or before June 30, 2000. Approximately $4,000,000 of the sale proceeds will be escrowed as security for the Company's indemnification obligations under the Company's initial sale of an 80.1% membership interest to Bush Hog Investors. The Company will apply $18,000,000 of the proceeds from the sale of its membership interest in New Bush Hog to prepay its outstanding indebtedness to LaSalle under the loan agreement described above. The Company is installing a horizontal boring mill acquired in an installment sale for approximately $5,000,000 and is negotiating a five-year financing lease to finance the acquisition. The Company believes that the acquisition of this new equipment will permit the Company to reduce subcontracting on future major press orders. 15 OUTLOOK The sale of an 80.1% membership interest in New Bush Hog and the proposed sale of the Company's remaining membership interest in New Bush Hog will have a positive effect on the Company's working capital, equity and debt-to-equity ratio. At the same time, the effect of the sale is to deprive the Company of the cash flow generated by the operating activities of its former Agricultural Products Group ($12,790,000 and $7,862,000, respectively in 1999 and 1998). The principal sources of liquidity for the Company's continuing operations will be its operating cash flows, if any, and borrowings under the new credit facility with Foothill. The Company projects that after application of the net proceeds of the sale of an 80.1% interest in New Bush Hog, it will require approximately $37,000,000 in cash in 2000 to, among other things, (1) discharge certain accrued liabilities and claims arising out of events associated with operations of the Agricultural Products Group before March 7, 2000, (2) extinguish the remainder of its outstanding indebtedness to banks, (3) reduce outstanding payables, (4) finance peak working capital requirements of the Industrial Products Group and (5) finance the acquisition of new equipment. Verson's peak working capital requirements could vary significantly, either higher or lower, from the projected level. The working capital needs of Verson will depend upon the magnitude of new press orders, the timing of the receipt of those orders, the timing of production under the orders and the extent to which the Company receives progress payments on those orders. The Company's working capital projections are also conditioned upon successful negotiation of the Verson labor agreement which expires in June 2000. The Company anticipates that its projected cash and capital requirements will be funded in part by the proceeds (net of escrow requirements) from the sale of its remaining New Bush Hog membership interest (approximately $24,000,000) and a financing lease (approximately $5,000,000), with the remainder being financed by borrowings under the Foothill credit facility. The key challenges faced by the Company's Industrial Products Group include: 1. New Profitable Business. The Group's operating results in 2000 will be adversely affected by (a) the current low level of the Group's backlog ($51,401,000 at December 31, 1999 compared to $145,268,000 a year earlier) and (b) the fact that approximately 50% of the current backlog represents no margin work booked in 1997. Because of the fall off in new orders in 1999 and the first quarter of 2000, Verson is expected to have excess capacity during 2000, revenues are expected to decline substantially and the Company anticipates that it will incur an operating loss. The group's long term viability depends upon the generation of new orders with appropriate margins as well as a timely adjustment of the Company's cost structure consistent with the level of orders received. 2. Management of Major Projects. The Company has been working to correct the operating problems of its Industrial Products Group and has taken several significant steps which it believes will help to correct the problems. These steps include changes in the group management team, development of a new planning system that will help the Company plan and track engineering, purchasing and manufacturing costs, and the acquisition of equipment which should enable the Company to reduce outsourcing work. The group in the future must demonstrate its ability to estimate costs of major projects accurately and to manage those projects so that they are completed on time and on budget. 3. Adequacy of Financial Resources. The Company and one of its customers amended several related press orders to address the customer's concern that the Company may lack the necessary financial resources to complete orders already in production. The customer has conditionally agreed to permit the completion of the orders pursuant to a revised schedule, subject to the customer's ongoing review of the Company's financial status. Similarly, due to the Company's financial condition, the Company was slow during 1999 and the first quarter of 2000 to make payments to its creditors, including its suppliers. This has raised concern among suppliers about whether to continue to supply the Company and extend additional credit. Two additional challenges that the Company faces in its business are (1) the business must carry relatively large work-in-process inventories because of the significant periods of time necessary to plan, design and build large metal forming presses and (2) the business is subject to the timing, severity and duration of automotive customer buying cycles. The Company must have the ability to obtain financing, including customer deposits, in order to address these challenges. 16 The Company has obtained the Foothill credit lines of up to $30,000,000 secured by the assets of its Verson division and anticipates that it will enter into a financing lease during the second quarter of 2000 to finance capital equipment purchased during the first quarter of 2000 at a cost of approximately $5,000,000. These financings are subject to preconditions regarding the Company's eligible borrowing base and to on-going compliance requirements, which if not met would permit Foothill and/or the financing lease lessor to declare an event of default under the applicable agreements. The Company's ability to meet these requirements is dependent on future results which cannot be predicted with certainty. Although the Foothill credit lines (with the exceptions previously noted) do not provide for loans against work-in-process and raw material inventories, the Company believes that it has financing in place for calendar year 2000 that will be adequate to support the initiatives necessary in 2000 to improve the operations of Verson and secure new orders. While there can be no assurance that additional financing will not be necessary at some point in 2000, currently the credit line appears sufficient to address projected fluctuations in working capital and cash requirements. If these lines of credit become inadequate or an event of default is declared, the Company will be required to pursue alternative financing sources at that time. MARKET RISK The Company's market risk is the exposure to adverse changes in interest rates. At December 31, 1999, the Company's total debt outstanding (revolving credit agreement and capitalized leases) totaled $134,483,000. Capitalized lease debt ($3,783,000) was represented by fixed rate financing and was not subject to market rate fluctuations. The remaining portion of the Company's debt at December 31, 1999 ($130,700,000) was subject to the terms of the Amended and Restated Credit Agreement that provided for interest rates at either a floating prime (prime plus 250 basis points) or fixed LIBOR rate, plus 400 basis points. The base interest rates were periodically agreed to with the lender for fixed periods of 30 to 90 days. The balance outstanding at December 31, 1999 approximated fair market value. A hypothetical immediate 10% increase in interest rates would adversely affect 2000 earnings and cash flow by approximately $1,335,000 based on the composition of debt levels at December 31, 1999. YEAR 2000 COMPLIANCE Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead. If not corrected, these programs could cause date-related transaction failures. As of the date of the filing of this annual report on Form 10-K, the Company has not experienced any Year 2000 problems, either internally or with third party vendors or customers. Although the Company is not aware of any Year 2000 problems experienced by its third party vendors and does not expect that its operations will be affected by any Year 2000 problems in the future, there can be no assurance that the Company's operations will not be affected by Year 2000 problems. However, the Company believes that the possibility of significant interruptions of normal operations is remote. CAUTIONARY FACTORS This report and other documents or oral statements which have been and will be prepared or made in the future contain or may contain forward-looking statements by or on behalf of the Company. Such statements are based upon management's expectations at the time they are made. Actual results may differ materially. In addition to the assumptions and other factors referred to specifically in connection with such statements, the following factors, among others, could cause actual results to differ materially from those contemplated. The Company's principal continuing business involves designing, manufacturing, marketing and servicing complex medium and large metal forming presses. Significant periods of time are necessary to plan, design and build these complex machines. With respect to new presses, there are risks of customer acceptances and start-up or performance problems. Large amounts of capital are required to be devoted by the Company's customers to purchase and install these presses. The installation of the press may be an integral part of a customer's program for the introduction and manufacture of a new model of an automobile or appliance. The Company's success in obtaining and managing a relatively small number of sales opportunities, including the Company's success in securing progress payments for such sales and meeting the requirements of warranties and guarantees associated with such sales, can affect the Company's financial performance. Other factors that could cause actual results to differ materially from those contemplated include: - Factors relating to the Company's ability to obtain financing and refinancing, to comply with covenants in its loan agreements and to maintain a satisfactory credit standing with its suppliers. - Factors affecting customers' purchases of new equipment, rebuilds, parts and services such as: the restructuring and automation of customer 17 manufacturing processes, the cash flows of customers; consolidations in the automobile industry; work stoppages at customers; and the timing, severity and duration of automotive customer buying cycles. - Factors affecting the Company's ability to capture available sales opportunities, including: customers' perceptions of the quality and value of the Company's products as compared to competitors' products; customers' perceptions of the advantages of dealing with a single press manufacturer; whether the Company has successful reference installations demonstrate the speed, efficiency and reliability of new presses to customers; customers' perceptions of the health and stability of the Company as compared to its competitors; the availability of manufacturing capacity at the Company's factory and changes in the value of the dollar relative to German and Japanese currencies. - Factors affecting the Company's ability to successfully manage sales it obtains, such as: the accuracy of the Company's cost and time estimates for major projects; the adequacy of the Company's systems to manage major projects and its success in completing projects on time and within budget; the Company's success in recruiting and retaining managers and key employees; wage stability and cooperative labor relations; and plant capacity and utilization. - Factors affecting the Company's general business, such as: unforeseen patent, tax, product, environmental, employee health or benefit, or contractual liabilities; nonrecurring restructuring and other special charges; changes in accounting or tax rules or regulations; reassessments of asset valuations for such assets as receivables, inventories, fixed assets and intangible assets; and leverage and debt service. SAFE HARBOR STATEMENT Statements contained within the description of the business of the Company contained in Item 1, the Management's Discussion and Analysis of Financial Conditions and Results of Operation as well as within the non 10-K portion of the 1999 Annual Report that relate to future operating periods are subject to risks and uncertainties that could cause actual results to differ from management's projections. Operations of the Company include the manufacturing and sale of agricultural and industrial machinery. Factors affecting all operations of the Company include actions of competitors in the industries served by the Company, production difficulties including capacity and supply constraints, labor relations, interest rates and other risks and uncertainties. Additional risks and uncertainties under the sections "Outlook" and "Cautionary Factors" within the Management's Discussion and Analysis of Financial Condition and Results of Operation should also be noted. The Company's outlook is based upon assumptions relating to the factors discussed above. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference to the section entitled, "Market Risk" in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations. 18 (This page has been left blank intentionally.) 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Allied Products Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income (loss), shareholders' investment and cash flows listed in the index appearing under Part IV of Form 10-K (Item 14(a)1), present fairly, in all material respects, the consolidated financial position of Allied Products Corporation and its subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Part IV of Form 10-K (Item 14(a)2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Chicago, Illinois April 3, 2000 20 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEAR ENDED DECEMBER 31, --------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Net sales from continuing operations............ $143,775,000 $137,020,000 $151,091,000 Cost of products sold........................... 147,961,000 147,114,000 123,099,000 ------------ ------------ ------------ Gross profit (loss)........................... $ (4,186,000) $(10,094,000) $ 27,992,000 ------------ ------------ ------------ Other costs and expenses: Selling and administrative expenses........... $ 22,113,000 $ 21,251,000 $ 21,440,000 Interest expense.............................. 6,205,000 3,732,000 1,889,000 Other (income) expense, net................... 1,836,000 922,000 $ (3,018,000) ------------ ------------ ------------ $ 30,154,000 $ 25,905,000 $ 20,311,000 ------------ ------------ ------------ Income (loss) before taxes from continuing operations.................................... $(34,340,000) $(35,999,000) $ 7,681,000 Provision (benefit) for income taxes: Current....................................... -- 12,000 84,000 Deferred...................................... -- (6,225,000) 2,757,000 ------------ ------------ ------------ Income (loss) from continuing operations........ $(34,340,000) $(29,786,000) $ 4,840,000 Discontinued operations, net of tax............. 7,575,000 15,673,000 10,806,000 ------------ ------------ ------------ Net income (loss)............................... $(26,765,000) $(14,113,000) $ 15,646,000 ============ ============ ============ Earnings (loss) per common share: Basic: Continuing operations....................... $(2.90) $(2.51) $0.40 0.64 1.32 0.89 ------------ ------------ ------------ Discontinued operations..................... $(2.26) $(1.19) $1.29 ============ ============ ============ Income (loss) per common share.............. Diluted: $(2.90) $(2.51) $0.39 Continuing operations....................... 0.64 1.32 0.88 ------------ ------------ ------------ Discontinued operations..................... $(2.26) $(1.19) $1.27 ============ ============ ============ Income (loss) per common share.............. Weighted average shares outstanding: Basic......................................... 11,838,000 11,895,000 12,107,000 ============ ============ ============ Diluted....................................... 11,838,000 11,895,000 12,353,000 ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 21 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ----------------------------- 1999 1998 ------------- ------------- Current Assets: Cash and cash equivalents................................. $ 1,054,000 $ 727,000 ------------ ------------ Notes and accounts receivable, less allowances of $1,130,000 and $266,000, respectively................... $ 20,460,000 $ 25,701,000 ------------ ------------ Inventories: Raw materials........................................... $ 3,571,000 $ 5,591,000 Work in process......................................... 43,094,000 61,616,000 ------------ ------------ $ 46,665,000 $ 67,207,000 ------------ ------------ Deferred tax asset........................................ $ 8,995,000 $ 10,540,000 ------------ ------------ Prepaid expenses.......................................... $ 228,000 $ 315,000 ------------ ------------ Current assets associated with discontinued operations.... $ 84,073,000 $ 77,374,000 ------------ ------------ Total current assets.................................. $161,475,000 $181,864,000 ------------ ------------ Plant and Equipment, at cost: Land...................................................... $ 1,671,000 $ 1,688,000 Buildings and improvements................................ 52,435,000 49,036,000 Machinery and equipment................................... 36,603,000 32,863,000 ------------ ------------ $ 90,709,000 $ 83,587,000 Less--Accumulated depreciation and amortization........... 32,023,000 26,971,000 ------------ ------------ $ 58,686,000 $ 56,616,000 ------------ ------------ Other Assets: Deferred tax asset........................................ $ 4,165,000 $ 4,165,000 Deferred charges (goodwill), net of amortization.......... 1,134,000 1,313,000 Other..................................................... 2,853,000 2,511,000 Noncurrent assets associated with discontinued operations.............................................. 28,298,000 29,335,000 ------------ ------------ $ 36,450,000 $ 37,324,000 ------------ ------------ $256,611,000 $275,804,000 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 22 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' INVESTMENT
DECEMBER 31, ----------------------------- 1999 1998 ------------- ------------- Current Liabilities: Revolving credit agreement................................ $130,700,000 $119,300,000 Current portion of long-term debt......................... 1,023,000 223,000 Accounts payable.......................................... 32,659,000 46,560,000 Accrued expenses.......................................... 22,648,000 19,350,000 Current liabilities associated with discontinued operations.............................................. 17,877,000 11,386,000 ------------ ------------ Total current liabilities............................. $204,907,000 $196,819,000 ------------ ------------ Long-term debt, less current portion shown above............ $ 378,000 $ 572,000 ------------ ------------ Other long-term liabilities................................. $ 5,442,000 $ 4,557,000 ------------ ------------ Noncurrent liabilities associated with discontinued operations................................................ $ 2,814,000 $ 2,126,000 ------------ ------------ Commitments and Contingencies Shareholders' Investment: Preferred stock: Undesignated--authorized 2,000,000 shares at December 31, 1999 and 1998; none issued............... $ -- $ -- Common stock, par value $.01 per share; authorized 25,000,000 shares; issued 14,047,249 shares at December 31, 1999 and 1998.............................. 140,000 140,000 Additional paid-in capital................................ 97,971,000 98,377,000 Retained earnings (deficit)............................... (12,524,000) 16,131,000 ------------ ------------ $ 85,587,000 $114,648,000 Treasury stock at cost: 2,200,203 and 2,228,640 shares at December 31, 1999 and 1998, respectively................ (42,517,000) (42,918,000) ------------ ------------ Total shareholders' investment........................ $ 43,070,000 $ 71,730,000 ------------ ------------ $256,611,000 $275,804,000 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 23 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Cash Flows from Operating Activities: Income (loss) from continuing operations..... $ (34,340,000) $ (29,786,000) $ 4,840,000 Income from discontinued operations.......... 7,575,000 15,673,000 10,806,000 ------------- ------------- ------------ Net income (loss).......................... $ (26,765,000) $ (14,113,000) $ 15,646,000 Adjustments to reconcile income (loss) from continuing operations to cash provided from (used for) operating activities: Gains on sales of operating and nonoperating assets...................... (75,000) (1,829,000) (1,628,000) Depreciation and amortization.............. 5,288,000 3,316,000 2,867,000 Amortization of deferred charges........... 179,000 179,000 177,000 Deferred income tax provision (benefit).... -- (6,225,000) 2,757,000 Provision for doubtful accounts............ 1,367,000 179,000 30,000 Provision for inventory valuation.......... 12,122,000 8,813,000 -- Stock option compensation.................. -- 1,119,000 1,375,000 Changes in noncash assets and liabilities, net of effects of assets/businesses acquired or sold and noncash transactions: (Increase) decrease in accounts receivable............................. 3,874,000 (5,341,000) 1,081,000 (Increase) decrease in inventories....... 8,420,000 (25,083,000) (20,795,000) (Increase) decrease in prepaid expenses............................... 87,000 70,000 (297,000) Increase (decrease) in accounts payable and accrued expenses................... (9,921,000) 29,324,000 (4,628,000) Other, net................................. 638,000 (1,187,000) (723,000) Adjustment to reconcile income from discontinued operations to cash provided from (used for) discontinued operations.... 5,215,000 (7,811,000) 2,123,000 ------------- ------------- ------------ Net cash provided from (used for) operating activities................................. $ 429,000 $ (18,589,000) $ (2,015,000) ------------- ------------- ------------ Cash Flows from Investing Activities: Additions to plant and equipment............. $ (7,085,000) $ (30,459,000) $(10,564,000) Proceeds from sales of plant and equipment... 74,000 3,317,000 465,000 Proceeds from sales of assets/businesses..... -- -- 14,737,000 Net cash used in discontinued operations..... (1,708,000) (19,222,000) (4,731,000) ------------- ------------- ------------ Net cash used for investing activities....... $ (8,719,000) $ (46,364,000) $ (93,000) ------------- ------------- ------------ Cash Flows from Financing Activities: Borrowings under revolving credit agreements................................. $ 124,000,000 $ 186,000,000 $122,000,000 Payments under revolving credit agreements... (112,600,000) (117,100,000) (98,600,000) Payments of short and long-term debt......... (361,000) (218,000) (152,000) Purchases of treasury stock.................. -- (1,624,000) (21,572,000) Dividends paid............................... (1,890,000) (1,904,000) (1,770,000) Stock rights/option transactions............. (119,000) 91,000 2,096,000 Net cash used in discontinued operations..... (413,000) (174,000) (118,000) ------------- ------------- ------------ Net cash provided from financing activities................................. $ 8,617,000 $ 65,071,000 $ 1,884,000 ------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents.................................. $ 327,000 $ 118,000 $ (224,000) Cash and cash equivalents at beginning of year......................................... 727,000 609,000 833,000 ------------- ------------- ------------ Cash and cash equivalents at end of year....... $ 1,054,000 $ 727,000 $ 609,000 ============= ============= ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 24 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 ----------- ---------- ---------- Supplemental Information: (A) Noncash investing and financing activities: 1. Assets acquired through the assumption of debt......................................... $ 1,632,000 $1,559,000 $ 526,000 =========== ========== ========== 2. Treasury shares issued in lieu of cash for the Company's Incentive Compensation Plan........ $ 114,000 $ -- $ -- =========== ========== ========== (B) Interest paid during year...................... $11,564,000 $6,033,000 $3,225,000 =========== ========== ========== (C) Income/franchise taxes paid, net of (refunds), during year.................................. $ (351,000) $1,072,000 $1,313,000 =========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. 25 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT COMMON AND TREASURY STOCK
COMMON TREASURY ($.01 PAR VALUE STOCK, PER SHARE) AT COST --------------- ------------ Balance at December 31, 1996................................ $ 94,000 $(23,539,000) Issuance of 4,682,405 common shares in connection with a three-for-two stock split............................... 46,000 -- Purchase of 974,930 common shares for treasury purposes... -- (21,572,000) Treasury shares issued (188,273) in connection with the exercises of stock options.............................. -- 2,858,000 -------- ------------ Balance at December 31, 1997................................ $140,000 $(42,253,000) Purchase of 144,943 common shares for treasury purposes... -- (1,624,000) Treasury shares issued (60,566) in connection with the exercises of stock options.............................. -- 959,000 -------- ------------ Balance at December 31, 1998................................ $140,000 $(42,918,000) Treasury shares issued (28,437) in lieu of cash for the Company's Incentive Compensation Plan................... -- 401,000 -------- ------------ Balance at December 31, 1999................................ $140,000 $(42,517,000) ======== ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 26 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT ADDITIONAL PAID-IN CAPITAL AND RETAINED EARNINGS (DEFICIT)
ADDITIONAL RETAINED PAID-IN EARNINGS CAPITAL (DEFICIT) ----------- ------------ Balance at December 31, 1996................................ $97,586,000 $ 18,272,000 Net income for the year................................... -- 15,646,000 Common dividends declared and paid--$.147 per share....... -- (1,770,000) Issuance of 4,682,405 common shares in connection with a three-for-two stock split............................... (46,000) -- Treasury shares issued in connection with the exercises of stock options........................................... 613,000 -- Tax benefit associated with stock option exercises........ 365,000 -- ----------- ------------ Balance at December 31, 1997................................ $98,518,000 $ 32,148,000 Net loss for the year..................................... -- (14,113,000) Common dividends declared and paid--$.16 per share........ -- (1,904,000) Treasury shares issued in connection with the exercises of stock options........................................... (141,000) -- ----------- ------------ Balance at December 31, 1998................................ $98,377,000 $ 16,131,000 Net loss for the year..................................... -- (26,765,000) Common dividends declared and paid--$.16 per share........ -- (1,890,000) Treasury shares issued in lieu of cash for the Company's Incentive Compensation Plan............................. (287,000) -- Purchase of Shareholder Rights............................ (119,000) -- ----------- ------------ Balance at December 31, 1999................................ $97,971,000 $(12,524,000) =========== ============
The accompanying notes to consolidated financial statements are an integral part of these statements 27 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION-- The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany items and transactions have been eliminated. NATURE OF OPERATIONS-- Allied Products Corporation's continuing operations manufacture large metal stamping presses through its Industrial Products Group. The Company's Agricultural Products Group, which manufactured implements and machinery used in agriculture, landscaping and ground maintenance businesses, was sold subsequent to the end of 1999--see Note 3. The Company's Coz division, which was part of the Industrial Products Group and supplied thermoplastic compounds and additives, was sold in the fourth quarter of 1997. All manufacturing operations are within the United States. Implements and machinery manufactured by the discontinued Agricultural Products Group are primarily sold through dealerships in the United States with some limited export sales to Canada. Metal stamping presses produced by the Industrial Products Group are sold directly to the end users which include automobile manufacturers, first and second tier automotive parts producing companies and the appliance industry. Automobile manufacturers and automotive parts producing companies account for approximately 95% of consolidated net sales from continuing operations in 1999. Press sales generally are concentrated in the United States and Mexico. USE OF ESTIMATES-- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Due to the nature of percentage of completion estimates, it is reasonably possible that cost estimates will be revised in the near term. REVENUE RECOGNITION-- Sales by the discontinued Agricultural Products Group are recorded when products are shipped to independent dealers in accordance with industry practices. Provisions for sales incentives and other sales related expenses are made at the time of the sale. Revenue and costs related to press manufacturing within the Industrial Products Group are recognized on the percentage of completion method. Prior to 1997, the Company's basis for measuring progress on contracts was based primarily on internal labor hours. At the time, labor hours of Company employees were considered a reasonable indicator of the progress on the contract. In late 1996, because of a significant increase in the Company's backlog, significantly more subcontracting was starting to be initiated on each project. In the first quarter of 1997, it was concluded that using Verson labor hours as a basis for measuring progress was not consistent with how business was being done. The Company concluded that it was more appropriate to use a production milestone approach by individual press in the first quarter of 1997. This approach to measuring progress focused on engineering, manufacturing and final check-out as the key measures on individual presses manufactured under one contract. At the beginning of each job, cost and revenue estimates were made for both engineering and manufacturing work. Estimates were also made on the amount of time the engineering and manufacturing work would take to complete. Under this contract milestone approach, the key progress measures were based on the estimated timeframe assoiated with the engineering and production process of each individual press. The determination of progress was based upon the months of engineering or production incurred, compared to total engineering or production scheduled for each individual press. 28 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) Verson personnel monitored progress on individual presses on an ongoing basis. Such monitoring would result in changes based upon changes in the estimated time to complete engineering and manufacturing work. In the fourth quarter of 1998, the Company undertook a comprehensive review of the compilation of costs and revenue recognition associated with each press and recorded additional changes to cost estimates of approximately $21,000,000. The Company determined that, in an environment where there were significant production delays, subcontract delays, internal space constraints, cost overruns and inefficiencies, reassessment of the appropriateness of measuring progress based on contract milestones was required. Commencing in the fourth quarter of 1998, the Company discontinued using contact milestones to measure contract progress and began measuring progress on contracts based on the percentage that incurred costs to date bear to the total estimated costs after giving effect to the most recent estimates of total costs. The cumulative impact of revisions in total cost estimates during the manufacturing process is reflected in the period in which the changes become known. On press orders where margin levels cannot be reasonably estimated, the Company does not recognize any gross profit margin until the particular press in process reaches a point in production where the gross profit margin can be reasonably estimated. Margins are then recognized over the remaining period of production. Certain press orders contain penalties for late delivery. Such penalties are considered part of the cost of the press when late delivery of the press appears probable. Losses expected to be incurred on jobs in process are charged to income as soon as such losses are known. The Company has recorded cumulative contract losses of $22,079,000 and $12,079,000 (including reserves of $5,142,000 and $8,813,000 at December 31, 1999 and 1998, respectively, for estimated future losses expected to be incurred on jobs in process) associated with several jobs in process having a total sales value of $103,430,000 and $104,734,000 at December 31, 1999 and 1998, respectively. Other uncertainties associated with these contracts make it reasonably possible that additional losses could occur in the near term--see Note 10. ACCOUNTS RECEIVABLE-- Current accounts receivables for the discontinued Agricultural Products Group are net of provisions for sales incentive programs and returns and allowances. Extended payment terms (up to one year) are offered to dealers in the form of floor plan financing which is customary within the industry. Such receivables (with the exception of receivables associated with service parts) are generally not collected until the dealer sells the related piece of equipment to a retail customer. The Company maintains a security interest in the equipment related to such receivables to minimize the risk of loss. INVENTORIES-- The basis of all of the Company's inventories is determined by using the lower of FIFO cost or market method. Included in work in process inventory are accumulated costs ($49,105,000 at December 31, 1999 and $70,400,000 at December 31, 1998) associated with contracts under which the Company recognizes revenue on a percentage of completion basis. These balances include unbilled actual production costs incurred plus a measure of estimated profit/loss ($3,786,000 loss at December 31, 1999 and $695,000 profit at December 31, 1998) recognized in relation to the sales recorded, less customer payments ($36,580,000 at December 31, 1999 and $25,902,000 at December 31, 1998) associated with the work in process inventory. A significant portion of the work in process inventory will be completed, shipped and invoiced prior to the end of the following year. PLANT AND EQUIPMENT-- Expenditures for the maintenance and repair of plant and equipment are charged to expense as incurred. Expenditures for major replacement or betterment are capitalized. Interest costs of $979,000 were capitalized in 1998 (none in 1999 or 1997) in relation to the construction of a building 29 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) addition at the Verson division of the Industrial Products Group. The cost and related accumulated depreciation of plant and equipment replaced, retired or otherwise disposed of is removed from the accounts and any gain or loss is reflected in earnings. DEPRECIATION-- Depreciation of the original cost of plant and equipment is charged to expense over the estimated useful lives of such assets calculated under the straight-line method. Estimated useful lives are 20 to 40 years for buildings and improvements and 3 to 12 years for machinery and equipment. DEFERRED CHARGES (GOODWILL)-- Deferred charges (goodwill) associated with the 1986 acquisition of Verson (cost of approximately $13,113,000) is being amortized on a straight line basis over a period of 20 years. VALUATION OF LONG-LIVED ASSETS-- Long-lived assets such as property, plant and equipment and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. STOCK SPLIT-- On July 24, 1997, the Company announced that the Board of Directors authorized a three-for-two stock split effected by means of a stock dividend to shareholders of record on August 15, 1997. A total of 4,682,405 additional common shares were issued in conjunction with the stock split. The Company distributed cash in lieu of fractional shares resulting from the stock split. All applicable share and per share data have been adjusted for the stock split. EARNINGS (LOSS) PER COMMON SHARE-- Basic earnings (loss) per common share is based on the average number of common shares outstanding--11,838,000, 11,895,000 and 12,107,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Diluted earnings (loss) per common share is based on the average number of common shares outstanding, as noted above, increased by the dilutive effect of outstanding stock options--246,000 for the year ended December 31, 1997. For the years ended December 31, 1999 and 1998, dilutive securities were excluded from the calculation of diluted loss per share as their effect would have been antidilutive. INCOME TAXES-- Income taxes are accounted for under the asset and liability method in accordance with FASB SFAS 109--Accounting for Income Taxes. See Note 4. STATEMENT OF CASH FLOWS-- The Company considers investments with original maturities of three months or less to be cash equivalents. FINANCIAL INSTRUMENTS-- The fair value of cash and cash equivalents approximates the carrying value of these assets due to the short maturity of these instruments. The fair value of the Company's debt, current and long-term, is estimated to approximate the carrying value of these liabilities based upon borrowing rates currently available to the Company for borrowings with similar terms. RECLASSIFICATIONS-- The Consolidated Statements of Income (Loss) for the years ended December 31, 1998 and 1997 reflect certain inmaterial adjustments between continuing and discontinued operations made to a previous unaudited presentation of such amounts. 30 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) 2. ACCRUED EXPENSES: The Company's accrued expenses related to continuing operations consist of the following:
DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- Salaries and wages............................... $ 1,943,000 $ 2,800,000 Warranty......................................... 5,563,000 4,687,000 Self insurance accruals.......................... 2,871,000 2,875,000 Pensions, including retirees' health............. 5,362,000 4,644,000 Taxes, other than income taxes................... 949,000 888,000 Environmental matters............................ 2,376,000 1,225,000 Other............................................ 3,584,000 2,231,000 ----------- ----------- $22,648,000 $19,350,000 =========== ===========
3. ACQUISITIONS AND DISPOSITIONS: ACQUISITIONS-- In April 1998, the Company acquired for cash substantially all of the assets and assumed certain liabilities of Great Bend Manufacturing Company ("Great Bend") located in Great Bend, Kansas. Great Bend manufactures and sells tractor-mounted front end loaders which are used principally in agricultural applications. The Company also acquired for cash in April 1998 substantially all of the assets of Universal Turf Equipment Corporation ("Universal Turf") located in Opp, Alabama. Universal Turf manufactures and sells turf maintenance implements including reel mowers, verti-cut mowers, reel grinders and spraying equipment. Both operations acquired are part of the discontinued Agricultural Products Group. Total cash purchase price for both of these operations was $10,953,000. In October 1998, the Company's Verson division formed a joint venture with Theodor Grabener GmbH & Co. KG of Germany and Automatic Feed Company of Napoleon, Ohio, that will help the two American companies more effectively penetrate the European market for large stamping presses and related systems. The new entity, Verson Pressentechnik GmbH, is located in Netphen-Werthenbach, Germany. This operation, in which Verson holds a 60% stake, is part of the Industrial Products Group. These acquisitions, taken individually and in the aggregate, are not material to the Company's consolidated operations. DISPOSITIONS-- During the fourth quarter of 1997, the Company sold for cash (approximately $14,700,000) substantially all of the assets of its Coz division. The purchaser also assumed certain specified liabilities associated with this division. The sale resulted in a pretax gain of approximately $1,530,000 and is included in Other (income) expense under the caption "Net gain on sales of operating and non-operating assets"--see Note 12. At the end of 1993, the Company sold for cash substantially all of the assets and liabilities of the White-New Idea Farm Equipment division. In connection with this sale, the purchaser was required to purchase the real estate located in Coldwater, Ohio upon the issuance of a covenant not to sue and related no further action letter by the Ohio Environmental Protection Agency. The Company completed the necessary environmental remediation during 1997 and, in 1998, the purchaser acquired the real estate for cash resulting in a gain of approximately $1,947,000, which is included in Other (income) expense under the caption "Net gain on sales of operating and non-operating assets"--see Note 12. DISCONTINUED OPERATIONS-- On July 16, 1999, the Company announced that it had signed a letter of intent with CC Industries, Inc., a privately held firm headquartered in Chicago, to form a new joint venture that would own and 31 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) operate the Company's divisions (Bush Hog and Great Bend) of the Agricultural Products Group. On March 7, 2000, the Company's shareholders approved the Limited Liability Company Interest Purchase and Asset Contribution Agreement ("Purchase Agreement") by and among the Company, Bush Hog, L.L.C., a Delaware limited liabillity company ("New Bush Hog") and Bush Hog Investors, L.L.C., a Delaware limited liability company ("Bush Hog Investors"). Pursuant to the Purchase Agreement, the Company agreed (i) to transfer to New Bush Hog substantially all of the assets and certain liabilities of the Bush Hog and Great Bend divisions constituting the Agricultural Products Group in exchange for all of the outstanding membership interests of New Bush Hog and (ii) to sell to Bush Hog Investors membership interests representing 80.1% of the total outstanding membership interests of New Bush Hog for a purchase price of $126,494,000, subject to post-closing adjustments. This sale was consummated on March 7, 2000. Upon consummation of the joint venture, New Bush Hog owns substantially all of the assets of the Agricultural Products Group subject to some of its liabilities, the Company has significantly reduced its bank indebtedness, Bush Hog Investors became the owner of 80.1% of the outstanding membership interests of New Bush Hog and the Company owned 19.9% of the outstanding membership interests of New Bush Hog. The Company retained all liabilities and obligations for claims made with respect to events or injuries occurring before the closing, including product liability, workers' compensation and environmental claims and claims regarding employment practices. The liabilities retained by the Company include liabilities under existing product liability claims, any additional claims, including product liability claims, arising out of events associated with operations of the Agricultural Product Group before the closing, and workers' compensation claims, for which the Company has provided reserves of approximately $5,600,000. The Company also remains responsible for monetary liabilities, if any, under a race discrimination class action suit brought by seven former or present employees of the Company's Bush Hog division--see Note 10. The Company also retains the obligation to make future contributions, if any, required to fund obligations under the Bush Hog Salaried Pension Plan. Benefits under the Plan will be frozen as of the closing. Certain of these obligations, which are contingent, may effect future results of operations if and when such obligations become probable and estimable. In addition, the Company retains liabilities for taxes and other governmental charges relating to operations before the closing and liabilities under employee benefit plans, which plans, other than the Bush Hog Salaried Pension Plan, are to be discontinued at closing. Following completion of the transaction, the Company retains a minority interest in New Bush Hog, which will be recorded on a cost basis, and will have no ability to control the direction and development of New Bush Hog. Under the cost method of accounting, the investment in New Bush Hog will be reflected in the Company's balance sheet at cost and dividends from New Bush Hog will be taken into income as they are received to the extent distributions are not a return of capital. New Bush Hog is obligated to pay quarterly dividends approximately equal to quarterly income, subject to certain conditions contained in the Limited Liability Company Agreement. The Company applied the net proceeds from the sale to repay existing indebtedness. The one time gain on the sale of the Agricultural Products Group business, which will be recognized in the first quarter of 2000 and subject to final adjustment, is estimated at the closing of the transaction as follows: Purchase price.............................................. $126,494,000 Estimated net assets of discontinued operations sold at closing................................................... (82,458,000) Estimated transaction costs................................. (2,319,000) Estimated pension curtailment gain.......................... 2,578,000 Estimated deferred income taxes on asset sold............... (4,403,000) ------------ Estimated gain on sale before taxes......................... $ 39,892,000 ============
32 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) On March 7, 2000, the Company received a distribution of approximately $3,600,000 from New Bush Hog, which the Company recorded as a return of capital. On March 24, 2000, the Company announced that it had signed a definitive agreement to sell its remaining 19.9% interest in New Bush Hog to Bush Hog Investors for a purchase price of approximately $27,800,000 subject to post-closing adjustments. The sale, which is expected to close prior to the end of the second quarter of 2000, is expected to result in a pretax gain of approximately $9,800,000. The Company has included the operations of the Agricultural Products Group, an allocation of all direct financing, administrative, other expenses and income taxes and a pro rata allocation of interest expense (based upon the group's proportionate share of consolidated invested capital) under the caption "Discontinued operations, net of tax" in the accompanying Consolidated Statements of Income (Loss). Previously issued Consolidated Statements of Income (Loss) have been revised to reflect the effect of the discontinued operations. In addition, current and noncurrent assets and liabilities associated with the above noted discontinued operations have been reclassified in the accompanying balance sheets. Summarized results of discontinued operations for the years ended December 31, 1999, 1998 and 1997 are as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Net sales....................... $143,897,000 $136,814,000 $119,471,000 ============ ============ ============ Income before taxes............. $ 7,575,000 $ 14,356,000 $ 17,154,000 Provision (benefit) for income taxes......................... -- (1,317,000) 6,348,000 ------------ ------------ ------------ Discontinued operations, net of tax........................... $ 7,575,000 $ 15,673,000 $ 10,806,000 ============ ============ ============
Allocated interest expense was $5,145,000, $2,464,000 and $1,417,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Provision (benefit) for income taxes has been allocated based on amounts identified with continuing operations with the remaining provision (benefit) being allocated to discontinued operations. 4. INCOME TAXES: Provision (benefit) for income taxes related to continuing operations in 1999, 1998 and 1997 consists of the following:
YEAR ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ----------- ----------- ---------- Federal--current...................... $ -- $ -- $ 35,000 Federal--deferred..................... -- (6,225,000) 2,757,000 State--current........................ -- 12,000 49,000 ----------- ----------- ---------- Total provision (benefit)............. $ -- $(6,213,000) $2,841,000 =========== =========== ==========
33 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) The provision (benefit) for income taxes related to continuing operations in 1999, 1998 and 1997 differs from amounts computed by applying the statutory rate to pretax income as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1999 1998 1997 ------------ ------------ ---------- Income tax provision (benefit) at statutory rate................... $(12,019,000) $(10,425,000) $2,688,000 Current net operating loss not benefitted....................... 12,019,000 8,414,000 -- State income tax, net of federal tax benefit...................... -- 8,000 32,000 Permanent book over tax differences on acquired assets............... -- 62,000 62,000 Reversal of deferred tax liability........................ -- (4,225,000) -- Other, net......................... -- (47,000) 59,000 ------------ ------------ ---------- Total provision (benefit).......... $ -- $ (6,213,000) $2,841,000 ============ ============ ==========
The significant components of net deferred tax assets were as follows:
DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- Deferred tax assets: Net operating loss and tax credit carryforwards................................ $46,662,000 $52,052,000 Self-insurance accruals........................ 2,654,000 2,507,000 Inventories.................................... 4,871,000 3,942,000 Receivables.................................... 412,000 97,000 Sale/leaseback transaction..................... 1,557,000 1,557,000 Employee benefits, including pensions.......... 3,616,000 3,788,000 Warranty....................................... 2,029,000 1,602,000 Environmental matters.......................... 867,000 447,000 Other.......................................... 1,094,000 765,000 Temporary differences associated with discontinued operations...................... 5,497,000 4,520,000 ----------- ----------- Net deferred tax asset before valuation allowance.................................... $69,259,000 $71,277,000 Valuation allowance............................ (50,602,000) (52,052,000) ----------- ----------- Net deferred tax asset......................... $18,657,000 $19,225,000 =========== ===========
Changes in the valuation allowance during 1999 were associated with the expiration of certain net operating loss carryforwards offset by the effect of net operating loss carryforwards associated with the current year and additional valuation allowances related to certain timing differences at December 31, 1999. The prospects for future earnings of the Company makes it more likely than not that the Company will utilize the benefits arising from a portion of the net deferred tax asset noted above. However, no benefit was recorded in 1999 for the increase in temporary differences as it is likely the items comprising the increase will reverse and become net operating loss carryforwards in the near term. Additionally, upon the sale of the discontinued operations in the first quarter of 2000, an estimated $5,600,000 charge related to certain temporary differences associated with continuing operations will be recorded. This charge is for a valuation allowance for certain temporary differences that are expected to reverse and become, in the near term, net operating loss carryforwards subject to 34 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) expiration. The valuation allowance was based on management's belief that unless the Industrial Products Group is able to reduce production costs and return to profit levels experienced prior to 1997, the sale of the Agricultural Products Group will further decrease the likelihood of the Company being able to utilize all of its remaining tax loss carryforwards. During 1998, the Company recorded a deferred tax benefit of $5,639,000 as a part of that year's tax benefit. This benefit represents a reversal of a tax liability accumulated in years prior to 1998. The net operating loss carryforwards expire between 2000 and 2014, and investment tax credit carryforwards of $635,000 expire between 2000 and 2004. The Company provided a valuation allowance in both 1999 and 1998 for deferred tax assets related to net operating loss, tax credit carryforwards and certain timing differences based upon a determination that current negative evidence outweighs positive evidence with respect to realization being more likely than not in the future for these components of the net deferred tax asset. The Company projects that future Federal income tax provisions and payments will be based upon the Alternative Minimum Tax rate as substantial tax loss carryforwards still exist for tax reporting purposes. Tax returns for the years subsequent to 1995 are potentially subject to audit by the Internal Revenue Service. 5. FINANCIAL ARRANGEMENTS: The Company's debt, including $1,401,000 at December 31, 1999 ($795,000 at December 31, 1998) related to continuing operations of which $1,023,000 ($223,000 at December 31, 1998) is current, consists of the following:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- Capitalized lease obligations, at interest rates up to 12% (weighted average of 8.3% and 7.8% at December 31, 1999 and 1998, respectively), due in varying amounts through 2005 (Note 6)............................................. $3,783,000 $2,925,000 Less current portion........................................ 1,432,000 627,000 ---------- ---------- $2,351,000 $2,298,000 ========== ==========
Scheduled maturities of the noncurrent portion of long-term debt at December 31, 1999 are due as follows: 2001........................................................ $ 559,000 2002........................................................ 388,000 2003........................................................ 348,000 2004........................................................ 571,000 2005........................................................ 485,000 ---------- $2,351,000 ==========
During 1996, the Company entered into an Amended and Restated Credit Agreement with two banks. The Amended and Restated Credit Agreement was subsequently amended during 1997 and 1998. Effective February 1, 1999, the Company entered into a Second Amended and Restated Credit Agreement ("Credit Agreement") with the same two banks, replacing the Amended and Restated Credit Agreement. During 1999, the Company entered into four amendments and waivers to the Credit Agreement. As of December 31, 1999, the amended Credit Agreement provides for up to $135,000,000 of borrowings and/or letters of credit at either a floating prime (prime plus 250 basis 35 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) points) or fixed LIBOR (LIBOR plus 400 basis points) rate. The Company granted a lien upon and security interests in all of the assets (except real estate) of the Company and its subsidiaries to the lenders and was required to meet certain periodic financial tests. The Company was not in compliance with certain provisions of the Credit Agreement and related amendments at various times throughout 1999. Amendments to the Credit Agreement provided for waivers of compliance through December 31, 1999. In return for a waiver of non-compliance with certain covenants, the bank required that events of default under the Credit Agreement be expanded to include failure to complete the joint venture involving the sale of the Agricultural Products Group. In contemplation of the sale of an 80.1% interest in the Agricultural Products Group and to help finance the build up of receivables and inventories within this group during December and the first quarter of 2000, an affiliate of Bush Hog Investors agreed, under the Loan and Security Agreement ("Bush Hog Investors Loan") dated as of December 16, 1999, to loan the Company up to $5,000,000, secured by the group's real property in Selma, Alabama. Borrowings under this agreement were to bear interest at floating prime (prime plus 400 basis points). No amounts were borrowed under this agreement during 1999. During 1998, the Company entered into an interest rate lock in anticipation of a private debt placement of up to $75,000,000. The Company anticipated that by entering into a private placement agreement, favorable fixed interest rates could be obtained on a long-term basis and that exposure to floating interest rates under the Amended and Restated Credit Agreement would be reduced. During the fourth quarter of 1998, the Company suspended efforts to secure financing through a private placement. Hedging losses of $3,005,000 were incurred in 1998 in the final settlement of the interest rate lock and are included in Other (income) expense under the caption "Treasury lock settlement"--see Note 12. Also during 1998, the Company entered into an interest rate swap agreement for a notional amount of $50,000,000, expiring May 2001. Under the terms of the swap agreement, the Company paid the counterparty a fixed rate of interest (5.99%) and received in return a floating rate based on LIBOR. This interest rate swap had the effect of turning $50,000,000 of the Company's floating rate debt under its credit agreement into a fixed rate obligation. At December 31, 1998, the fixed interest rate paid by the Company under the swap agreement exceeded the average borrowing rate under the Credit Agreement by .64%. This rate differential was recorded as interest expense on a monthly basis. The swap fair market value at December 31, 1998 was a negative $1,100,000. The Company's weighted average interest rate, independent of the interest paid on the interest rate swap, was approximately 7% at December 31, 1998 (7.2% including the interest paid on the interest rate swap). During the third quarter of 1999, the interest rate swap was terminated at no cost to the Company. The weighted average interest rate on borrowings outstanding at December 31, 1999 and 1998 were 10.2% and 7.2%, respectively. SUBSEQUENT EVENT-- Effective February 11, 2000, the Company entered into a Fifth Amendment and Consent to the Credit Agreement. The amended agreement provided for up to $138,000,000 of borrowings and/or letters of credit and extended the termination date of the agreement to March 7, 2000. On March 7, 2000, the Company entered into a Loan and Security Agreement with LaSalle Bank National Association ("LaSalle"). Under the terms of the agreement, the Company may borrow up to $18,000,000 at a floating prime (prime less 100 basis points) rate within three months after the closing of the agreement. Amounts outstanding under the agreement are due 30 months after closing. Prepayment is allowed without penalty. The loan is secured by a first lien on the Company's 19.9% interest in New Bush Hog. Subsequent to closing of this agreement, the Company borrowed the maximum amount available under the agreement. These proceeds, combined with the proceeds received from the sale of an 80.1% interest in the operations of the Agricultural Products Group, were 36 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) applied to repay the Company's indebtedness outstanding under the Second Amended and Restated Credit Agreement, the Company's indebtedness outstanding under the Bush Hog Investors Loan and costs associated with the sale. The Company also entered into a new credit facility with Foothill Capital Corporation ("Foothill") effective March 29, 2000. The new credit facility has a three year term, maturing in March 2003, and consists of term loan of $10,600,000 and a revolving credit facility which may be drawn upon from time to time up to the lower of $19,400,000 or an amount based upon a percentage of eligible accounts receivable and eligible inventories relating to presses which are within sixty (60) days of shipment, as determined by Foothill subject to reserves as determined by Foothill (the "Borrowing Base"). The amount available under the term loan sub-line is reducedby $176,667 monthly commencing in September 2000. The maximum remaining amount due at maturity in March 2003 is $5,123,323. Interest is payable monthly at a floating prime rate (prime plus 200 basis points on the term loan and prime plus 125 basis points on the revolver). In the event of a default, the interest rate increases by 300 basis points. Foothill received a closing fee of $300,000 plus a monthly fee of $50,000 for each month a balance is outstanding under the revolving credit facility. With certain exceptions, the penalty for prepayment is $900,000 (3% of the maximum credit available) in the first year, declining to 2% and 1% in the second and third years. Certain portions of the Borrowing Base will be determined in June, following Foothill's review and determination of eligible receivables. In connection with the Foothill loan, the Company granted a lien upon and security interests in substantially all of its assets (except its membership interest in New Bush Hog). The loan agreement requires that the Company sell its remaining interest in New Bush Hog on or before June 30, 2000. Restrictions in the Foothill loan agreement include, among other things, limitations on capital expenditures, liens and guaranties and restrictions on acquisitions and investments and does not permit the payment of cash dividends. Additionally, Foothill can accelerate repayment in the event of a material adverse change in the business, as defined in the agreement. Financial covenants include a covenant that earnings before interest, taxes, depreciation and amortization ("EBITDA"), exclusive of extraordinary gains, exceed the amounts listed below as of the dates and for the periods indicated: June 30, 2000.............................. last three months $(1,300,000) September 30, 2000......................... last six months $(3,500,000) December 31, 2000.......................... last nine months $(4,600,000) March 31, 2001............................. last twelve months $(3,900,000) June 30, 2001.............................. last twelve months $(3,000,000) September 30, 2001......................... last twelve months $ 1,300,000 December 31, 2001.......................... last twelve months $ 7,600,000
While the Company projects that it will be able to comply with this covenant, the Company's EBITDA for future peirods cannot be predicted with a reasonable degree of certainty. The Company's future operating results depend, among other things, upon the receipt in the next several months and continuing thereafter of new press orders in appropriate sequences and bearing appropriate margins. Because the borrowing base is limited solely to a percentage of eligible accounts receivable and eligible inventories relating to presses which are within sixty (60) days of shipment (and not to a percentage of total inventories as well), the credit facility is not a source of financing for the substantial work in process inventories frequently required in the Company's business. This will limit the Company's ability to accept press orders which do not include customer deposits. 6. LEASES: CAPITAL LEASES-- The Company leases various types of manufacturing, office and transportation equipment. 37 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) Capital leases included in Machinery and equipment in the accompanying balance sheets are as follows:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- Capitalized cost................................... $5,143,000 $3,622,000 Less--Accumulated amortization..................... 1,634,000 1,081,000 ---------- ---------- $3,509,000 $2,541,000 ========== ==========
See Note 5 for information as to future debt payments relating to the above leases. Capital leases associated with continuing operations included capitalized cost of $1,244,000 less accumulated amortization of $485,000 at December 31, 1999 and capitalized cost of $988,000 less accumulated amortization of $283,000 at December 31, 1998. OPERATING LEASES-- Rent expense for operating leases, which is charged against income, was as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Minimum rentals........................ $1,184,000 $1,215,000 $1,989,000 Contingent rentals..................... 204,000 87,000 41,000 ---------- ---------- ---------- $1,388,000 $1,302,000 $2,030,000 ========== ========== ==========
Contingent rentals are composed primarily of truck fleet unit charges for actual usage. Some leases contain renewal and purchase options. The leases generally provide that the Company pay taxes, maintenance, insurance and certain other operating expenses. Operating lease expense associated with continuing operations totaled $338,000, $295,000 and $925,000 for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, future minimum rental payment commitments under operating leases that have initial or remaining noncancelable lease terms in excess of one year are as follows:
MINIMUM ANNUAL SUBLEASE NET MINIMUM RENTAL RENTAL ANNUAL RENTAL PAYMENTS INCOME PAYMENTS ---------- --------- ------------- Year ending December 31, 2000................................. $ 711,000 $ (63,000) $ 648,000 2001................................. 651,000 (65,000) 586,000 2002................................. 519,000 (66,000) 453,000 2003................................. 460,000 (68,000) 392,000 2004................................. 129,000 (23,000) 106,000 ---------- --------- ---------- $2,470,000 $(285,000) $2,185,000 ========== ========= ==========
Net minimum annual rental payments associated with continuing operations were $348,000 for 2000, $333,000 for 2001, $309,000 for 2002, $269,000 for 2003 and $87,000 for 2004. 7. PREFERRED STOCK: The Company has 2,000,000 shares of authorized preferred stock of which 350,000 shares are designated as Series B Variable Rate Cumulative Preferred Stock and 150,000 shares are designated as Series C Cumulative Preferred Stock. All shares of the Series B and Series C Preferred Stock have 38 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) been redeemed. In conjunction with the declaration of a dividend of the preferred share purchase right in 1999, the Company designated 13,000 shares as Series D Junior Participation Preferred Stock--see Note 8. The remaining 1,487,000 shares of authorized preferred stock are undesignated and unissued at December 31, 1999. 8. COMMON STOCK AND OPTIONS: The Company has an incentive stock plan ("1977 plan") which authorizes stock incentives for key employees in the form of stock awards, stock appreciation rights and stock options. Options under the 1977 plan, which are granted at fair market value at date of grant, are non-qualified options (not "incentive stock options" as defined by the Internal Revenue Code). Options currently outstanding under the 1977 plan become exercisable to the extent of 25% one year from date of grant and 25% in each of the next three years, and expire 10 years from the date of grant. There were no stock awards issued under this plan in 1999, 1998 or 1997. No stock appreciation rights have been granted to date under this plan. At December 31, 1999, there are no options outstanding under this plan. Additional stock incentives will not be issued under this plan. In 1990, the Company's Board of Directors approved a new incentive stock plan, the 1990 Long Term Incentive Stock Plan ("1990 plan") which authorizes stock incentives for key employees in the form of stock awards and stock options. The 1990 plan, as amended, authorizes the issuance of up to 1,500,000 shares of the Company's Common Stock. Options under the 1990 plan, which are granted at fair market value at date of grant, may be granted as either incentive stock options or non-statutory stock options. Options granted become exercisable to the extent of 50% one year from date of grant and the remaining 50% two years from date of grant. Since the inception of the 1990 plan, the Company has issued options to purchase 1,398,877 shares (net of forfeitures) of the Company's Common Stock at prices between $1.00 and $19.00 per share. There are 309,650 options outstanding under this plan at December 31, 1999 and are included in the following table. At December 31, 1999, the Company has the capacity to issue an additional 101,123 stock incentives under the 1990 plan. In 1994, shareholders approved a new incentive plan, the 1993 Directors Incentive Plan ("1993 plan") which authorizes the issuance of stock options to members of the Board of Directors who are not employees of the Company. Options under the 1993 plan, which are granted at fair market value at date of grant, are granted as non-statutory stock options. Options granted become exercisable to the extent of 50% one year from date of grant and the remaining 50% two years from date of grant. Since the inception of the 1993 plan, the Company has issued options to purchase 114,750 shares of the Company's Common Stock at prices between $8.34 and $19.01 per share. All options issued are outstanding under this plan at December 31, 1999 and are included in the table below. In 1997, shareholders approved a new incentive stock plan, the 1997 Incentive Stock Plan ("1997 plan") to replace the 1990 plan and the 1993 plan described above. The 1997 plan permits a committee of the Company's Board of Directors to grant incentive awards in the form of non-qualified stock options, incentive stock options, stock awards including restricted stock, stock appreciation rights and performance units to key employees and non-employee directors. The 1997 plan authorizes the issuance of up to 750,000 shares of the Company's Common Stock pursuant to the grant or exercise of stock options, stock appreciation rights, restricted stock and performance units. Non-qualified stock options issued under this plan were granted at fair market value at date of grant. Options granted become exercisable over a period of up to three years from date of grant with no option exercisable prior to one year from date of grant. Since the inception of the 1997 plan, the Company has issued options to purchase 709,400 shares (net of forfeitures) of the Company's Common Stock at prices between $3.625 and $24.875. All options issued under this plan (net of forfeitures) are outstanding at December 31, 1999 and are included in the table below. At December 31, 1999, the Company has the capacity to issue an additional 40,600 stock incentives under the 1997 plan. 39 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) Stock option transactions in 1999, 1998 and 1997 were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1999 1998 1997 -------------------- -------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- -------- -------- Outstanding at beginning of year........................ 1,059,940 $12.11 810,360 $13.89 931,758 $12.15 Granted................... 170,000 3.68 369,100 8.31 110,000 24.65 Exercised................. -- -- (111,520) 12.09 (188,273) 11.14 Expired................... (22,065) 15.92 -- -- (375) 16.09 Forfeited................. (74,075) 13.66 (8,000) 16.41 (42,750) 15.87 --------- ------ --------- ------ -------- ------ Outstanding at end of year.... 1,133,800 $10.68 1,059,940 $12.11 810,360 $13.89 ========= ====== ========= ====== ======== ====== Options exercisable at end of year........................ 808,600 $12.59 610,340 $13.09 523,529 $10.93 Weighted average fair value of options granted during the year........................ $ 1.23 $ 1.89 $ 6.60
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- Risk free interest rate........................ 6.29% 4.29% 6.10% Dividend yield................................. 3.56% 0.97% 0.70% Expected lives................................. 4 years 4 years 4 years Volatility..................................... 45.10% 22.50% 23.00%
The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------- ------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE RANGES OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE ------------------------- --------- ----------- -------- -------- -------- $1.75-5.875 197,150 8.79 years $ 3.55 27,150 $ 2.70 7.9375-12.92 578,150 6.27 years 8.32 428,450 8.45 15.26-24.875 358,500 6.60 years 18.40 353,000 18.37 --------- ------ $1.75-24.875 1,133,800 6.81 years $10.68 808,600 $12.59 ========= ======
At December 31, 1999, the Company has four stock options plans, which are described above. The Company applied Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for these plans. Compensation costs recognized in relation to certain stock option exercises amounted to $1,119,000 and $1,375,000 for the years ended December 31, 1998 and 1997, respectively. No compensation costs have been recognized for the years ended December 31, 1999, 1998 and 1997 in relation to the issuances of options in each of the respective years. Had compensation costs for the Company's stock option plans been determined based on the fair value at the grant date for options 40 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) granted under these plans consistent with the method of SFAS 123--Accounting for Stock-Based Compensation, the Company's net income (loss) and earnings (loss) per share would have been revised to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ------------ ------------ ----------- Net income (loss) As reported $(26,765,000) $(14,113,000) $15,646,000 Pro forma (27,536,000) (14,978,000) 15,135,000 Basic earnings (loss) per share As reported $ (2.26) $ (1.19) $ 1.29 Pro forma (2.33) (1.26) 1.25 Diluted earnings (loss) per share As reported $ (2.26) $ (1.19) $ 1.27 Pro forma (2.33) (1.26) 1.23
On February 15, 1991, the Company declared a dividend distribution of one right ("1991 Right") to purchase an additional 1.5 shares of the Company's Common Stock for $50 on each 1.5 shares of Common Stock outstanding. On August 10, 1999, the Company's Board of Directors authorized the redemption of these 1991 rights for the price of $.01 per right from all holders of record as of July 30, 1999. On July 28, 1999, the Company's Board of Directors declared a dividend of one preferred share purchase right ("Right") for each outstanding share of common stock, par value $.01 per share, of the Company ("Common Shares") to the stockholders of record on July 30, 1999 ("Record Date"). Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series D Junior Participating Preferred Stock of the Company, no par value per share ("Preferred Shares"), at a price of $50.00 per one one-thousandth of a Preferred Share ("Purchase Price"), subject to adjustment. In the event that any person or group of affiliated or associated persons acquires beneficial ownership of 15% or more of the outstanding Common Shares, or a person filing a Schedule 13G or 13D with no intent to change the control of the Company on the date of the agreement acquires beneficial ownership of 20% or more of the outstanding Common Shares (each an "Acquiring Person"), each holder of a Right, other than the Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold after a person or group has become an Acquiring Person, each holder of a Right (other than Rights beneficially owned by Acquiring Person, which will be void) will thereafter have the right to receive that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. The distribution date is the earlier of: (i) 10 days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 15% or more of the outstanding Common Shares or, in the case of a person filing a Schedule 13G or 13D with no intent to change the control of the Company, 10 days following a public announcement that such person has acquired beneficial ownership of 20% or more of the outstanding Common Shares; or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors of the Company prior to such time as any person or group of affiliated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding Common Shares. The Rights are not exercisable until the Distribution Date. The Rights will expire on July 31, 2009 ("Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company. 41 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) 9. RETIREMENT, PENSION AND POSTRETIREMENT HEALTH PLANS: The Company sponsors several defined benefit pension plans which cover certain union and office employees. Benefits under these plans generally are based on the employee's years of service and compensation during the years immediately preceding retirement. The Company's general funding policy is to contribute amounts deductible for Federal income tax purposes. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ending December 31, 1999, and a statement of the financial status as of December 31, 1999 and 1998:
YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- Change in benefit obligation: Benefit obligation at beginning of year........ $40,601,000 $38,606,000 Service cost................................... 953,000 718,000 Interest cost.................................. 2,633,000 2,684,000 Amendments..................................... 299,000 56,000 Actuarial losses............................... 362,000 2,227,000 Benefits paid.................................. (2,579,000) (3,690,000) ----------- ----------- Benefit obligation at end of year.............. $42,269,000 $40,601,000 =========== =========== Change in plan assets: Fair value of plan assets at beginning of year......................................... $36,768,000 $46,162,000 Actual return on plan assets................... 6,276,000 (6,849,000) Employer contributions......................... -- 1,145,000 Benefits paid.................................. (2,579,000) (3,690,000) ----------- ----------- Fair value of plan assets at end of year....... $40,465,000 $36,768,000 =========== =========== DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- Funded status: Funded status at end of year................... $(1,804,000) $(3,833,000) Unrecognized transition obligation............. (276,000) (482,000) Unrecognized prior service cost................ 1,555,000 1,927,000 Unrecognized net actuarial (gain).............. (3,765,000) (772,000) ----------- ----------- Accrued pension cost at end of year............ $(4,290,000) $(3,160,000) =========== ===========
The projected benefit obligation and accumulated benefit obligation for pension plans with accumulated benefit obligations in excess of plan assets were $1,794,000 and $1,277,000, respectively, as of December 31, 1999 and $1,484,000 and $802,000, respectively, as of December 31, 1998. There were no assets associated with these related plans. The expected long-term rate of return used in determining the net periodic pension cost in all years was 7.5%. The actuarial present value of the benefit obligation was determined using a discount rate of 7.5% in 1999, 6.75% in 1998 and 7.5% in 1997. The rate of compensation increase used to measure the benefit obligation in three plans was 5%. All other plans are based on current compensation levels. The plans' assets include common stocks, fixed income securities, short-term investments and cash. Common stock investments include approximately 612,710 and 281,810 shares of the Company's Common Stock at December 31, 1999 and 1998, respectively. 42 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) The following table provides the amounts recognized in the balance sheet as of December 31, 1999 and 1998:
DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- Accrued benefit liability......................... $(4,290,000) $(3,299,000) Intangible asset.................................. -- 139,000 ----------- ----------- Accrued pension cost at end of year............... $(4,290,000) $(3,160,000) =========== ===========
Net periodic pension costs as they relate to defined benefit plans were as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Service cost......................... $ 953,000 $ 718,000 $ 758,000 Interest cost........................ 2,633,000 2,684,000 2,717,000 Expected return on plan assets....... (2,893,000) (2,938,000) (2,678,000) Amortization of transition obligation......................... (206,000) (472,000) (473,000) Amortization of prior service costs.............................. 671,000 277,000 328,000 Amortization of actuarial (gain) loss............................... (29,000) (409,000) (327,000) ----------- ----------- ----------- Net periodic pension cost (income)... $ 1,129,000 $ (140,000) $ 325,000 Curtailment loss..................... -- -- 210,000 ----------- ----------- ----------- Net periodic pension cost (income) after curtailment.................. $ 1,129,000 $ (140,000) $ 535,000 =========== =========== ===========
Curtailment loss in 1997 was related to the retirement of certain Corporate executives. Net periodic pension cost (income) after curtailment related to continuing operations were $312,000, $(265,000) and $160,000 for the years ended December 31, 1999, 1998 and 1997, respectively. As part of the Agricultural Products Group sale, the Company retained liabilities under the Bush Hog Salaried Pension Plan. The Company estimates a $2,578,000 pension curtailment gain will arise when the Company assumes the pension plan obligations and assets related to this plan. Certain employees of the Company are also eligible to become participants in the Save Money and Reduce Taxes ("SMART") 401(k) plan. Under terms of the plan, the trustee is directed by each employee on how to invest the employee's deposit. As of December 31, 1999 and 1998, assets of the SMART plan include approximately 401,000 and 434,000 shares, respectively, of the Company's Common Stock. Effective October 1, 1998, the Company instituted the Allied Products Corporation Savings Incentive 401(k) Plan for Bush Hog salaried employees. Except for supplemental contributions that are payable under the SMART Plan, terms of the plan are identical to those of the SMART plan. Employees eligible under this new plan are not eligible for the SMART plan. Effective with the sale of the Agricultural Products Group, benefits could no longer be earned under this plan. Also effective October 1, 1998, the Company instituted a matching provision for voluntary deposits by employees (up to 6% of their salaries) on the basis of $1 for every $2 deposited. This matching feature is available to participants in the SMART plan and the Allied Products Corporation Savings Incentive Plan. The Company's total contribution into these plans amounted to approximately $900,000 ($359,000 associated with continuing operations) in 1999 and $205,000 ($90,000 associated with continuing operations) in 1998. 43 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) Effective January 1, 1998, the Company instituted a supplemental contribution feature to the SMART plan described above. This discretionary noncontributory feature replaces the Target Benefit Plan and a defined contribution plan--see below. Currently, all employees eligible for the SMART plan receive an allocation which is based upon a percentage of the earnings of the employees. The Company's total supplemental contribution amounted to approximately $1,240,000 ($759,000 associated with continuing operations) in 1999 and $680,000 ($215,000 associated with continuing operations) in 1998. Effective January 1, 1995, the Company instituted a noncontributory defined contribution retirement plan called the Target Benefit Plan. All non union employees not covered by pension plans were covered under the Target Benefit Plan. Under the terms of the Target Benefit Plan, the Company made an actuarially determined annual contribution based upon each eligible employee's years of service and earnings as defined. Provisions for the contribution to this plan in 1997, all of which were associated with continuing operations, were $664,000. Effective January 1, 1998, this plan was terminated. On this date, all employees previously receiving benefits under this plan now receive benefits under the SMART plan described above. Benefits earned under the Target Benefit Plan were transferred to the SMART plan. The Company also has a defined contribution retirement plan which covers certain employees. There are no prior service costs associated with this plan. The Company follows the policy of funding retirement contributions under this plan as accrued. Contributions to this plan, all of which were associated with discontinued operations, were $222,000 in 1997. Benefits under this plan were frozen effective January 1, 1998. On this date, all employees previously receiving benefits under this plan now receive benefits under the SMART plan described above. The Company provides medical benefits for retirees and their spouses at the Verson division and certain other former employees of several noncontinuing operations. Accruals for such costs are recognized in the financial statements over the service lives of these employees. Contributions are required of most retirees for medical coverage. The current obligation was determined by application of the terms of the related medical plans, including the effects of established maximums on covered costs, together with relevant actuarial assumptions and health-care cost trend rates projected at annual rates ranging ratably from 7.2% for retirees under age 65 (and for retirees age 65 and older) in 2000 to 5% over 7 years. The effect of a 1% annual increase (decrease) in these assumed cost trend rates would increase the accumulated postretirement benefit obligation by approximately $103,000 and $68,000 for the years ended December 31, 1999 and 1998, respectively. The annual service and interest costs would not be materially affected. The following table provides a reconciliation of the changes in the plans' benefit obligations over the two year period ending December 31, 1999 and a statement of the financial status as of December 31, 1999 and 1998:
YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- Change in benefit obligation: Benefit obligation at beginning of year................... $ 864,000 $ 799,000 Service cost.............................................. 73,000 55,000 Interest cost............................................. 82,000 56,000 Actuarial (gains) losses.................................. 327,000 50,000 Benefits paid............................................. (133,000) (96,000) ----------- ----------- Benefit obligation at end of year......................... $ 1,213,000 $ 864,000 =========== ===========
44 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- Funded status: Funded status at end of year.............................. $(1,213,000) $ (864,000) Unrecognized prior service cost........................... 9,000 10,000 Unrecognized net actuarial (gain) loss.................... 175,000 (175,000) ----------- ----------- Accrued postretirement benefit cost at end of year........ $(1,029,000) $(1,029,000) =========== ===========
Net periodic postretirement benefit costs include the following:
YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 --------- --------- -------- Service cost................................................ $ 73,000 $ 55,000 $ 50,000 Interest cost............................................... 82,000 56,000 56,000 Amortization of unrecognized net (gains) losses............. 7,000 (10,000) (11,000) Amortization of prior plan amendments....................... 1,000 1,000 1,000 -------- -------- -------- Net periodic postretirement benefit cost.................... $163,000 $102,000 $ 96,000 ======== ======== ========
Measurement of the postretirement benefit obligation was based on a discount rate of 7.5% in 1999, 6.75% in 1998 and 7.5% in 1997. 10. ENVIRONMENTAL, LEGAL AND CONTINGENT LIABILITIES: ENVIRONMENTAL MATTERS-- The Company's manufacturing plants generate both hazardous and nonhazardous wastes, the treatment, storage, transportation and disposal of which are subject to federal, state and local laws and regulations. The Company believes that its manufacturing plants are in substantial compliance with the various federal, state and local laws and regulations, and does not anticipate any material expenditures to remain in compliance. Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended ("CERCLA"), and other statutes, the United States Environmental Protection Agency ("EPA") and the states have the authority to impose liability on waste generators, site owners and operators, and others regardless of fault or the legality of the original disposal activity. Accordingly, the Company has been named as a potentially responsible party ("PRP"), or may otherwise face potential liability for environmental remediation or cleanup, in connection with the sites described below that are in various stages of investigation or remediation. Under applicable law, the Company, along with each other PRP, could be held jointly and severally liable for the total remediation costs of PRP sites. At one site, the Company is one of seven PRP's because of its apparent absentee ownership of four parcels of land from 1967 to 1969 which may have held part or all of one or more settling ponds operated by a tenant business. The Company has already paid $85,000 as its share of a settlement of an EPA demand for $415,000 in past response costs, and the EPA has sought payment from the PRP's of an additional $572,000 in response costs. The Company is not aware of any other parties' inability to pay. The EPA has ordered the Company and one other PRP to undertake the design and construction of the remediation project. All PRP's have agreed to undertake the design and construction of the remediation project pursuant to a financial participation agreement. The EPA estimates the present value of the cost to implement its selected cleanup method to be approximately $1,869,000. The Company has accrued its estimated share of the remaining cleanup cost which is not considered significant. The Company has also filed a claim against its insurers. 45 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) Pursuant to a consent decree entered into in November 1991 with the U.S. Department of Justice, the Company closed and remediated a landfill leased by the Company and formerly used for the disposal of spent foundry sands. During 1995, remedial action required by the consent decree was completed, and the EPA approved the Remedial Action Report submitted by the Company. The Company's remaining obligations under the consent decree include periodic inspections, monitoring and maintenance as needed. The Company has also been named as a PRP, along with numerous parties, at various hazardous waste sites undergoing cleanup or investigation for cleanup. The Company believes that at each of these sites, it has been improperly named or will be considered to be a "de minimus" party. The Company is a defendant in an action filed in July 1991 in the United States District Court, Northern District of New York where a private party, ITT Commercial Finance Corp., seeks recovery of costs associated with an environmental cleanup at a site formerly owned by the Company. At this site, which the Company or one of its subsidiaries owned from 1968 until 1976, the plaintiff and current owner seeks to recover in excess of $4,000,000, including attorney fees, from the Company and other defendants. The Company has denied liability and asserted cross-claims against the co-defendants. Trial is currently scheduled to commence in May 2000. The Company has also filed claims against its insurers. The Company is in the process of investigating or has determined the need to perform environmental remediation or clean up at certain manufacturing sites formerly operated and still owned by the Company. At the sites where the Company has determined that some remediation or cleanup is required, the Company has provided for the estimated cost for such remediation or cleanup. One site, located in Coldwater, Ohio, was sold to the purchaser of the White-New Idea business. That sale was contingent on the issuance of a covenant not to sue and related no further action letter by the State of Ohio under the Ohio Voluntary Action Program. The Company completed all necessary investigation and remediation, and expended approximately $1,300,000 in this effort. Upon submission of the final report, a covenant not to sue and no further action letter was issued by the Ohio Environmental Protection Agency. While this project was underway, the Company entered into a series of agreements for financial contribution with both the prior owner and the purchaser of the facility, and recovered approximately 50% of the $1,300,000 spent. During 1999, 1998 and 1997, the Company recorded charges (credits) of approximately $1,245,000, $(151,000) and $(1,181,000), respectively, toward various environmental matters discussed above, $1,000,000 of which was recorded in the fourth quarter of 1999 based on recent developments with respect to an environmental claim. At December 31, 1999, the Company has accruals on a non-discounted basis, including those discussed above, of $2,376,000 for the estimated cost to resolve its potential liability with the above and other, less significant, matters. Additional liabilities are possible and the ultimate outcome of these matters may have an effect on the financial position or results of operations in a future period. However, the Company believes that the above accruals are adequate for the resolution of known environmental matters and the outcome of these matters is not expected to have a material adverse effect on the Company's financial position or its ongoing results of operations. OTHER-- In connection with the sale of the business and assets of the Littell division in 1991, the Company entered into a "License Agreement" pursuant to which the Company licensed certain technology to the purchaser for which the purchaser agreed to pay royalties totaling $8,063,000 plus interest, in minimum quarterly installments of $312,500 commencing in November 1992, with a final lump sum payment of approximately $7,300,000 due May 22, 1996. The purchaser's payment obligation was secured by the technology license and was guaranteed by the purchaser's parent. The Company 46 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) initially recorded this agreement as a long-term note receivable. In 1995, however, the Company established a reserve of $7,699,000 (reduced to $7,165,000 at December 31, 1996) against the receivable, due to published adverse financial information about the purchaser and its parent which raised serious concerns about the collectability of the receivable. During 1997, the Company entered into a settlement agreement with the purchaser of the business. Under the terms of the agreement, the purchaser agreed to pay the Company $3,000,000 and all parties agreed to the dismissal/release of certain actions, claims and security interests. All amounts due under this agreement were collected in 1998 ($610,000) and 1997 ($2,390,000). In January 1998, an adversary proceeding was filed against the Company in United States Bankruptcy Court, Southern District of Texas, Houston Division by Cooper Manufacturing Corp., a debtor in a bankruptcy proceeding. The transactions and occurrences on which the adversary proceeding was based were the Company's sale of the assets of a former division and certain financial transactions related thereto. Causes of action described in the adversary proceeding included accounting, turnover, fraudulent transfers, "alter ego," economic duress, unjust enrichment and restitution. The case was settled during 1999 by payment of $615,000 by the Company to the plaintiffs. One case pending against the Company in the United States District Court for the Northern District of Alabama, Southern Division, is a race discrimination class action lawsuit brought by seven plaintiffs who are current or former employees. The complaint, which was filed in May 1998 but not served on the Company until October 1998, alleges discrimination with respect to compensation, promotions, job assignments, discipline and other terms and conditions of employment and seeks injunctive relief, back pay, compensatory and punitive damages, attorney fees and costs. The potential class identified by plaintiffs could include several hundred current or former employees. No class certification hearing has been held and no order has been entered. The Company denies the allegations of the plaintiffs and is vigorously defending this claim. During the fourth quarter of 1999, based on recent developments in this case, the Company established a $1,000,000 reserve considering the range of potential loss associated with this claim. An unfavorable outcome of this claim could have a material adverse effect on the Company's financial position and results of operations. Changes in the estimate in the near term are reasonably possible. In May 1999 and June 1999, the Company was served with two complaints purporting to be class action lawsuits on behalf of shareholders who purchased the Company's common stock between February 6, 1997 and March 11, 1999. The complaints, which were filed in the United States District Court for the Northern District of Illinois, were virtually identical. They alleged various violations of the federal securities laws, including misrepresentations or failure to disclose material information about the Company's results of operations, financial condition, weakness in its financial internal controls, accounting for long-term construction contracts and employee stock option compensation expense. In August 1999, the District Court ordered that the two cases be consolidated for all purposes. A Consolidated Amended Complaint was filed on October 12, 1999. The Company filed a Motion to Dismiss on December 13, 1999. The action was dismissed, without prejudice, by order dated March 13, 2000, with leave to amend the complaint. No estimate can currently be made as to the claim. However, should the plaintiff further amend the complaint and survive subsequent motions to dismiss, such claim could have a material adverse effect on the financial position and results of operations in the near term if an unfavorable outcome were to occur. The Company is involved in a number of other legal proceedings as a defending party, including product liability claims for which additional liability is reasonably possible. It is the Company's policy to reserve on a non-discounted basis for all known and estimated unreported product liability claims. The products to which the claims primarily relate are products currently manufactured by the Company's Industrial Products Group and products related to discontinued operations for which the Company contractually retained certain product liability claims generally arising prior to the sale of the related business. To reasonably estimate the liability of such claims (reserves of $6,204,000 and 47 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) $4,674,000 at December 31, 1999 and 1998, respectively), the Company historically uses estimates provided by legal counsel based on existing claims experience in all years, and in 1999 and 1998 also obtained actuarial information which was based on the Company's historical claim experience to estimate incurred but not reported claims. Payment of these claims may take place over the next several years. Additional liabilities are possible and the ultimate outcome of these matters may have an effect on the financial position or results of operations in a future period. For one product liability claim filed in December of 1998 in the Circuit Court of Hinds County, Mississippi, First Judicial District, the amount of damages claimed against all defendants is $100,000,000, which exceeds the Company's liability insurance limits of $50,000,000. Although there is no guarantee that the ultimate outcome of this claim against the Company will not exceed such limits, the Company currently believes that the ultimate outcome of this claim will not exceed its insurance coverage. However, changes in the estimate in the near term could be material to the financial position and results of operations if an unfavorable outcome were to occur. For all other matters, after consideration of relevant data, including insurance coverage and accruals, management believes that the eventual outcome of these matters will not have a material adverse effect on the Company's financial position or its ongoing results of operations. The Verson division may not be able to meet delivery schedules for certain presses currently on orders in production. Certain customers of this division may seek to exercise remedies for alleged breach of contract by the Company. The remedies could include partial or complete cancellation of orders and recovery of damages for late delivery, which may include downtime, lost sales and lost profit. The Company cannot at this time determine the amount of any potential claim that may be asserted due to late delivery, however, such claims could have a material adverse effect on the financial position and results of operations in the near term, if an unfavorable outcome were to occur. In response to General Motors' concerns that the Company's cash flow problems would further delay or preclude the Company from completing four presses that were in various stages of production, the Company recently entered into amendments to purchase orders with General Motors. The aggregate sales price of the presses covered by these purchase orders exceeds $75,000,000. Under the terms of the amendments, the Company and General Motors agreed to revised shipping, payment and testing schedules that allow the Company to ship components of, and receive payments for, the first two of the four presses earlier than it would have been able to under the terms of the original purchase orders. Payment terms for the third and fourth presses were largely unchanged from the original order (i.e., 90% upon completion, testing and shipment), however, delivery dates (and related payments) have been extended so that the last press will not be shipped until the first quarter of 2001 and final payment will not be received until the first quarter of 2002. Upon fulfillment of certain conditions set forth in the amendments, General Motors will waive and release the Company from all claims arising from or attributable to the Company's alleged late delivery defaults on all presses and will accept delivery of the last two (2) presses covered by this order. Until such time as to the fulfillment of these conditions, General Motors reserves the right to cancel the purchase orders associated with the third and fourth presses until the Company has demonstrated that it has the financial ability to complete these presses on a timely basis. Such cancellation could have a material adverse effect on the financial position and results of operations in the near term. At December 31, 1998, the Company was contingently liable for approximately $1,579,000 primarily relating to outstanding letters of credit. The Company has entered into agreements with certain executive officers of the Company which provide that, if within one year following a defined change in ownership or control of the Company there shall be an involuntary termination of such executive's employment, or if there shall be defined patterns of activity during such period by the Company causing such executive to resign, then, subject to prevailing tax laws and regulations, the executive shall be entitled to payments of up to approximately three years' compensation. 48 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) 11. OPERATIONS BY INDUSTRY SEGMENT: The Company's continuing operations involve a single industry segment as described in Note 1. Approximately 13%, 4% and 8% of the Company's net sales from continuing operations in 1999, 1998 and 1997, respectively, were exported principally to Canada (13%, 19% and 35% of export sales in 1999, 1998 and 1997, respectively) and Mexico (86%, 76% and 55% of export sales in 1999, 1998 and 1997, respectively). Approximately 66%, 52% and 55% of the Company's total net sales in 1999, 1998 and 1997, respectively, were derived from sales by the Industrial Products Group to the three major U.S. automobile manufacturers. 12. SUMMARY OF OTHER (INCOME) EXPENSE: Other (income) expense consists of the following:
YEAR ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ---------- ----------- ----------- Interest income....................................... $ (360,000) $ (86,000) $ (50,000) Goodwill amortization................................. 179,000 179,000 177,000 Loan cost expenses/amortization....................... 645,000 275,000 -- Environmental related expenses (credits).............. 1,245,000 (151,000) (1,181,000) Net gain on sales of operating and non-operating assets.............................................. (75,000) (1,830,000) (1,645,000) Equity in net loss of nonconsolidated joint venture... 631,000 188,000 54,000 Provision (credit) for collectability (recovery) of long-term note receivable (Note 10)................. -- (610,000) (2,390,000) Idle facility income.................................. (504,000) (183,000) (368,000) Litigation settlements/insurance provisions........... 615,000 -- 2,125,000 Treasury lock settlement.............................. -- 3,005,000 -- Other miscellaneous................................... (540,000) 135,000 260,000 ---------- ----------- ----------- $1,836,000 $ 922,000 $(3,018,000) ========== =========== ===========
13. QUARTERLY FINANCIAL DATA (UNAUDITED): Summarized quarterly financial data for 1999 and 1998 restated for discontinued operations are as follows (in thousands of dollars, except per share data):
QUARTER ENDING --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------- -------- ------------- ------------ 1999 Net sales from continuing operations......... $45,338 $37,491 $30,401 $30,545 Gross profit (loss).......................... (9,481) 3,191 4,529 (2,425) Income (loss) from continuing operations..... (16,006) (4,464) (2,873) (10,997) Income (loss) per common share from continuing operations--diluted............. (1.35) (.38) (.24) (.93) Net income (loss)............................ (12,666) (1,325) 540 (13,314) Net income (loss) per common share--diluted............................. (1.07) (.11) .05 (1.12) 1998 Net sales from continuing operations......... $28,563 $48,033 $43,116 $17,308 Gross profit (loss).......................... 8,641 7,236 (6,731) (19,240) Income (loss) from continuing operations..... 1,572 2,540 (8,812) (25,086) Income (loss) per common share from continuing operations--diluted............. .13 .21 (.74) (2.12) Net income (loss)............................ 5,330 7,101 (7,148) (19,396) Net income (loss) per common share--diluted............................. .44 .59 (.60) (1.64)
49 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) Loss from continuing operations in the fourth quarter of 1999 included charges of approximately $1,900,000 related primarily to product liability (including incurred but not reported) claims for which developments during the quarter required increased loss provisions. Also during the fourth quarter of 1999, the Company recorded a $1,000,000 charge for certain environmental matters--see Note 10. An additional $1,000,000 reserve was provided for in the quarter for a race discrimination class action lawsuit as described in Note 10. Subsequent to the end of 1999 and as discussed in Note 3, the Company's shareholders approved the sale of a majority interest in the operations that had constituted the Agricultural Products Group. The Company has included the operations of the Agricultural Products Group, an allocation of all direct financing, administrative, other expenses and income taxes and a pro rata allocation of interest expense under the caption "Discontinued operations--net of tax" in the accompanying Consolidated Statements of Income (Loss). Previously issued Consolidated Statements of Income (Loss) have been restated to reflect the effect of the discontinued operations. The following table reconciles the quarterly operating results as previously reported to the restated amounts presented above:
QUARTER ENDING --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------- -------- ------------- ------------ 1999 Net sales from continuing operations: As previously reported................... $ 82,240 $ 74,624 $ 69,332 (1) Net change associated with discontinued operations............................. (36,902) (37,133) (38,931) (1) -------- -------- -------- -------- Restated................................. $ 45,338 $ 37,491 $ 30,401 (1) ======== ======== ======== ======== Gross profit (loss): As previously reported................... $ (9) $ 12,536 $ 14,037 (1) Net change associated with discontinued operations............................. (9,472) (9,345) (9,508) (1) -------- -------- -------- -------- Restated................................. $ (9,481) $ 3,191 $ 4,529 (1) ======== ======== ======== ======== Income (loss) from continuing operations: As previously reported................... $(12,666) $ (1,325) $ 540 (1) Net change associated with discontinued operations............................. (3,340) (3,139) (3,413) (1) -------- -------- -------- -------- Restated................................. $(16,006) $ (4,464) $ (2,873) (1) ======== ======== ======== ======== Income (loss) per common share from continuing operations--diluted: As previously reported................... $ (1.07) $ (.11) $ .05 (1) Net change associated with discontinued operations............................. (.28) (.27) (.29) (1) -------- -------- -------- -------- Restated................................. $ (1.35) $ (.38) $ (.24) (1) ======== ======== ======== ========
50 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
QUARTER ENDING --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------- -------- ------------- ------------ 1998 Net sales from continuing operations: As previously reported................... $ 62,831 $ 88,985 $ 77,184 $ 44,834 Net change associated with discontinued operations............................. (34,268) (40,952) (34,068) (27,526) -------- -------- -------- -------- Restated................................. $ 28,563 $ 48,033 $ 43,116 $ 17,308 ======== ======== ======== ======== Gross profit (loss): As previously reported................... $ 19,155 $ 19,215 $ 956 $(15,661) Net change associated with discontinued operations............................. (10,514) (11,979) (7,687) (3,579) -------- -------- -------- -------- Restated................................. $ 8,641 $ 7,236 $ (6,731) $(19,240) ======== ======== ======== ======== Income (loss) from continuing operations: As previously reported................... $ 5,330 $ 7,101 $ (7,148) $(19,396) Net change associated with discontinued operations............................. (3,758) (4,561) (1,664) (5,690) -------- -------- -------- -------- Restated................................. $ 1,572 $ 2,540 $ (8,812) $(25,086) ======== ======== ======== ======== Income (loss) per common share from continuing operations--diluted: As previously reported................... $ .44 $ .59 $ (.60) $ (1.64) Net change associated with discontinued operations............................. (.31) (.38) (.14) (.48) -------- -------- -------- -------- Restated................................. $ .13 $ .21 $ (.74) $ (2.12) ======== ======== ======== ========
- - ------------------------ (1) Operations for the fourth quarter of 1999 were presented on a continuing/discontinued basis, resulting in no restatement of this quarter. 14. OUTLOOK: The principal sources of liquidity for the Company's continuing operations will be its operating cash flows, if any, and borrowings under the new credit facility with Foothill. The Company projects that after application of the net proceeds of the sale of an 80.1% interest in New Bush Hog, it will require approximately $37,000,000 in cash in 2000 to, among other things, (1) discharge certain accrued liabilities and claims arising out of events associated with operations of the Agricultural Products Group before March 7, 2000, (2) extinguish the remainder of its outstanding indebtedness to banks, (3) reduce outstanding payables, (4) finance peak working capital requirements of the Industrial Products Group and (5) finance the acquisition of new equipment. Verson's peak working capital requirements could vary significantly, either higher or lower, from the projected level. The working capital needs of Verson will depend upon the magnitude of new press orders, the timing of the receipt of those orders, the timing of production under the orders and the extent to which the Company receives progress payments on those orders. The Company's working capital projections are also conditioned upon successful negotiation of the Verson labor agreement which expires in June 2000. The Company anticipates that its projected cash requirements will be funded in part by the proceeds (net of escrow requirements) from the sale of its remaining New Bush Hog membership interest (approximately $24,000,000) and a financing lease (approximately $5,000,000), with the remainder being financed by borrowings under the Foothill credit facility. 51 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) The key challenges faced by the Company's Industrial Products Group include: 1. NEW PROFITABLE BUSINESS. The group's operating results in 2000 will be adversely affected by (a) the current low level of the group's backlog ($51,401,000 at December 31, 1999 compared to $145,268,000 a year earlier) and (b) the fact that approximately 50% of the current backlog represents no margin work booked in 1997. Because of the fall off in new orders in 1999 and the first quarter of 2000, Verson is expected to have excess capacity during 2000, revenues are expected decline substantially and the Company anticipates that it will incur an operating loss. The group's long-term viability depends upon the generation of new orders with appropriate margins as well as a timely adjustment of the Company's cost structure consistent with the level of orders received. 2. MANAGEMENT OF MAJOR PROJECTS. The Company has been working to correct the operating problems of its Industrial Products Group and has taken several significant steps which it believes will help to correct the problems. These steps include changes in the group management team, development of a new planning system that will help the Company plan and track engineering, purchasing and manufacturing costs, and the acquisition of equipment which should enable the Company to reduce outsourcing work. The group in the future must demonstrate its ability to estimate costs of major projects accurately and to manage those projects so that they are completed on time and on budget. 3. ADEQUACY OF FINANCIAL RESOURCES. The Company and one of its customers amended several related press orders to address the customer's concern that the Company may lack the necessary financial resources to complete orders already in production. The customer has conditionally agreed to permit the completion of the orders pursuant to a revised schedule, subject to the customer's ongoing review of the Company's financial status. Similarly, due to the Company's financial condition, the Company was slow during 1999 and the first quarter of 2000 to make payments to its creditors, including its suppliers. This has raised concern among suppliers about whether to continue to supply the Company and extend additional credit. Two additional challenges that the Company faces in its business are (1) the business must carry relatively large work-in-process inventories because of the significant periods of time necessary to plan, design and build large metal forming presses and (2) the business is subject to the timing, severity and duration of automotive customer buying cycles. The Company must have the ability to obtain financing, including customer deposits, in order to address these challenges. The Company has obtained the Foothill credit lines of up to $30,000,000 secured by the assets of its Verson division and anticipates that it will enter into a financing lease during the second quarter of 2000 to finance capital equipment purchased during the first quarter of 2000 at a cost of approximately $5,000,000. These financings are subject to preconditions regarding the Company's eligible borrowing base and to ongoing compliance requirements, which if not met would permit Foothill and/ or the financing lease lessor to declare an event of default under the applicable agreements. The Company's ability to meet these requirements is dependent on future results which cannot be predicted with certainty. Although the Foothill credit lines (with the exceptions previously noted) do not provide for loans against work-in-process and raw material inventories, the Company believes that it has financing in place for calendar year 2000 that will be adequate to support the initiatives necessary in 2000 to improve the operations of Verson and secure new orders. While there can be no assurance that additional financing will not be necessary at some point in 2000, currently the credit line appears sufficient to address projected fluctuations in working capital and cash requirements. If these lines of credit become inadequate or an event of default is declared, the Company will be required to pursue alternative financing sources at that time. 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY See the Company's Proxy Statement incorporated by reference as part of this Part III, under the caption "Proposal 1: Election of Directors" for information with respect to the directors. In addition, see the information under the caption "Executive Officers of the Company" as part of Part I, Item 1 of this Report which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION See the Company's Proxy Statement incorporated by reference as part of Part III, Item 10 of this report, under the captions "Management Compensation" for information with respect to executive compensation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners. See the Company's Proxy Statement incorporated by reference as part of Part III, Item 10 of this report, under the captions "Outstanding Stock and Voting Rights", "Beneficial Owners" and "Principal Stockholders and Management Ownership" for information with respect to the ownership of certain beneficial owners of Common Stock of the Company. (b) Security Ownership of Management. See the Company's Proxy Statement incorporated by reference as part of Part III, Item 10 of this report, under the caption "Principal Stockholders and Management Ownership" for information with respect to the beneficial ownership by management of Common Stock of the Company. (c) Changes in Control. There is no arrangement known to the Company, the operation of which may at a subsequent date result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the Company's Proxy Statement incorporated by reference as part of Part III, Item 10 of this report, under the captions "Proposal 1: Election of Directors" and "Management Compensation" for information with respect to certain relationships and related transactions with management. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS Included in Part II of this report: Report of Independent Accountants Consolidated statements of income (loss) for the years ended December 31, 1999, 1998 and 1997 Consolidated balance sheets as of December 31, 1999 and 1998 Consolidated statements of cash flows for the years ended December 31, 1999, 1998 and 1997 Consolidated statements of shareholders' investment for the years ended December 31, 1999, 1998 and 1997 Notes to consolidated financial statements 53 (a) 2. FINANCIAL STATEMENT SCHEDULES Included in Part IV of this report: Schedule II--Valuation and qualifying accounts for the years ended December 31, 1999, 1998 and 1997 (a) 3. EXHIBITS The following exhibits are incorporated by reference as noted below: 2(a) The Registrant's Limited Liability Company Interest Purchase and Asset Contribution Agreement by and between Allied Products Corporation, Bush Hog Investors, L.L.C. and Bush Hog, L.L.C. dated as of October 21, 1999 is incorporated by reference to Exhibit 2 of the Company's September 30, 1999 Quarterly Report in Form 10-Q (File No. 1-5530). 3(a) The Registrant's Restated Certificate of Incorporation, as amended, is incorporated by reference to Exhibit 3 of the Company's 1988 Annual Report on Form 10-K (File No. 1-5530). 3(b) The Registrant's Amendments to Restated Certificate of Incorporation is incorporated by reference to Exhibit 3 of the Company's 1990 Annual Report on Form 10-K (File No. 1-5530). 3(c) The Registrant's By-Laws of the Company, as amended, are incorporated by reference to Exhibit 3 of the Company's 1998 Annual Report on Form 10-K (File No. 1-5530). 4(a) The Registrant's Rights Agreement, dated as of July 28, 1999, between Allied Products Corporation and LaSalle Bank National Association, which includes as Exhibit A the Terms of Series D Preferred Stock, as Exhibit B the Form of Right Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock is incorporated by reference to Exhibit 4.1 of the Company's Form 8-K dated July 30, 1999 (File No. 1-5530). 10(a) *The Registrant's 1977 Incentive Stock Plan is incorporated by reference to Exhibit 10(a) of the Company's 1980 Annual Report on Form 10-K (File No. 1-5530). 10(b) *The Registrant's SMART Plan is incorporated by reference to Exhibit 10(d) of the Company's 1984 Annual Report on Form 10-K (File No. 1-5530). 10(c) *The Registrant's 1990 Long-Term Incentive Stock Plan is incorporated by reference to Exhibit 10 of the Company's 1991 Annual Report on Form 10-K (File No. 1-5530). 10(d) The Registrant's Agreement for the sale of the assets of the White-New Idea Farm Equipment Division of Allied Products Corporation is incorporated by reference to Exhibit(c)(2)(a)(i) of the Company's report on Form 8-K dated January 14, 1994 (File No. 1-5530). 10(e) *The Registrant's Allied Products Corporation Executive Retirement Plan dated April 4, 1994 is incorporated by reference to Exhibit 10(a) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(f) *The Registrant's Executive Officer's Agreement in Event of Change in Control or Ownership of Allied Products Corporation dated April 1, 1994 is incorporated by reference to Exhibit 10(b) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(g) *The Registrant's Allied Products Corporation Retirement Plan dated as of December 31, 1993 is incorporated by reference to Exhibit 10(d) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530).
54 10(h) *The Registrant's Bush Hog Segment of the Allied Products Corporation Combined Retirement Plan effective December 31, 1993 is incorporated by reference to Exhibit 10(e) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(i) *The Registrant's Verson Segment of the Allied Products Corporation Combined Retirement Plan effective December 31, 1993 is incorporated by reference to Exhibit 10(f) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(j) *The Registrant's Littell Segment of the Allied Products Corporation Combined Retirement Plan effective December 31, 1993 is incorporated by reference to Exhibit 10(g) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(k) The Registrant's Consent to Stock Repurchase dated as of November 27, 1996 is incorporated by reference to Exhibit 10B of the Company's 1996 Annual Report on Form 10-K (File No. 1-5530). 10(l) *The Registrant's 1997 Incentive Stock Plan is incorporated by reference to Exhibit 10 of the Company's June 30, 1997 Quarterly Report on Form 10-Q (File No. 1-5530).
- - ------------------------ * Management contracts or compensatory plans. The following exhibits are attached only to the copies of this report filed with the Securities and Exchange Commission:
EXHIBIT NO. NAME OF EXHIBIT ---------------- --------------- 2.1 First Amendment to Limited Liability Company Interest Purchase and Asset Contribution Agreement, dated as of December , 1999. 2.2 Second Amendment to Limited Liability Company Interest Purchase and Asset Contribution Agreement, dated as of February 10, 2000. 2.3 Third Amendment to Limited Liability Company Interest Purchase and Asset Contribution Agreement, dated as of March 7, 2000. 10.1 Material Contract-Loan and Security Agreement between Allied Products Corporation, as Borrower, and LaSalle Bank National Association, as Lender, dated as of March 7, 2000. 10.2 Material Contract-Letter of Agreement dated March 23, 2000 between Allied Products Corporation, as Seller, and Bush Hog Investors, as Buyer, regarding the sale of Registrant's 19.9% interest in Bush Hog, L.L.C. 10.3 Material Contract-Loan and Security Agreement by and between Allied Products Corporation and Foothill Capital Corporation dated as of March 29, 2000. 21 Subsidiaries of the Registrant. 23 Consent of Independent Accountants. 24 Power of Attorney. 27 Financial Data Schedule.
Other financial statements, schedules and exhibits not included above have been omitted as inapplicable or because the required information is included in the consolidated financial statements or notes thereto. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the fourth quarter of the year ended December 31, 1999. 55 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---------- --------- ----------- Allowance for doubtful accounts-- Current receivables: Balance at beginning of year................... $ 519,000 $ 531,000 $ 629,000 Add (deduct)-- Provision charged to income.................. 1,553,000 129,000 114,000 Allowance applicable to receivables acquired................................... -- 47,000 -- Receivables charged off as bad debts, net of recoveries................................. (599,000) (188,000) (212,000) ---------- --------- ----------- Balance at end of year......................... $1,473,000 $ 519,000 $ 531,000 ========== ========= =========== Long-term receivables: Balance at beginning of year................... $ -- $ 610,000 $ 7,165,000 Add (deduct)-- Provision charged to income.................. -- -- -- Receivables charged off as bad debts, net of recoveries................................. -- (610,000) (6,555,000) ---------- --------- ----------- Balance at end of year......................... $ -- $ -- $ 610,000 ========== ========= ===========
- - ------------------------ Amounts in the above schedule relate to both continuing and discontinued operations. 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLIED PRODUCTS CORPORATION (Registrant) April 13, 2000 By: /s/ RICHARD A. DREXLER ---------------------------------------------- Richard A. Drexler, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE AND FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. * /s/ [RICHARD A. DREXLER] ---------------------------------------------- Richard A. Drexler, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE AND FINANCIAL OFFICER DIRECTOR April 13, 2000 * /s/ [ROBERT J. FLECK] ---------------------------------------------- Robert J. Fleck, VICE PRESIDENT--ACCOUNTING, CHIEF ACCOUNTING AND ADMINISTRATIVE OFFICER * /s/ [LLOYD DREXLER] ---------------------------------------------- Lloyd Drexler, DIRECTOR * /s/ [STANLEY J. GOLDRING] ---------------------------------------------- Stanley J. Goldring, DIRECTOR * /s/ [JOHN E. JONES] ---------------------------------------------- John E. Jones, DIRECTOR * /s/ [MITCHELL I. QUAIN] ---------------------------------------------- Mitchell I. Quain, DIRECTOR * /s/ [S. S. SHERMAN] ---------------------------------------------- S. S. Sherman, DIRECTOR * By: /s/ [MARK C. STANDEFER] ------------------------------------------ Mark C. Standefer, ATTORNEY-IN-FACT
57 EX-2.1 2 EXHIBIT 2.1 EXHIBIT 2.1 FIRST AMENDMENT TO LIMITED LIABILITY COMPANY INTEREST PURCHASE AND CONTRIBUTION AGREEMENT THIS FIRST AMENDMENT TO LIMITED LIABILITY COMPANY INTEREST PURCHASE AND CONTRIBUTION AGREEMENT ("Amendment") is made and entered into as of the ___ day of December, 1999, by and among Allied Products Corporation, a Delaware corporation ("Allied"), Bush Hog Investors, L.L.C., a Delaware limited liability company ("Crown"), and Bush Hog, L.L.C., a Delaware limited liability company (the "Company"). Unless otherwise defined herein, capitalized terms used herein shall have the same meanings assigned to them in the Limited Liability Company Interest Purchase and Contribution Agreement dated as of October 21, 1999 (the "Agreement") between Allied, Crown and the Company. WITNESSETH: WHEREAS, Allied, Crown and the Company entered into the Agreement, which provides for (i) Allied selling, contributing, transferring and assigning to the Company the Purchased Assets subject solely to the Assumed Liabilities; (ii) Allied selling to Crown eighty and one-tenth percent (80.10%) of the limited liability company interests in the Company; and (iii) Crown and Allied entering into a limited liability company agreement; WHEREAS, Henry Crown and Company (Not Incorporated),an affiliate of Crown, ("HCC") is making a $5,000,000 loan ("Loan") to Allied to provide working capital for the Bush Hog and Great Bend divisions of Allied until the closing under the Agreement which loan is being made pursuant to a Loan Agreement dated December 16, 1999 between HCC and Allied and will be evidenced by a promissory note and secured by a mortgage and security agreement on certain of Allied's property in Selma, Alabama (the loan agreement, promissory note, mortgage, security agreement and any other documents evidencing such loan and the security therefore herein called the "Loan Documents"); WHEREAS, as a condition of the Loan, Allied has agreed that Crown may terminate the Agreement if (i) all amounts owed to HCC under the Loan and Loan Documents, including interest, principal and penalties, have not been paid to HCC on or before February 15, 2000; (ii) the Closing has not occurred on or before February 15, 2000 or (ii) if Allied is in default under the Loan Documents; and ; WHEREAS, Allied, Crown and the Company desire to delete and replace in its entirety SCHEDULE 1.5(a)-3 to the Agreement; and NOW, THEREFORE, in consideration of the covenants and agreements set forth herein, Allied, Crown and the Company do hereby agree as follows: 1. SECTION 1.5(a). Immediately proceeding the last sentence of this Section that begins "For purposes of this Section 1.5, . . . .", insert the following sentence in its entirety: "Notwithstanding the foregoing, if prior to the Closing Allied has not paid to Henry Crown and Company (Not Incorporated) ("HCC") all amounts due HCC under that certain Loan Agreement dated December 16, 1999, (the "Loan Agreement") by and between Henry Crown and Company (Not Incorporated), an Illinois limited partnership ("Henry Crown"), and Allied, and the promissory note, mortgage, security agreement and other documents evidenceing the loan under the Loan Agreement (collectively the "Loan Documents"), then Allied directs Crown to pay to HCC from the Purchase Price, all such amounts due HCC and only the remaining portion of the Purchase Price shall be paid to Allied. 2. SECTION 6.10. The following new Section 6.10 is hereby added in its entirety: "6.10 HENRY CROWN LOAN. Allied shall have paid to HCC all amounts due and owing, including without limitation, principal, penalties and interest, pursuant to the Loan Documents." 3. SECTION 10.1(d). The date of February 29, 2000 referred to in this section is hereby deleted in its entirety and replaced with the date of February 15, 2000. 4. SECTION 10.1(g). The following Section 10.1(g) is added in its entirety: "(g) By Crown, if Allied defaults in any manner under the Loan Documents or if all amounts payable to HCC under the Loan Documents have not been paid on or before February 15, 2000." 5. SCHEDULE 1.5(a)-3. SCHEDULE 1.5(a)-3 is hereby deleted in its entirety and replaced with EXHIBIT A attached hereto. 6. RATIFICATION. Except as set forth in this Amendment, all of the terms, covenants, and conditions of the Agreement as amended and all the rights and obligations of Allied, Crown and the Company thereunder, shall remain in full force and effect, and are not otherwise altered, amended, revised, or changed. 7. COUNTERPARTS. This Amendment may be executed in counterparts, each of which shall be an original and all of which counterparts taken together shall constitute one and the same agreement. [SIGNATURES ON FOLLOWING PAGE] 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. ALLIED: CROWN: ALLIED PRODUCTS CORPORATION, BUSH HOG INVESTORS, L.L.C., a a Delaware corporation Delaware limited liability company By: /s/ Mark Standefer By: Henry Crown and Company (Not ------------------- Incorporated), an Illinois limited Its: Vice President partnership, its manager By: /s/ William H. Crown -------------------- a General Partner COMPANY: BUSH HOG, L.L.C., a Delaware limited liability company By: Allied Products Corporation Its: Manager By: /s/ Mark Standefer ------------------ Its: Vice President 3 EXHIBIT A 4 EX-2.2 3 EXHIBIT 2.2 EXHIBIT 2.2 SECOND AMENDMENT TO LIMITED LIABILITY COMPANY INTEREST PURCHASE AND CONTRIBUTION AGREEMENT THIS SECOND AMENDMENT TO LIMITED LIABILITY COMPANY INTEREST PURCHASE AND CONTRIBUTION AGREEMENT ("Amendment") is made and entered into as of the ____ day of February, 2000, by and among Allied Products Corporation, a Delaware corporation ("Allied"), Bush Hog Investors, L.L.C., a Delaware limited liability company ("Crown"), and Bush Hog, L.L.C., a Delaware limited liability company (the "Company"). Unless otherwise defined herein, capitalized terms used herein shall have the same meanings assigned to them in the Limited Liability Company Interest Purchase and Contribution Agreement dated as of October 21, 1999 (the "Agreement") between Allied, Crown and the Company. WITNESSETH: WHEREAS, Allied, Crown and the Company entered into the Agreement, which provides for (i) Allied selling, contributing, transferring and assigning to the Company the Purchased Assets subject solely to the Assumed Liabilities; (ii) Allied selling to Crown eighty and one-tenth percent (80.10%) of the limited liability company interests in the Company; and (iii) Crown and Allied entering into a limited liability company agreement; WHEREAS, pursuant to a Loan Agreement dated December 16, 1999 Henry Crown and Company (Not Incorporated),an affiliate of Crown, ("HCC") made a $5,000,000 loan ("Loan") to Allied to provide working capital for the Bush Hog and Great Bend divisions of Allied until the closing under the Agreement. The Loan is evidenced by a promissory note and secured by a mortgage and security agreement on certain of Allied's property in Selma, Alabama (the loan agreement, promissory note, mortgage, security agreement and any other documents evidencing such loan and the security therefore herein called the "Loan Documents"); WHEREAS, as a condition of the Loan, Crown, the Company and Allied amended the Agreement pursuant to a First Amendment To Limited Liability Company Interest Purchase And Contribution Agreement ("First Amendment") which amendment granted Crown the option to terminate the Agreement if (i) all amounts owed to HCC under the Loan and Loan Documents, including interest, principal and penalties, have not been paid to HCC on or before February 15, 2000; (ii) the Closing has not occurred on or before February 15, 2000 or (ii) if Allied is in default under the Loan Documents. The First Amendment also amended and restated in their entirety Schedule 1.5(a)-3 and Exhibit 5.3 of the Agreement (the Agreement as amended by the First Amendment herein called the "Amended Agreement"); and WHEREAS, Allied, Crown and the Company desire to amend the Amended Agreement to defer certain dates contained in the First Amendment and to clarify certain provisions of Exhibit 5.3. NOW, THEREFORE, in consideration of the covenants and agreements set forth herein, Allied, Crown and the Company do hereby agree as follows: 1. SECTION 1.5. The reference to "One Hundred Twenty Million Eighty-Six Thousand Forty One Dollars ($120,086,041)" in Section 1.5(a) and Section 1.5(c) is hereby deleted and replaced with "One Hundred Twelve Million Seventy-Six Thousand and Forty One Dollars ($112,076,041). 2. SECTION 10.1(d). The date of February 15, 2000 referred to Section 10.1(d) of the Amended Agreement is hereby deleted in its entirety and replaced with the date of March 6, 2000. 3. SECTION 10.1(e). The date of February 29, 2000 referred to Section 10.1(e) of the Amended Agreement is hereby deleted in its entirety and replaced with the date of March 31, 2000. 4. SECTION 10.1(g). Section 10.1(g) of the Amended Agreement is amended in its entirety to read as follows: (g) By Crown, if Allied defaults in any manner under the Loan Documents or if all amounts payable to HCC under the Loan Documents have not been paid on or before March 6, 2000." 5. EXHIBIT 5.3. Section 7.1(c) of Exhibit 5.3, the Limited Liability Company Agreement, of the Amended Agreement is hereby amended in its entirety to read as follows: (c) Crown and the Company shall have thirty (30) days after receipt of the Allied Sale Notice ("Election Period") either (i) to notify Allied in writing that they will purchase the Allied Interest on the terms proposed by Allied as described in SECTION 7.1(b) ("Purchase Notice") or (ii) if neither the Company or Crown desire to purchase the Allied Interest on the terms proposed by Allied, to notify Allied in writing ("Appraisal Notice") of the election to initiate the Appraisal Process. If either Crown or the Company give Allied an Appraisal Notice, then Crown and the Company shall have twenty (20) days after receipt of the written notice ("Appraisal Period") of the Appraised Value to notify Allied in writing ("Appraised Value Purchase Notice") that they will purchase the Allied Interest at the Appraised Value. If neither the Company or Crown sends to Allied a Purchase Notice or Appraisal Notice within the Election Period or if the Company or Crown sends an Appraisal Notice within the Election Period but do not send an Appraised Value Purchase Notice within the Appraisal Period, then Allied shall have the option, which it may exercise by sending written notice to the Manager, Crown and the Company, within thirty (30) days after the Election Period or the Appraisal Period, whichever is applicable, (the "Sale Transaction Notice"), to require that the Manager sell all of the assets of the Company. In lieu of selling all of the assets of the Company, the Manager may, in its discretion, require that the Members sell all of their Membership Interests or cause the Company to enter into another transaction which effectively constitutes a sale of the Company, in which event the provisions of SECTION 7.3 (d) AND (e) shall apply to such sale (the "Sale Transaction"). The Manager shall have the sole discretion to negotiate the 2 terms and conditions of any Arms Length Sale Transaction. If within one hundred eighty (180) days after Allied sends the Sales Transaction Notice to the Manager, the Manager has not made reasonable efforts to effectuate an Arms Length Sale Transaction, Allied shall have the right to engage an investment banking firm and/or otherwise pursue an Arms Length Sale Transaction. The Manager will be deemed to be making reasonable efforts to effectuate an Arms Length Sale Transaction, if it has engaged an investment banking firm which is making reasonable efforts to effectuate an Arms Length Sale Transaction. An Arms Length Sale Transaction is a Sale Transaction in which all Members are treated equally with respect to their Membership Interests, in proportion to their Percentage Interests, and the purchaser is not an Affiliate of Crown or the Allied Owners. The transactional costs related to a Arms Length Sale Transaction shall be paid, at the option of the Manager, by the Company or the Members based on their respective Percentage Interests at the date of the Allied Sale Notice. If Allied does not issue the Sale Transaction Notice in accordance with this SECTION 7.1(c), then Allied may not issue an Allied Sale Notice to Crown pursuant to SECTION 7.1(b) for 1 year after the Election Period. 6. Section 7.1(f) of Exhibit 5.3 of the Amended Agreement is amended by changing the reference to Section 7.1(b)(i) to Section 7.1(b). 7. Section 7.3 (d) of Exhibit 5.3 of the Amended Agreement is amended in its entirety to read as follows: (d) In the event Crown has exercised the Drag-Along Option or Allied has exercised the Tag-Along Option or in the case of a Sale Transaction, the Allied Owners shall receive the same total consideration, on a pro rata basis according to their respective Percentage Interests, as the Crown Owners receive pursuant to the Proposed Sale or the Sale Transaction. 8. Section 8.1(c) of Exhibit 5.3 of the Amended Agreement is amended in its entirety to read as follows: (a) "Appraisal Process" refers to the situation where the Company, Allied, Crown or the Declining Member, as the case may be, (i) within sixty (60) days of the Manager's request for Optional Capital more than twenty-four (24) months after the date hereof, (ii) within thirty (30) days of Crown's election to initiate the Appraisal Process pursuant to SECTION 7.1(b) or (iii) within sixty (60) days of Crown's election to initiate the Appraisal Process pursuant to SECTION 7.4(b), either agree or fail to agree on the Fair Market Value of the Company (the applicable sixty (60) day period or thirty (30) day period herein called the "Negotiation Period"). In the event of such a failure to reach agreement within such Appraisal Period, Crown and Allied shall provide the other with a final good faith proposed Fair Market Value of the Company (the "Crown Final Proposal" and the "Allied Final Proposal"), in writing, within ten (10) business days after the expiration of such Negotiation Period. Crown and Allied shall then choose an investment banking firm or accounting firm (the "Appraiser") to determine the Fair Market Value of the Company within thirty (30) days of the engagement of such firm; provided, however, 3 that the Fair Market Value of the Company must either: (i) equal the Crown Final Proposal or the Allied Final Proposal, or (ii) fall somewhere between the Crown Final Proposal and the Allied Final Proposal. (i) The value of the Company determined by the Appraisal Process (the "Appraised Value") shall be final and binding upon the parties. Any determination of the Appraised Value of the Company pursuant to an Appraisal Process shall also be binding upon the Company and all of the Members with respect to any future determination of the Fair Market Value of the Company or Appraised Value (for the twenty-four (24) month period following the valuation date of the Appraisal Process), except that the Appraised Value shall be increased by (i) the cumulative amount of all Optional Contributions after the date the Appraised Value was determined, and shall be reduced by (ii) Cumulative Distributions after the date the Appraised Value was determined, and shall be further increased or reduced by (iii) the Net Cumulative Earnings or Deficit, respectively. Provided, however, that Allied, on behalf of the Allied Owners, or Crown, on behalf of the Crown Owners, may choose not to be bound by an Appraised Value which is more than 3 months old and related to a different matter (e.g. a prior Optional Capital call), and instead elect to have a new Appraisal Process, as long as the Member electing to begin the new Appraisal Process, and its Affiliates that are Members, bears the entire cost of such Appraisal Process and notifies the other Member and the Manager as follows: (A) if the Appraised Value is to be used in connection with the Manager's request for Optional Capital more than twenty four (24) months after the date hereof, within 5 days after receipt of the Manager's request, and (B) if the Appraised Value is to be used in connection with Crown's election to initiate the Appraisal Process pursuant to SECTION 7.1(b) or SECTION 7.4(b), within 5 days after delivery of delivery of Crown's notice. (ii) If Crown and Allied are unable to agree on the Appraiser within fifteen (15) days after the Negotiation Period, Crown and Allied each shall choose an investment banking firm or accounting firm, and direct such firms to choose, within fifteen (15) days, the Appraiser who shall perform the Appraisal Process. (iii) The cost of the Appraiser shall be split evenly between Crown and Allied. 9. RATIFICATION. Except as set forth in this Amendment, all of the terms, covenants, and conditions of the Agreement as amended and all the rights and obligations of Allied, Crown and the Company thereunder, shall remain in full force and effect, and are not otherwise altered, amended, revised, or changed. 4 10. COUNTERPARTS. This Amendment may be executed in counterparts, each of which shall be an original and all of which counterparts taken together shall constitute one and the same agreement. [SIGNATURES ON THE FOLLOWING PAGE] 5 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. ALLIED: CROWN: ALLIED PRODUCTS CORPORATION, BUSH HOG INVESTORS, L.L.C., a a Delaware corporation Delaware limited liability company By: /s/ Richard A. Drexler By: Henry Crown and Company (Not ---------------------- Incorporated), an Illinois limited Its: President partnership, its manager By: /s/ William H. Crown -------------------- a General Partner COMPANY: BUSH HOG, L.L.C., a Delaware limited liability company By: Allied Products Corporation Its: Manager By: /s/ Richard A. Drexler ---------------------- Its: President 6 EX-2.3 4 EXHIBIT 2.3 EXHIBIT 2.3 THIRD AMENDMENT TO LIMITED LIABILITY COMPANY INTEREST PURCHASE AND ASSET CONTRIBUTION AGREEMENT This Amendment (the "Amendment"), dated as of March 7, 2000 is made by and among Bush Hog Investors, L.L.C., a Delaware limited liability company ("Crown"), Allied Products Corporation, a Delaware corporation ("Allied"), and Bush Hog, L.L.C., a Delaware limited liability company (the "Company"). RECITALS A. The Limited Liability Company Interest Purchase and Asset Contribution Agreement dated as of October 21, 1999, by and among Crown, Allied and the Company (the "Agreement") provides for certain title policies to be provided with specified endorsements at the Closing (as defined in the Agreement); and B. The title insurance company, Chicago Title Insurance Company, is unable or unwilling to provide certain of the endorsements as required under the Agreement due either to limitations imposed by state law or factual situations with respect to the property; and C. In order to induce Crown to consummate the transactions contemplated by the Agreement, Allied is prepared to indemnify the Company from and against any and all loss arising from the inability to obtain such endorsements on the terms and conditions hereinafter set forth. D. The parties also desire to set forth certain agreements regarding the calculation of the Purchase Price. The parties agree, for good and adequate consideration, and as an inducement to Crown to consummate the transactions contemplated under the Agreement, as follows: 1. INTENTIONALLY DELETED 2. Section 8.1 is amended to add the following subparagraph (e) after subparagraph (d): (e) to the extent the Company is not entitled to recover under any title insurance policy as to such matter, any encroachment of any building or fence over setback lines or property lines as shown on the survey dated November 18, 1999, prepared by the Sommerville Group Inc. regarding the Selma, Alabama property, including without limitation the downtown and Selfield Road locations. 3. The first sentence of Section 8.4(b) amended and restated as follows: (b) Allied shall not be responsible to Crown Group under Section 8.1(b) unless and until the aggregate of all Indemnifiable Damages suffered by Crown under Sections 8.1(b) and (d) exceeds $200,000 and then Allied shall be responsible to fully indemnify Crown Group for all Indemnifiable Damages in excess thereof, provided, however, that this provision shall not apply to breaches of the representations and warranties contained in Sections 2.1, 2.4, 2.5, 2.10(a) (last three sentences, but only in connection with Real property for which title insurance described in Section 4.9 has not been received by Crown as of the Closing), Section 2.14, 2.22, 2.24 and 2.30, and with respect to breaches resulting from either Allied's fraud or willful misstatements, in any such events for which Crown Group shall be fully indemnified notwithstanding the amount of Indemnifiable Damages. 4. The Estimated Purchase Price is calculated as set forth on attached Exhibit A. 5. The cutoff for calculation of the Purchase Price and adjustments thereto shall be as of midnight on March 7, 2000. The Purchase Price is hereby reduced by $65,000 to represent the net income of the Business for March 7, 2000. 6. The parties acknowledge that the amount attributable to the adjustment for Closing Date Long Term Liabilities has not been agreed to by the parties as of the Closing Date. 2 Consequently, the figure used for Closing purposes is $465,000, which amount shall be finally determined in accordance with Section 1.5(a)(iv)(A) of the Agreement. 7. Except as expressly amended herein, the Agreement shall remain in full force and effect as amended by a First Amendment dated December 16, 1999, and a Second Amendment dated February 10, 2000.. IN WITNESS WHEREOF, the parties have executed this Amendment as of March 7, 2000. CROWN: BUSH HOG INVESTORS, L.L.C. a Delaware limited liability company By: Henry Crown and Company (Not Incorporated), an Illinois limited partnership, its manager By: /s/ David M. Arnburg -------------------- Authorized Agent of General Partner ALLIED: ALLIED PRODUCTS CORPORATION, a Delaware corporation By: /s/ Mark C. Standefer --------------------- Its: Vice President COMPANY: BUSH HOG, L.L.C., a Delaware limited liability company By: Allied Products Corporation Its; Manager By: /s/ Mark C. Standefer --------------------- Its: Vice President 3 EXHIBIT A A. Estimated Fixed Working Capital Adjustment: $78,273,000 Base Adjusted Working Capital 59,022,000 ---------- 19,251,000 Multiply by 80.1% X .801 ---------- Total Adjustment $15,420,051 B. Base Adjusted Net Tangible Investments: $23,852,000 Estimated Final Adjusted Net Tangible Investment 22,871,000 ---------- (981,000) Multiply by 80.1% X .801 ---------- (785,781) Credit 365 days @ $2,255.90 824,498 Total Adjustment -0- C. Base Long Term Assumed Liabilities $1,411,000 Estimated Long Term Assumed Liabilities 2,580,851 --------- (1,169,851) Multiply by 80.1% X .801 ---------- ($ 937,051) Original Purchase Price $112,076,141 Adjusted Working Capital 15,420,051 Adjusted Net Tangible Investment -0- Long Term Assumed Liabilities ( 937,051) Cutoff Date Adjustment Date ( 65,000) ------------- $126,494,141
EX-10.1 5 EXHIBIT 10.1 EXHIBIT 10.1 ================================================================================ LOAN AND SECURITY AGREEMENT dated as of March 7, 2000 between ALLIED PRODUCTS CORPORATION, as Borrower and LASALLE BANK NATIONAL ASSOCIATION, as Lender ================================================================================ TABLE OF CONTENTS Page ---- 1. DEFINITIONS.................................................................1 1.1 General Terms......................................................1 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement.......................................7 1.3 Other Terms Defined in Illinois Uniform Commercial Code............7 1.4 Other Definitional Provisions......................................8 2. CREDIT......................................................................8 2.1 Term Loan Facility.................................................8 2.2 INTENTIONALLY OMITTED..............................................8 2.3 INTENTIONALLY OMITTED..............................................8 2.4 Voluntary Prepayments..............................................8 2.5 Borrower's Loan Account............................................9 2.6 Statements; Telephonic Notice......................................9 2.7 Interest and Fees..................................................9 2.8 Method of Payment.................................................10 2.9 Term of this Agreement............................................10 2.10 Survival..........................................................10 3. CONDITIONS OF ADVANCES.....................................................11 3.1 Conditions to Initial Loans.......................................11 3.2 Conditions to All Loans...........................................11 4. COLLATERAL.................................................................12 4.1 Security Interest.................................................12 4.2 Preservation of Collateral and Perfection of Security Interests Therein...........................................................12 4.3 Loss of Value of Collateral.......................................12 4.4 Setoff............................................................12 5. REPRESENTATIONS AND WARRANTIES.............................................13 5.1 Existence.........................................................13 5.2 Corporate Authority...............................................13 5.3 Binding Effect....................................................13 5.4 Financial Data....................................................13 5.5 Collateral........................................................14 5.6 Solvency..........................................................14 5.7 Chief Place of Business...........................................15 5.8 Other Names.......................................................15 5.9 Tax Liabilities...................................................15 5.10 Loans.............................................................15 5.11 Margin Stock......................................................15 5.12 Litigation and Proceedings........................................15 5.13 Other Agreements..................................................16 5.14 Employee Controversies............................................16 i 5.15 Compliance with Laws and Regulations; Environmental Matters.......16 5.16 Patents, Trademarks and Licenses..................................17 5.17 ERISA.............................................................17 5.18 Financial Condition...............................................18 5.19 Survival of Warranties............................................18 5.20 Bank Accounts.....................................................18 5.21 Subsidiaries......................................................18 5.22 Accuracy of Information...........................................18 5.23 Assets and Properties.............................................18 5.24 Insurance.........................................................18 5.25 Contingent Obligations............................................19 5.26 Account Warranties................................................19 5.27 Broker's Fees.....................................................19 6. AFFIRMATIVE COVENANTS......................................................19 6.1 Financial Statements and Other Reports............................19 6.2 Inspection........................................................21 6.3 Maintenance of Licenses, Etc......................................22 6.4 Claims and Taxes..................................................22 6.5 Lender's Closing Costs and Expenses...............................22 6.6 Borrower's Liability Insurance....................................22 6.7 Business Interruption Insurance...................................23 6.8 ERISA Reporting...................................................23 6.9 Notice of Suit or Adverse Change in Business......................24 6.10 Environmental Safety and Health Laws..............................24 6.11 Supplemental Disclosure...........................................24 6.12 Collateral Records................................................24 6.13 Endorsement.......................................................25 6.14 Maintenance of Properties.........................................25 6.15 Collateral Locations..............................................25 6.16 Use of Proceeds and Margin Security...............................25 6.17 Appraisals........................................................25 7. NEGATIVE COVENANTS.........................................................25 7.1 Encumbrances......................................................25 7.2 Restrictions on Distributions.....................................26 8. DEFAULT, RIGHTS AND REMEDIES OF LENDER.....................................26 8.1 Defaults..........................................................26 8.2 Rights and Remedies Generally.....................................27 8.3 Entry Upon Premises and Access to Information.....................27 8.4 Sale or Other Disposition of Collateral by Lender.................27 8.5 Waiver of Demand..................................................28 8.6 Waiver of Notice..................................................28 9. MISCELLANEOUS..............................................................28 9.1 Amendments and Waivers............................................28 ii 9.2 Costs and Attorneys' Fees.........................................28 9.3 Expenditures by Lender............................................29 9.4 Custody and Preservation of Collateral............................29 9.5 Reliance by Lender................................................29 9.6 Assignment; Parties...............................................29 9.7 CHOICE OF LAW.....................................................29 9.8 CONSENT TO JURISDICTION...........................................29 9.9 SERVICE OF PROCESS................................................30 9.10 WAIVER OF JURY TRIAL AND BOND.....................................30 9.11 ADVICE OF COUNSEL.................................................31 9.12 SEVERABILITY......................................................31 9.13 Application of Payments...........................................31 9.14 Marshaling; Payments Set Aside....................................31 9.15 Section Titles....................................................31 9.16 Continuing Effect.................................................31 9.17 Notices...........................................................32 9.18 Equitable Relief..................................................33 9.19 Indemnification...................................................33 9.20 Counterparts......................................................34 9.21 Entire Agreement..................................................34 9.22 Confidentiality...................................................34 9.23 Governmental Regulation...........................................34 9.24 Amendment of Loan Agreement.......................................34 iii EXHIBITS Exhibit A Form of Term Note Exhibit B Form of Financial Statement Certificate Exhibit C Form of Endorsement Exhibit D Form of Notice of Borrowing SCHEDULES Schedule 3.1 Conditions to Initial Loans Schedule 5.1 Jurisdiction of Incorporation; Qualification Schedule 5.2 Governmental Consents and Restrictions Schedule 5.4(A) Financials Schedule 5.4(B) Projections Schedule 5.4(C) Pro Forma Schedule 5.5 Locations of Collateral Schedule 5.7 Chief Place of Business Schedule 5.8 Other Names Schedule 5.9 Tax Audits Schedule 5.12 Litigation and Proceedings Schedule 5.14 Employee Controversies Schedule 5.15(B) Environmental Matters Schedule 5.16 Patents, trademarks and Licenses Schedule 5.17 ERISA Schedule 5.20 Bank Accounts Schedule 5.21 Capitalization; Subsidiaries Schedule 5.24 Insurance Schedule 5.25 Contingent Obligations Schedule 7.1 Liens iv LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), dated as of March 7, 2000, is by and between ALLIED PRODUCTS CORPORATION., a Delaware corporation, ("Borrower"), and LASALLE BANK NATIONAL ASSOCIATION, a national banking association ("Lender"). All capitalized terms used herein are defined in Section 1 of this Agreement. W I T N E S S E T H: WHEREAS, Borrower desires to borrow up to Eighteen Million Dollars ($18,000,000) from Lender; and WHEREAS, Lender is willing to make certain loans and to extend credit to Borrower of up to such amount upon the terms and conditions set forth herein, the proceeds of which will be used by Borrower for the working capital needs of Borrower and for general corporate purposes; NOW, THEREFORE, in consideration of the terms and conditions contained herein, and of any loans or extensions of credit heretofore, now or hereafter made to or for the benefit of Borrower by Lender, the parties hereto hereby agree as follows: 1. DEFINITIONS. 1.1 General Terms. When used herein, the following terms shall have the following meanings: "Account Debtor" shall mean the party who is obligated on or under an Account. "Accounts" shall mean all "accounts" (as defined in the Code) owed to or owned or acquired by Borrower arising or resulting from the sale of goods or the rendering of services. "Affiliate" of any Person shall mean any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with such Person; (b) that directly or beneficially owns or holds five percent (5%) or more of any class of the voting stock or other equity interests of such Person, or (c) five percent (5%) or more of the voting stock (or in the case of a Person which is not a corporation, five percent (5%) or more of the equity interest) of which is owned directly or beneficially or held by such Person. Notwithstanding the foregoing, Lender shall not be deemed to be an Affiliate of the Borrower. "Authorized Officer" shall mean, at any time, any of the chief executive officer, chief financial officer, controller, or any vice president of Borrower, acting singly. "Benefit Plan" shall mean, with respect to any Person, a defined benefit plan as defined in Section 3(35) of ERISA (other than a Multiemployer Plan) in respect of which such Person or an ERISA Affiliate of such Person is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "Bush Hog" shall mean Bush Hog, L.L.C., a Delaware limited liability company, of which Borrower owns 19.9% of the membership interests. "Business Day" means a day (other than a Saturday or Sunday) on which LaSalle and other banks generally are open in Chicago for the conduct of substantially all of their commercial lending activities. "Capitalized Lease" shall mean, at any time, any lease which, in accordance with GAAP, is required to be capitalized on the consolidated balance sheet of Borrower and its Subsidiaries at such time, and "Capitalized Lease Obligations" of Borrower and its Subsidiaries at any time shall mean the aggregate amount which, in accordance with GAAP, is required to be reported as a liability on the consolidated balance sheet of Borrower and its Subsidiaries. "Closing Date" shall mean the date of this Agreement. "Closing Fee" shall have the meaning set forth in subsection 2.7(E). "Code" shall have the meaning set forth in subsection 1.3 hereof. "Collateral" shall have the meaning set forth in subsection 4.1 hereof. "Commitment" shall mean the commitment of Lender to make the Loan as set forth in subsection 2.1 hereof. "Contingent Obligation" of a Person shall mean any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, operating agreement or take_or_pay contract or application for a letter of credit. "Default" shall mean the occurrence or existence of any one or more of the events described in subsection 8.1 hereof. "DOL" shall have the meaning set forth in subsection 6.8 hereof. "Dollars", "dollars" and "$" each mean lawful money of the United States of America. "Environmental Lien" shall mean a lien in favor of any governmental entity for (a) any liability under federal or state environmental laws or regulations or (b) damages 2 arising from, or costs incurred by such governmental entity in response to, a release or threatened release of a hazardous or toxic waste, substance or constituent, or other substance into the environment. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "ERISA Affiliate" shall mean, with respect to any Person, any (i) corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as such Person; (ii) partnership, trade or business under common control (within the meaning of Section 414(c) of the Internal Revenue Code) with such Person; and (iii) solely for purposes of liability under Section 412(c)(11) of the Internal Revenue Code, for the lien created under Section 412(n) of the Internal Revenue Code or for a tax imposed for failure to meet minimum funding standards under Section 4971 of the Internal Revenue Code, member of the same affiliated service group (within the meaning of Section 414(m) of the Internal Revenue Code) as such Person, any corporation described in clause (i) above or any partnership, trade or business described in clause (ii) above. "Financials" shall have the meaning set forth in subsection 5.4 hereof. "Financing Agreements" shall mean, collectively, that certain Put and Call Agreement of even date herewith, by and among Lender, Borrower and Bush Hog Investors, L.L.C., and acknowledged and consented to by Bush Hog, L.L.C. and CC Industries, Inc., that certain Guaranty of even date herewith, made by CC Industries, Inc. in favor of Lender, and all other agreements, instruments and documents, including, without limitation, this Agreement and any security agreements, loan agreements, notes, guarantees, mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust, subordination agreements, pledges, powers of attorney, consents, assignments, intercreditor agreements, mortgagee waivers, landlord estoppel statements, reimbursement agreements, contracts, notices, leases, financing statements and all other written matter whether heretofore, now or hereafter executed by or on behalf of Borrower or any of Borrower's Subsidiaries and delivered to Lender, together with all agreements, documents and instruments referred to therein or contemplated thereby. "Fiscal Year" shall mean a twelve-month period ending on the last day of December in each year. "GAAP" means generally accepted accounting principles in the United States of America as set forth in statements from Auditing Standards No. 69 entitled "The Meaning of 'Present Fairly in Conformance with Generally Accepted Accounting Principles in the Independent Auditors Reports'" issued by the Auditing Standards Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board that are applicable to the circumstances as of the date of determination. "Indebtedness" shall mean, with respect to any Person, as of the date of determination thereof: (i) all of such Person's indebtedness for borrowed money; (ii) all 3 indebtedness of such Person or any other Person secured by any Lien with respect to any property or asset owned or held by such Person, regardless of whether the indebtedness secured thereby shall have been assumed by such Person; (iii) all indebtedness of other Persons which such Person has directly or indirectly guaranteed (whether by discount or otherwise), endorsed (otherwise than for collection or deposit in the ordinary course of business), discounted with recourse to such Person or with respect to which such Person is otherwise directly or indirectly liable, including, without limitation, indebtedness directly or indirectly guaranteed by such Person through any agreement (contingent or otherwise) to (A) purchase, repurchase or otherwise acquire such indebtedness or any security therefor, (B) provide funds for the payment or discharge of such indebtedness or any other liability of the obligor of such indebtedness (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), (C) maintain the solvency of any balance sheet or other financial condition of the obligor of such indebtedness, or (D) make payment for any products, materials or supplies or for any transportation or services regardless of the nondelivery or nonfurnishing thereof if in any such case the purpose or intent of such agreement is to provide assurance that such indebtedness will be paid or discharged or that any agreements relating thereto will be complied with or that the holders of such indebtedness will be protected against loss in respect thereof; (iv) all of such Person's Capitalized Lease Obligations; and (v) all actual or contingent reimbursement obligations with respect to letters of credit issued for such Person's account. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute. "IRS" shall have the meaning set forth in subsection 6.8 hereof. "Lender" or "Lenders" shall mean LaSalle together with its successors and assigns pursuant to Section 10 hereof. "Liabilities" shall mean all of Borrower's liabilities, obligations and indebtedness to Lender of any and every kind and nature, whether heretofore, now or hereafter owing, arising, due or payable and howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed or otherwise (including obligations of performance) and whether arising or existing under written agreement, oral agreement or operation of law, relating to any or all of Borrower's indebtedness and obligations to Lender under this Agreement and the other Financing Agreements. "Lien" shall mean any lien (statutory or otherwise), mortgage, pledge, hypothecation, assignment, deposit arrangement, option, warrant, purchase agreement, shareholders' agreement, restriction, redemption agreement or other charge, encumbrance, restriction or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever. "Loan Account" shall have the meaning set forth in subsection 2.5 hereof. "Loan" shall mean the Term Loan. 4 "Management Letter" shall have the meaning set forth in subsection 6.1(E) hereof. "Material Adverse Change" shall mean a material adverse change, which has not previously been disclosed to Lender, in the business, properties, condition (financial or otherwise), performance, prospects or results of operations of Borrower and its Subsidiaries "Material Adverse Effect" shall mean a material adverse effect, the probability of occurrence of which has not previously been disclosed to Lender, on (a) the business, property, condition (financial or other), results of operations or prospects of Borrower and its Subsidiaries taken as a whole, (b) the ability of Borrower or any Subsidiary of Borrower to perform its obligations under the Financing Agreements to which it is a party, or (c) the validity or enforceability of any of the Financing Agreements or the rights or remedies of Lender thereunder. "Maturity Date" shall mean September 7, 2002. "Multiemployer Plan" shall mean, with respect to any Person, an employee benefit plan defined in Section 4001(a) (3) of ERISA which is, or within the immediately preceding six (6) years was, contributed to by such Person or an ERISA Affiliate of such Person. "Notice of Borrowing" shall mean a notice given by the Borrower to Lender pursuant to subsection 3.2(A), in substantially the form of Exhibit D hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any Person succeeding to the functions thereof. "Permitted Liens" shall mean the Liens permitted under subsection 7.1 hereof. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, limited liability company, corporation, institution, entity, party or government (whether national, federal, state, provincial, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Plan" shall mean, with respect to any Person, any employee benefit plan defined in Section 3(3) of ERISA in respect of which such Person or any ERISA Affiliate of such Person is, or at any time within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "Prime Rate" shall mean a variable rate of interest per annum equal to the highest of the "prime rate", "corporate base rate", "reference rate" or similar benchmark rate announced or published from time to time by LaSalle at its principal place of business in Chicago, Illinois, which rate is not necessarily the lowest rate of interest charged by LaSalle with respect to commercial loans. Any change in the Prime Rate shall be effective 5 as of the effective date stated in the announcement by LaSalle of such change. "Pro Forma" shall mean the unaudited consolidated and consolidating balance sheet of Borrower and its Subsidiaries as of the Closing Date after giving effect to the transactions contemplated by this Agreement and the other Financing Agreements. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation T" shall mean Regulation T of the Board of Governors of the Federal Reserve System from time to time in effect and shall include any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by and to brokers and dealers of securities for the purpose of purchasing or carrying margin stock. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stock applicable to member banks of the Federal Reserve System. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by foreign lenders for the purpose of purchasing or carrying margin stock. "Subsidiary" shall mean, with respect to any Person, any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned by such Person. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of Borrower. "Term" shall have the meaning set forth in subsection 2.9 hereof. "Term Loan" shall have the meaning set forth in subsection 2.1 hereof. "Term Loan Commitment" shall mean the commitment of Lender to make the Term Loan. "Term Note" shall have the meaning set forth in subsection 2.1 hereof. "Termination Event" shall mean (i) a reportable event described in Section 4043 of ERISA or the regulations promulgated thereunder occurring with respect to any Benefit 6 Plan of Borrower or any ERISA Affiliate of Borrower for which the 30-day notice requirement has not been waived by the PBGC, or (ii) the withdrawal of Borrower or any ERISA Affiliate of Borrower from a Benefit Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA or the cessation of operations which results in the termination of employment of 20% of Benefit Plan participants who are employees of Borrower or any ERISA Affiliate of Borrower, or (iii) the occurrence of an obligation of Borrower or any ERISA Affiliate of Borrower arising under Section 4041 of ERISA to provide affected parties with a written notice of an intent to terminate a Benefit Plan in a distress termination described in Section 4041(c) of ERISA, or (iv) PBGC's institution of proceedings to terminate a Benefit Plan of Borrower or any ERISA Affiliate of Borrower, or (v) any event or condition which might constitute grounds under Section 4041A or 4042 of ERISA for the termination of, or the appointment of a trustee to administer any Benefit Plan or Multiemployer Plan of Borrower or any ERISA Affiliate of Borrower, or (vi) the partial or complete withdrawal (as defined in Section 4203 and 4205 of ERISA) of Borrower or any ERISA Affiliate of Borrower from a Multiemployer Plan, or (vii) the existence in a Multiemployer Plan of a potential withdrawal liability of Borrower or any ERISA Affiliate of Borrower, or (viii) the occurrence of any nonexempt "prohibited transaction" with respect to any plan under Section 406 of ERISA or Section 4975 of the Internal Revenue Code or (ix) as of the last day of any plan year, the present value of the benefits of any Benefit Plan of Borrower or any ERISA Affiliate of Borrower, as determined by the plan's independent actuaries, exceeds the aggregate value as of such date, as determined by such actuaries, of all assets of such plan by an amount sufficient that, in the event a distress termination within the meaning of Section 4041(c) of ERISA were to occur as of such date, Borrower would be subject to liability in excess of $100,000. "UFCA" shall have the meaning set forth in subsection 5.6 hereof. "UFTA" shall have the meaning set forth in subsection 5.6 hereof. "Unmatured" shall mean any event which, through the passage of time or the giving of notice or both, would mature into a Default. "Working Capital Credit Facility" shall mean that certain working capital credit facility provided, or to be provided, to Borrower by _______________________, in an amount not to exceed $50,000, 000, the terms, conditions and documentation of which, shall not conflict with or violate the terms and conditions of this Agreement or any other Financing Agreement. 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement. For purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to such terms in conformity with GAAP. Financial statements and other financial information furnished to Lender pursuant to this Agreement shall be prepared in accordance with GAAP as in effect at the time of such preparation. No "Accounting Changes" (as defined below) shall effect the determination or interpretation of any financial covenants, standards or terms in this Agreement; provided, that Borrower shall prepare footnotes to each compliance certificate and the financial statements 7 required to be delivered hereunder that show the differences between the financial statements delivered (which reflect such Accounting Changes) and the basis for calculating financial covenant compliance (without reflecting such Accounting Changes). "Accounting Changes" means: (a) changes in the accounting principles applied in the preparation of the Financials required by GAAP and implemented by Borrower; (b) changes in the accounting principles applied in the preparation of the Financials recommended by Borrower's independent public accountants and implemented by Borrower; and (c) changes in the carrying values of Borrower's or any of its Subsidiaries assets, liabilities or equity accounts reflected on the Financials resulting from any adjustments that, in each case were applicable to, but not included in, the Pro Forma. 1.3 Other Terms Defined in Illinois Uniform Commercial Code. All other terms contained in this Agreement (and which are not otherwise specifically defined herein) shall have the meanings provided in Article 9 of the Uniform Commercial Code, as in effect in the State of Illinois or, with respect to Collateral not located in the State of Illinois, as in effect in the jurisdiction where such Collateral is located, as appropriate (the "Code"), in either case to the extent the same are used or defined therein. 1.4 Other Definitional Provisions. Whenever the context so requires, the neuter gender includes the masculine and feminine, the singular number includes the plural, and vice versa. References to "Sections", "subsections", "Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in Section 1 may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. In this Agreement, "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific section, paragraph or clause in which the respective word appears; words importing any gender include the other gender; references to "writing" include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to agreements, documents, instruments and other contractual arrangements shall be deemed to include subsequent amendments, restatements, assignments, and other modifications thereto, but only to the extent such amendments, restatements, assignments and other modifications are not prohibited by the terms of this Agreement or any other Financing Agreements; references to Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. 2. CREDIT. 2.1 Term Loan Facility. Subject to the provisions of Section 3 below, Lender agrees, immediately following the execution of this Agreement, to lend to Borrower a term loan in the aggregate principal amount of up to Eighteen Million and No/100 Dollars ($18,000,000), or such lesser amount as Borrower may request (the "Term Loan"), provided that Borrower shall be entitled to request advances on the Term Loan (i) only in increments of $3,000,000, and (ii) only until June 7, 2000. After June 7, 2000, Borrower shall not be entitled to request any more advances on the Term Loan. No amount of the Term Loan which is repaid or 8 prepaid by Borrower may be reborrowed hereunder. The Term Loan shall be evidenced, in part, by a term note (the "Term Note") in the form attached hereto as Exhibit A with the blanks appropriately filled. The provisions of the Term Note notwithstanding, the Liabilities evidenced by the Term Note shall become immediately due and payable as provided in subsection 8.1 hereof, and, without notice or demand, upon the termination of this Agreement pursuant to subsection 2.9 hereof. 2.2 INTENTIONALLY OMITTED. 2.3 INTENTIONALLY OMITTED. 2.4 Voluntary Prepayments. Borrower may prepay the Liabilities in full or in part during the "Term" (as defined in subsection 2.9 hereof), upon five (5) Business Days' prior irrevocable written notice to Lender. 2.5 Borrower's Loan Account. Lender shall maintain a loan account (the "Loan Account") on its internal data control systems in which shall be recorded (i) all loans and advances made by Lender to Borrower pursuant to this Agreement, (ii) all payments made by Borrower on all such loans and advances and (iii) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all fees, charges, expenses and interest. All entries in Borrower's Loan Account shall be made in accordance with Lender's customary accounting practices as in effect from time to time. Borrower promises to pay the amount reflected as owing by it under its Loan Account (subject to the last sentence of subsection 2.6 hereof), and all of its other obligations hereunder and under any of the other Financing Agreements as such amounts become due or are declared due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) pursuant to the terms of this Agreement and the other Financing Agreements. 2.6 Statements; Telephonic Notice. (A) All advances and other financial accommodations to Borrower, and all other debits and credits provided for in this Agreement, may be evidenced by entries made by Lender in its internal data control systems showing the date, amount and reason for each such debit or credit. Until such time as Lender shall have rendered to Borrower written statements of account as provided herein, the balance in Borrower's Loan Account, as set forth on Lender's most recent printout, shall be rebuttably presumptive evidence of the amounts due and owing to Lender by Borrower. (B) Borrower hereby authorizes Lender to extend advances under the Loan and to transfer funds based on telephonic notices Lender in good faith believes to have been made by any Person authorized to act on behalf of Borrower. Borrower agrees to deliver promptly to Lender a written confirmation, if such confirmation is requested by Lender, of each telephonic notice. If the written confirmation differs in any material respect from the action taken by Lender, the records of Lender shall govern absent manifest error. 2.7 Interest and Fees. (A) Subject to subsection 2.7(C), each Term Loan advance shall bear interest on the outstanding principal amount thereof from the date when made at a rate per annum 9 equal to the Prime Rate - 1.00%. (B) Interest on each Loan shall be paid in arrears on the first Business Day of each month beginning April 1, 2000 and continuing thereafter, including, without limitation, on the Maturity Date and on the date of any prepayment of the Loan in full pursuant to Section 2.3. During the existence of any Unmatured Default interest shall be payable on demand of the Lender. Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed. The date of funding the Loan shall be included in the calculation of interest. The date of payment of the Loan shall be excluded from the calculation of interest. If the Loan is repaid on the same day it is made, one (1) day's interest shall be charged. (C) While any Unmatured Default exists and is continuing and/or after maturity of the Loan (whether by acceleration or otherwise), Borrower shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all Liabilities due and unpaid, at a rate per annum which is determined by adding three percent (3%) per annum to the rate then in effect for such Loan. (D) This Agreement and the Term Note are hereby limited by this subsection 2.7(D). In no contingency, whether by reason of acceleration of the maturity of the amounts due hereunder or otherwise, shall interest and fees contracted for, charged, received, paid or agreed to be paid to Lender exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest and fees would otherwise be payable to Lender in excess of the maximum amount permissible under applicable law, the interest and fees shall be reduced to the maximum amount permitted under applicable law. If from any circumstance, Lender shall have received anything of value deemed interest by applicable law in excess of the maximum lawful amount, an amount equal to any excess of interest shall be applied to the reduction of the principal amount of the Liabilities and not to the payment of fees or interest, or if such excessive interest exceeds the unpaid balance of the principal amount of Liabilities, such excess shall be refunded to Borrower. (E) Concurrently with the execution of this Agreement, Borrower shall pay Lender a closing fee of $180,000 (the "Closing Fee"). 2.8 Method of Payment. All payments of the Liabilities hereunder shall be made, without setoff, deduction or counterclaim, in immediately available funds to Lender at Lender's address specified pursuant to subsection 9.17 hereof, or at any other address of Lender specified in writing by Lender to Borrower, by noon (Chicago time) on the date when due. Lender is hereby authorized to charge Borrower's Loan Account by debiting the Loan for each payment of principal, interest, fees, and other Liabilities as it becomes due hereunder. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day. 2.9 Term of this Agreement. This Agreement shall be effective until, and including, the Maturity Date and shall terminate at 11:59 P.M. Chicago time on the Maturity Date; provided, however, that Lender shall retain the right to terminate this Agreement at any time upon the occurrence and during the continuance of a Default. Notwithstanding the foregoing, Borrower may terminate this Agreement (and such termination shall constitute a 10 prepayment hereunder) at any time other than as provided above upon satisfaction of the conditions set forth in subsections 2.4(A) and 2.7 hereof and the payment by Borrower to Lender of the then outstanding principal and accrued interest and payment and performance of all other Liabilities (including without limitation any fees due under subsection 2.7 hereof and any other fees owed to Lender). Upon the effective date of termination of this Agreement, all of the Liabilities shall become immediately due and payable without notice or demand. Notwithstanding any termination, whether prior to, on or after the Maturity Date, until all of the Liabilities (other than indemnification Liabilities pursuant to subsection 9.19 hereof to the extent no claims giving rise thereto have been asserted) shall have been fully paid and satisfied and all financing arrangements between Borrower and Lender shall have been terminated, all of Lender's rights and remedies under this Agreement and the other Financing Agreements shall survive, Lender shall retain its security interests in and to all existing and future Collateral, and Borrower shall continue to remit collections of Accounts and proceeds as provided herein. 2.10 Survival. The agreements and obligations of the Borrower in this Section 2 shall survive the payment of all Liabilities. 3. CONDITIONS OF ADVANCES. 3.1 Conditions to Initial Loans. The obligations of Lender to make the initial Loans on the Closing Date are, in addition to the conditions precedent specified in Section 3.2 hereof, subject to the delivery of all documents, and prior or concurrent satisfaction of all conditions, listed on Schedule 3.1, all in form and substance reasonably satisfactory to Lender, and are subject to the following: (A) Repayment of Indebtedness. Borrower shall fully and indefeasibly repay all other outstanding indebtedness of Borrower to Lender on or prior to the Closing Date. (B) Payment of Closing Fee. Lender shall have received payment in full of the Closing Fee. (C) Sale of Assets. Borrower shall have sold to Bush Hog, substantially all of the operating assets of Borrower's "Bush Hog division" and "Great Bend Manufacturing division". 3.2 Conditions to All Loans. Lender shall not be required to make any Term Loan advance on any date unless on the applicable borrowing date: (A) Borrower's Written Request. Lender shall have received a Notice of Borrowing from an Authorized Officer of Borrower, no later than 11:00 A.M., Chicago time, on the Business Day an advance is to be made, for an advance in a specific amount. In addition, prior to making any advance, Lender shall have received copies of all other documents required to be delivered to Lender under subsection 6.1 hereof. (B) Financial Condition. No Material Adverse Effect, as determined by Lender in its reasonable discretion, shall have occurred (a) at any time or times subsequent to the most recent annual financial statements provided pursuant to subsection 6.1(B) hereof, and (b) 11 prior to the receipt of the first of such statements, at any time subsequent to December 31, 1998. (C) No Default. There shall not have occurred any Default or Unmatured Default which is then continuing, nor shall any such Default or Unmatured Default occur after giving effect to the advance. (D) Representations and Warranties True and Correct. The representations and warranties of Borrower contained in this Agreement shall be true and correct in all material respects on and as of the date of any advance as though made on and as of such date. (E) Security Interest. Lender shall have a first priority perfected security interest in, and Lien on, the Collateral, subject to Permitted Liens. (F) Working Capital Credit Facility. Borrower shall have provided to Lender certified copies of the closing documents for the Working Capital Credit Facility, once such closing documents have been fully-executed and delivered by the parties thereto. (G) Other Requirements. Lender shall have received, in form and substance satisfactory to Lender, all certificates, orders, authorities, consents, legal opinions, consultant's reports, affidavits, applications, schedules, instruments, security agreements, financing statements, mortgages and other documents which are provided for hereunder or under the other Financing Agreements, or which Lender may at any time reasonably request and all legal matters incident to the making of such advances shall be satisfactory to Lender and its counsel. 4. COLLATERAL. 4.1 Security Interest. To secure payment and performance of the Liabilities, Borrower hereby grants to Lender a continuing security interest in and to all right, title and interest of Borrower in and to membership interests in Bush Hog, as determined under the laws of the State of Delaware and the Articles of Organization and Limited Liability Company Agreement of Bush Hog, including, without limitation, Borrower's interest in the capital, income, profits , and all other property hereafter delivered to Borrower in substitution for, as proceeds of, or in addition to any of the foregoing, all certificates, instruments and documents representing or evidencing such property, and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof, all of the foregoing whether now owned or hereafter acquired by Borrower and wheresoever located, being herein referred to as the "Collateral". 4.2 Preservation of Collateral and Perfection of Security Interests Therein. Borrower shall (i) execute and deliver to Lender, concurrently with the execution of this Agreement, and at any time or times hereafter at the request of Lender, all financing statements, instruments or other documents (and pay the cost of filing or recording the same in all public offices reasonably deemed necessary by Lender), as Lender may request, in a form reasonably satisfactory to Lender, and (ii) to the extent any of the Collateral consists of certificated membership interests or other securities, deliver all such certificates with appropriate powers or documents of transfer executed in blank, to perfect and keep perfected the security 12 interest and liens in the Collateral granted by Borrower to Lender, or to otherwise protect and preserve the Collateral and Lender's security interest and liens therein or to enforce Lender's security interests and liens in the Collateral. Should Borrower fail to do so, Lender is authorized to sign any such financing statements as Borrower's agent. Borrower further agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. 4.3 Loss of Value of Collateral. Borrower shall immediately notify Lender of any material loss or depreciation, in the value of the Collateral, taken as a whole. 4.4 Setoff. Borrower agrees that Lender have all rights of setoff and banker's lien provided by applicable law and, in addition thereto, Borrower agrees that (in addition to Lender's rights with respect to proceeds of Collateral) at any time any Default exists and is continuing, Lender may apply to the payment of the Liabilities, any and all balances, credits, deposits, accounts or moneys of Borrower then or thereafter with Lender. Without limitation of the foregoing and in addition to Lender's rights with respect to the proceeds of the Collateral, Borrower agrees that upon and after the occurrence of a Default, Lender and each of its branches and offices are hereby authorized, at any time and from time to time, without notice, (i) to setoff against, and to appropriate and apply to the payment of, the Liabilities (whether matured or unmatured, fixed or contingent or liquidated or unliquidated) any and all amounts owing by Lender or any such office or branch to Borrower (whether matured or unmatured, and, in the case of deposits, whether general or special, time or demand and however evidenced) and (ii) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such Liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as Lender may elect in its sole discretion. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that as of the date of the execution of this Agreement, and continuing so long as any Liabilities remain outstanding, and (even if there shall be no Liabilities outstanding) so long as this Agreement remains in effect: 5.1 Existence. (A) Borrower and each of Borrower's Subsidiaries is a corporation duly organized and validly existing and in good standing under the laws of the state of its incorporation and is duly qualified as a foreign corporation and in good standing in the states set forth on Schedule 5.1 hereto which are all of the states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary, except for those jurisdictions in which the failure so to qualify would not, in the aggregate, have a Material Adverse Effect. 5.2 Corporate Authority. The execution and delivery by Borrower or any of Borrower's Subsidiaries of the Financing Agreements to which it is a party, and the performance of each such Person's obligations thereunder: (i) are within such Person's corporate powers; (ii) are duly authorized by all necessary partnership or corporate action; (iii) are not in contravention of the terms of such Person's Certificate or Articles of Incorporation or By-Laws, or of any indenture, or other agreement or undertaking to which such Person is a party or by which such Person or any of its property is bound or any judgment, decree or order applicable to 13 such Person; (iv) do not, as of the execution hereof, require any governmental consent, registration or approval except for approvals or consents which will be obtained on or before the Closing Date and are described on Schedule 5.2 hereto; (v) except as described on Schedule 5.2 hereto, do not contravene any contractual or governmental restriction binding upon such Person; and (vi) will not, except as contemplated herein, result in the imposition of any lien, charge, security interest or encumbrance upon any property of such Person under any existing indenture, mortgage, deed of trust, loan or credit agreement or other material agreement or instrument to which such Person is a party or by which it or any of its property may be bound or affected. 5.3 Binding Effect. The Financing Agreements to which Borrower or any of Borrower's Subsidiaries are parties have been duly executed and delivered by such Persons and constitute the legal, valid and binding obligations of such Persons enforceable against such Persons in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting enforcement of creditors' rights generally. 5.4 Financial Data. (A) Borrower has furnished to Lender the audited financial statements of Borrower for the 1998 fiscal year and the unaudited financial statements of Borrower for the 1999 fiscal year (collectively, the "Financials") which are attached as Schedule 5.4(A). The Financials are in accordance with the books and records of Borrower and fairly present the financial condition of Borrower at the dates thereof and the results of operations for the periods indicated and the Financials have been prepared in accordance with GAAP (except, with respect to the unaudited financial statements for Borrower's 1999 fiscal year, for the absence of footnotes and subject to normal year-end adjustments). The historical financial statements to be furnished to Lender in accordance with subsection 6.1 hereof will be in accordance with the books and records of Borrower and will fairly present the financial condition of Borrower at the dates thereof and the results of operations for the periods indicated (subject, in the case of unaudited financial statements, to normal year-end adjustments) and such financial statements will be prepared in conformity with GAAP throughout the periods involved. Since the date of the Financials, there have been no changes in the condition, financial or otherwise, of Borrower as shown on the Financials, except (a) as contemplated herein, and (b) for changes in the ordinary course of business (none of which individually or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect). (B) Borrower has also furnished to Lender its projections for the period through December 31, 2000 (the "Projections") which are attached hereto as Schedule 5.4(B). The Projections have been prepared by Borrower in good faith and based on estimates and assumptions believed by Borrower and Borrower's Subsidiaries and their management to be reasonable as of the date such Projections were prepared, and it is Borrower's good faith belief that, subject to such assumptions and estimates, such Projections are achievable by Borrower and its Subsidiaries. All information, reports and other papers and data furnished to Lender are or will be, at the time the same are so furnished, accurate and correct in all material respects and complete insofar as completeness may be necessary to give a true and accurate knowledge of the subject matter thereof. (C) The Pro Forma attached as Schedule 5.4(C) hereto was prepared by Borrower based on the unaudited balance sheets of Borrower dated February [28], 2000 and was prepared 14 in accordance with GAAP. 5.5 Collateral. Except as permitted pursuant to subsection 7.1 hereof, all of the Collateral is owned by Borrower, has been duly authorized, validly issued, fully paid for, is nonassessable and is free and clear of all Liens, other than the lien of Bush Hog Investors, L.L.C., which is subordinated to Lender's Lien. The books and records relating to the Collateral are located at the locations set forth on Schedule 5.5 attached hereto. 5.6 Solvency. After giving effect to the funding of the initial Loans hereunder, neither Borrower nor any of its Subsidiaries (i) is or will thereby be rendered "insolvent" as that term is defined in Section 101(32) of the Federal Bankruptcy Code (the "Bankruptcy Code") (11 U.S.C. ss. 101(32)), Section 2 of the Uniform Fraudulent Transfer Act ("UFTA") or Section 2 of the Uniform Fraudulent Conveyance Act ("UFCA"), (ii) has or will have "unreasonably small capital," as that term is used in Section 548(a)(2)(B)(ii) of the Bankruptcy Code or Section 5 of the UFCA, (iii) is or will be engaged or about to engage in a business or a transaction for which its remaining property is "unreasonably small" in relation to the business or transaction as that term is used in Section 4 of the UFTA, (iv) is or will thereby be rendered unable to pay its debts as they mature or become due, within the meaning of Section 548(a)(2)(B) (iii) of the Bankruptcy Code, Section 4 of the UFTA and Section 6 of the UFCA, and (v) owns or will as a result thereof own assets having a value, either at "fair valuation" or at "present fair salable value", less than the amount required to pay such Person's "debts" as such terms are used in Section 2 of the UFTA and Section 2 of the UFCA. 5.7 Chief Place of Business. As of the execution hereof, the principal place of business and the chief executive office of Borrower and each Subsidiary of Borrower is located at the location set forth in Schedule 5.7 hereto. If any change in any such location occurs, Borrower promptly shall notify Lender thereof. As of the execution hereof, the books and records of Borrower of each such Person, all records of account and all chattel paper (to the extent the same have not been delivered to Lender) of each such Person are located at the principal place of business and chief executive office of such Person, and if any change in such location occurs, Borrower promptly shall notify Lender thereof. 5.8 Other Names. Except as disclosed on Schedule 5.8 hereto, neither Borrower nor any of its Subsidiaries is using any corporate or fictitious name other than the corporate name shown on such Person's Articles of Incorporation. 5.9 Tax Liabilities. Borrower and each of Borrower's Subsidiaries have filed all federal, state and local tax reports and returns required by any law or regulation to be filed by it except for extensions duly obtained, and have either duly paid all taxes, duties and charges indicated due on the basis of such returns and reports, or have made adequate provision for the payment thereof, and the assessment of any material amount of additional taxes in excess of those paid and reported is not reasonably expected. Except as disclosed on Schedule 5.9 hereto, no federal income tax returns of Borrower or any of Borrower's Subsidiaries have been audited by the Internal Revenue Service. The reserves for taxes reflected on the balance sheets included in the Financials are, and the reserves for taxes reflected on the balance sheets of Borrower submitted to Lender in accordance with the terms of subsection 6.1 hereof will be, adequate in amount for the payment of all liabilities for all federal, state and local taxes (whether 15 or not disputed) of Borrower and its Subsidiaries accrued through the date of such balance sheets. Except as disclosed on Schedule 5.9 hereto, there are no material unresolved questions or claims concerning any tax liability of Borrower or any of Borrower's Subsidiaries. 5.10 Loans. Except as disclosed in the Pro Forma, and for trade payables and normal accruals arising in the ordinary course of Borrower's and its Subsidiaries' business since September 30, 1999, none of Borrower or any of Borrower's subsidiaries currently has or is obligated in respect of any loans, other indebtedness for borrowed money or any guaranties, except for the Working Capital Credit Facility and except in favor of Lender. 5.11 Margin Stock. Neither Borrower nor any of its Subsidiaries owns any margin security and none of the loans advanced or other credit provided to Borrower hereunder will be used for the purpose of purchasing or carrying any margin security or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase any margin security or for any other purpose not permitted by Regulation U, Regulation T or Regulation X or any other regulation of the Board of Governors of the Federal Reserve System. 5.12 Litigation and Proceedings. Except as set forth on Schedule 5.12 attached hereto, there are no judgments outstanding against Borrower or any of its Subsidiaries nor is there now pending or, to the best of Borrower's knowledge after diligent inquiry, threatened, any litigation, investigations, contested claim, or governmental proceeding by or against Borrower or any of its Subsidiaries except judgments and pending or threatened litigation, investigations, contested claims and governmental proceedings which are not, in the aggregate, material to Borrower's or any of its Subsidiaries' business, operations, condition (financial or otherwise) or prospects. Except as otherwise described in Schedule 5.12, none of the matters listed in Schedule 5.12 could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. 5.13 Other Agreements. Neither Borrower nor any of its Subsidiaries is in default in any material respect under any material contract, lease, or commitment to which it is a party or by which it is bound. Borrower knows of no material dispute regarding any contract, lease, or commitment which is material to the continued financial success and well-being of Borrower or any of its Subsidiaries. 5.14 Employee Controversies. Except as disclosed on Schedule 5.14 hereto, there are no controversies pending or, to the best of Borrower's knowledge after diligent inquiry, threatened or anticipated, between Borrower or any of its Subsidiaries, on the one hand and any of their respective employees, or any collective bargaining units representing any of its employees on the other hand, other than employee grievances arising in the ordinary course of business which are not, in the aggregate, material to the continued financial success and well-being of Borrower or any Subsidiary of Borrower or the business of Borrower. Neither Borrower nor any of its Subsidiaries has any accrued and unpaid liability to any of its employees arising under the Federal Fair Labor Standards Act, as amended. 5.15 Compliance with Laws and Regulations; Environmental Matters. (A) General Compliance. The execution and delivery by Borrower and 16 any Subsidiaries of Borrower of the Financing Agreements to which they are parties and the performance of any such Person's obligations thereunder are not in contravention of any law or laws. Borrower and its Subsidiaries are in compliance with all laws, orders, regulations and ordinances of all federal, foreign, state and local governmental authorities relating to their business, operations and assets, except for laws, orders, regulations and ordinances the violation of which would not, individually or in the aggregate, have a Material Adverse Effect. (B) Environmental, Health and Safety Compliance. Except as described on Schedule 5.15(B) attached hereto: (i) the operations of Borrower and its Subsidiaries comply in all material respects with all applicable federal, state or local environmental, health and safety statutes and regulations; (ii) none of the operations of Borrower or any of its Subsidiaries is subject to any judicial or administrative proceeding alleging the violation in any material respect of any federal, state or local environmental, health or safety statute or regulation or is the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any hazardous or toxic waste, substance or constituent, or other substance into the environment or to remedy any occupational safety or health condition; (iii) none of Borrower nor any of its Subsidiaries has filed any notice under any federal or state law or regulation indicating past or present treatment, storage or disposal of a hazardous waste or reporting a spill or release of a hazardous or toxic waste, substance or constituent, or other substance into the environment; and (iv) neither Borrower nor any of its Subsidiaries has any contingent liability of which Borrower has knowledge or reasonably should have knowledge in connection with any release of any hazardous or toxic waste, substance or constituent, or any other substance into the environment. Except as otherwise described on Schedule 5.15(B), the items disclosed on Schedule 5.15(B) would not reasonably be expected to have a Material Adverse Effect. 5.16 Patents, Trademarks and Licenses. Borrower and its Subsidiaries possess adequate assets, licenses, permits, patents, patent applications, copyrights, service marks, trademarks, trademark applications, trade styles and trade names, governmental approvals or other authorizations and other rights that are necessary for each such Person to conduct its business as heretofore conducted by Borrower and its Subsidiaries or as contemplated to be conducted by Borrower and its Subsidiaries and all such licenses, permits, patents, patent applications, copyrights, service marks, trademarks, trademark applications, trade styles, trade names, governmental approvals or authorizations and other rights are listed on Schedule 5.16 attached hereto. 5.17 ERISA. Neither Borrower nor any ERISA Affiliate of Borrower maintains or contributes to any Plan other than a Plan listed on Schedule 5.17 attached hereto. Except as otherwise disclosed on Schedule 5.17 attached hereto, neither Borrower nor any ERISA Affiliate of Borrower maintains or contributes to any employee welfare benefit plan within the meaning of Subsection 3(1) of ERISA which provides lifetime medical benefits to retirees. Neither Borrower nor any ERISA Affiliate of Borrower has breached any of the responsibilities, obligations or duties imposed on it by ERISA or regulations promulgated thereunder with respect to any Plan such that Borrower would be subject to liability for losses, penalties or excise taxes in an aggregate amount in excess of $100,000. No accumulated funding deficiency (as defined in Section 302(a)(2) of ERISA and Section 412(a) of the Internal Revenue Code) exists in respect to any Benefit Plan. Neither Borrower nor any ERISA Affiliate of Borrower nor any fiduciary of any Plan which is not a Multiemployer Plan (i) has engaged in a nonexempt "prohibited 17 transaction" described in Section 406 of ERISA or Section 4975 of the Internal Revenue Code, or (ii) has taken any action which would constitute or result in a Termination Event with respect to any Plan, in each case which could result in liability to Borrower or an ERISA Affiliate of Borrower in excess of $100,000. Schedule B to the most recent annual report filed with the Internal Revenue Service with respect to each Benefit Plan has been furnished to Lender and is complete and accurate; since the date of each such Schedule B, there has been no material adverse change in the funding status or financial condition of the Benefit Plan relating to such Schedule B. Neither Borrower nor any ERISA Affiliate of Borrower has incurred any liability to the PBGC which remains outstanding other than for insurance premiums under Sections 4006 and 4007 of ERISA. Neither Borrower nor any ERISA Affiliate of Borrower has (i) failed to make a required contribution or payment to a Multiemployer Plan, or (ii) made or expects to make a complete or partial withdrawal under Sections 4203 or 4205 of ERISA from a Multiemployer Plan for which Borrower or any ERISA Affiliate of Borrower has any liability. Neither Borrower nor any ERISA Affiliate of Borrower has failed to make a required installment under Subsection (m) of Section 412 of the Internal Revenue Code or any other payment required under Section 412 of the Internal Revenue Code on or before the due date for such installment or other payment. Neither Borrower nor any ERISA Affiliate of Borrower is required to provide security to a Plan under Section 401(a) (29) of the Internal Revenue Code due to a Plan amendment that results in an increase in current liability for the plan year. The present value of the benefits of each Benefit Plan of Borrower and each ERISA Affiliate of Borrower as of the last day of the year for such plan, as determined by such Benefit Plan's independent actuaries, does not exceed the aggregate value, as determined by such actuaries, of all assets under such Benefit Plan by an aggregate amount in excess of $100,000 for all such Plans. Borrower is not required to contribute to any Multiemployer Plan except the Multiemployer Plans specifically identified on Schedule 5.17. Borrower has given to Lender all of the following: a listing of all of the Multiemployer Plans with the aggregate amount of the most recent annual contributions required to be made by Borrower and all ERISA Affiliates of Borrower to each such Multiemployer Plan; copies of any information which has been provided to Borrower or any ERISA Affiliate of Borrower regarding withdrawal liability under any Multiemployer Plan and all collective bargaining agreements pursuant to which such contributions are required to be made; and copies of each employee welfare benefit plan within the meaning of Subsection 3(1) of ERISA which provides lifetime medical benefits to employees, the most recent summary plan description for such plan and the aggregate amount of the most recent annual payments made to terminated employees under each such plan. Each of the foregoing statements will still be true and correct on the Closing Date and the date of each advance hereunder. 5.18 Financial Condition. Since September 30, 1999, there has been no Material Adverse Change. 5.19 Survival of Warranties. All representations and warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement. 5.20 Bank Accounts. Schedule 5.20 sets forth the account numbers and locations of all bank accounts of Borrower and its Subsidiaries which will be in effect as of the Closing Date. 18 5.21 Subsidiaries. Schedule 5.21 to this Agreement (i) contains a description of the corporate structure of Borrower and Borrower's Subsidiaries; and (ii) accurately sets forth the authorized, issued and outstanding shares of each class of capital stock and other outstanding equity interests of each such Person and the owners of such shares and other equity interests. 5.22 Accuracy of Information. The written information, exhibits and reports furnished by or on behalf of Borrower or any of its Subsidiaries to Lender in connection with the Financing Agreements, and all certificates and documents delivered to Lender pursuant to the terms thereof do not contain as of the date furnished any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. 5.23 Assets and Properties. Borrower and each of its Subsidiaries has good and marketable title to all of its assets and properties (tangible and intangible, real or personal) owned by it or a valid leasehold interest in all of its leased assets and all such assets and property are free and clear of all Liens, except Liens securing the Liabilities and Liens permitted under Section 7.1. Substantially all of the assets and properties owned by, leased to or used by Borrower and/or each such Subsidiary of Borrower are in good operating condition and repair, ordinary wear and tear excepted. Except for Liens granted to Lender, neither this Agreement nor any other Financing Agreement, nor any transaction contemplated under any such agreement, will affect any right, title or interest of the Borrower or such Subsidiary in and to any of such assets in a manner that would have or is reasonably likely to have a Material Adverse Effect. 5.24 Insurance. Schedule 5.24 to this Agreement accurately sets forth as of the Closing Date all insurance policies and programs which will be in effect with respect to the respective properties and assets and business of Borrower and its Subsidiaries, specifying for each such policy and program, (i) the amount thereof, (ii) the risks insured against thereby, (iii) the name of the insurer and each insured party thereunder, (iv) the expiration date thereof, (v) the annual premium with respect thereto and (vi) a description of any reserves relating to any self-insurance program that is in effect. Such insurance policies and programs reflect coverage that is reasonably consistent with prudent industry practice. 5.25 Contingent Obligations. Except as set forth on Schedule 5.25 to this Agreement, neither the Borrower nor any of its Subsidiaries has, as of the date of this Agreement, or will on the Closing Date become obligated in respect of, any Contingent Obligation not reflected in the financial statements delivered to Lender on or prior to the Closing Date or otherwise disclosed to Lender in the other Schedules to this Agreement. 5.26 Account Warranties. As to each Account of Borrower (a) at the time of its creation, such Account is and will be a valid, bona fide account, representing an undisputed indebtedness incurred by the named Account Debtor for goods actually sold and delivered or services actually performed; (b) to the best of Borrower's knowledge there are not setoffs, offsets or counterclaims, genuine or otherwise, against such Account; (c) such Account does not represent a sale to an Affiliate or a consignment, sale or return or a bill and hold transaction; (d) no agreement exists permitting any deduction or discount (other than the discount stated on the invoice); (e) Borrower is the lawful owner of such Account and has the right to 19 assign the same to Lender; (f) such Account is free of all security interests, liens and encumbrances; (g) such Account is due and payable in accordance with its terms; and (h) Borrower holds indefeasible title to such Account. 5.27 Broker's Fees. No broker's, finder's, due diligence, structuring, commitment, closing or debt or equity placement fees, commissions or similar compensation will be payable by Borrower with respect to any of the transactions contemplated hereby except as disclosed in Schedule 3.1, all of which will be paid by Borrower on the Closing Date. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that so long as any Commitments remain in effect and until payment in full of all Liabilities (other than indemnification Liabilities pursuant to subsection 9.19 hereof to the extent no claims giving rise thereto have then been asserted) and termination of this Agreement: 6.1 Financial Statements and Other Reports. Borrower and its Subsidiaries shall keep proper books of record and account in which full and true entries will be made of all dealings or transactions of or in relation to the business and affairs of Borrower and its Subsidiaries, in accordance with GAAP, and Borrower shall cause to be furnished to Lender: (A) Monthly. As soon as practicable, and in any event within thirty (30) days after the end of each fiscal month (including each fiscal month occurring during the 90-day delivery period applicable to the delivery of annual financial statements of Borrower and its Subsidiaries furnished to Lender pursuant to subsection 6.1(B) hereof): (i) unaudited consolidated and consolidating statements of income, retained earnings and cash flow of Borrower and its Subsidiaries for such fiscal month and for the period from the beginning of the then current Fiscal Year to the end of such fiscal month and the consolidated and consolidating balance sheets of Borrower and its Subsidiaries as of the end of such fiscal month, setting forth in each case, in comparative form, figures (1) in the case of statements, for the corresponding periods in the preceding Fiscal Year and (2) in the case of balance sheets, as of a date one year earlier, all in reasonable detail and certified by the chief financial officer of Borrower, as having been prepared in accordance with GAAP (except for the absence of footnotes) and fairly presenting (subject to normal year-end audit adjustments) the financial condition and results of operations of Borrower and each of its Subsidiaries at the dates and for the periods indicated therein, such certification to be in the form of Exhibit B hereto; and (ii) statements in which the actual cash flow and income for such fiscal month and for the period from the start of the then current Fiscal Year to the end of such fiscal month, and the actual balance sheets at the end of such fiscal month (in each case as required to be delivered pursuant to subsection 6.1(A)(i) hereof) are compared with the corresponding projected statements of income and cash flow and balance sheets for such periods and time furnished to Lender pursuant to subsection 6.1(C) below, in each case in the same format as the audited statements of income and cash flow and the audited 20 balance sheet; and (iii) a management report commenting on the financial performance of the Borrower for such fiscal month and for the period from the start of the then current Fiscal Year to the end of such fiscal month and on any deviations in results from those for the same periods in the prior Fiscal Year and from the budget for the current Fiscal Year period. (B) Annual. As soon as practicable and in any event within ninety (90) days after the end of each Fiscal Year of Borrower, consolidated and consolidating statements of income, retained earnings and cash flow of Borrower and its Subsidiaries for such Fiscal Year, and the consolidated and consolidating balance sheets of Borrower and its Subsidiaries as of the end of such Fiscal Year, setting forth in each case, in comparative form, corresponding figures for the period covered by the preceding annual audit (in the case of statements) and as of the end of the preceding Fiscal Year (in the case of balance sheets), all in reasonable detail and satisfactory in scope to Lender and audited by independent certified public accountants selected by Borrower and reasonably satisfactory to Lender, whose opinion shall be prepared in accordance with Statement of Auditing Standards No. 58 (the "Statement") entitled "Reports on Audited Financial Statements" and shall be "Unqualified" (as such term is defined in such Statement), and Borrower shall use its best efforts to cause such opinion to be the subject of a reliance letter from such accountants permitting Lender to rely on the contents thereof; (C) Projections. As soon as practicable and in any event within thirty (30) days before the start of each Fiscal Year of Borrower, annual projections of Borrower and its Subsidiaries for the succeeding Fiscal Year in detail (on a fiscal month basis), including statements of anticipated income and cash flow and balance sheets of Borrower and its Subsidiaries for the succeeding Fiscal Year (on a fiscal month basis) in detail; (D) All financial statements delivered to Lender pursuant to the requirements of subsections 6.1(A)-(C) (except where otherwise expressly indicated) shall be prepared in accordance with GAAP, consistently applied (subject in the case of interim financial statements to the lack of footnotes and normal year-end adjustments). Together with each delivery of financial statements required by subsection 6.1(B) hereof, Borrower shall deliver to Lender a certificate of the independent certified public accountants who performed the audit in connection with such statements stating that in making the audit necessary to the issuance of a report on such financial statements, they have obtained no knowledge of any Default or Unmatured Default, or, if such accountants have obtained knowledge of a Default or Unmatured Default, specifying the nature and period of existence thereof. Such accountants shall not be liable by reason of any failure to obtain knowledge of any Default or Unmatured Default which would not be disclosed in the ordinary course of an audit; (E) Letters from Accountants and Consultants. As soon as practicable and in any event within ten (10) days of delivery to Borrower, a copy of (i) each "Management Letter" prepared by Borrower's independent certified public accountants in connection with the financial statements referred to in subsection 6.1(B) hereof and (ii) to the extent that such letters may from time to time be issued by Borrower's independent certified public accountants or other management consultants, any letter issued by Borrower's independent certified public accountants 21 or other management consultants with respect to recommendations relating to Borrower's financial or accounting systems or controls; (F) Default Notices. As soon as practicable (but in any event not more than five (5) days after any Authorized Officer of Borrower obtains knowledge of the occurrence of an event or the existence of a circumstance giving rise to an Unmatured Default or a Default), notice of any and all Unmatured Defaults or Defaults hereunder; (G) Indebtedness Notices. Borrower shall promptly deliver copies of all notices given or received by Borrower or any of its Subsidiaries with respect to noncompliance with any term or condition related to any Indebtedness in excess of $1,000,000 either individually or in the aggregate, and shall promptly notify Lender of any potential or actual event of default with respect to any such Indebtedness; and (H) Other Information. With reasonable promptness, such other business or financial data as Lender may reasonably request. Lender acknowledges that as of the date hereof, Borrower has one Subsidiary located in Germany, and that Borrower does not create consolidated financial statements for it and such Borrower. 6.2 Inspection. Lender, or any Person designated by Lender in writing, shall have the right, from time to time hereafter following reasonable prior notice to Borrower (provided that no prior notice shall be required during the pendency of a Default), to call at Borrower's or any of its Subsidiaries' place or places of business (or any other place where the Collateral or other assets of such Persons or any information relating thereto are kept or located) during reasonable business hours, and, without hindrance or delay, (i) to inspect, audit, check and make copies of and extracts from Borrower's or any of its Subsidiaries' books and records relating to, and to make any verification concerning, the Collateral as Lender may consider reasonable under the circumstances, and (ii) to discuss the affairs, finances and business of Borrower or any of its Subsidiaries with any officers, employees or directors of Borrower or any of its Subsidiaries; provided, however, that such inspections shall be limited to one (1) time during each calendar year (except that such inspections shall not be so limited during the pendency of a Default). Borrower shall pay on demand all photocopying expenses incurred by Lender under this subsection 6.2. 6.3 Maintenance of Licenses, Etc. Borrower shall, and shall cause each of its Subsidiaries to, maintain its corporate existence and maintain in full force and effect all material licenses, bonds, franchises, leases, patents, permits, contracts and other rights necessary to the profitable conduct of its business conducted by it. Borrower shall, and shall cause each of its Subsidiaries to, comply in all material respects with all material laws, orders, regulations and ordinances of any federal, foreign, state or local governmental authority. Borrower shall, and shall cause each of its Subsidiaries to, pay promptly all liabilities to all of its employees arising under the minimum wage and maximum hour provisions of the Fair Labor Standards Act, as the same may be amended from time to time. 6.4 Claims and Taxes. Borrower shall, and shall cause each of its 22 Subsidiaries to, pay or cause to be paid all license fees, bonding premiums and related taxes and charges, and shall, and shall cause each of its Subsidiaries to, pay or cause to be paid all of such Persons' real and personal property taxes, assessments and charges and all of such Persons' franchise, income, unemployment, use, excise, old age benefit, withholding, sales and other taxes and other governmental charges assessed against such Persons, or payable by such Persons, at such times and in such manner as to prevent any penalty from accruing or any lien or charge from attaching to its property, provided that Borrower and its Subsidiaries shall have the right to contest in good faith, by an appropriate proceeding promptly initiated and diligently conducted, the validity, amount or imposition of any such tax, assessment or charge, and during the pendency of such good faith contest to delay or refuse payment thereof, if (i) Borrower and its Subsidiaries establish adequate reserves to cover such contested taxes, assessments or charges and (ii) such contest does not have a Material Adverse Effect or otherwise result in an Unmatured Default or a Default. 6.5 Lender's Closing Costs and Expenses. Borrower shall reimburse Lender in accordance with subsection 9.2 hereof for all reasonable expenses and fees paid or incurred in connection with the underwriting, documentation, negotiation and closing of the Loans and other extensions of credit described herein, including, without limitation, lien search, filing and recording fees and taxes and the reasonable fees and expenses of Lender's attorneys and paralegals (whether such attorneys and paralegals are employees of Lender or are separately engaged by Lender), whether such expenses and fees are incurred prior to or after the Closing Date. All reasonable costs and expenses incurred by Lender with respect to the negotiation, documentation and closing of the Loans and other extensions of credit described herein and the enforcement, collection and protection of Lender's interest in the Collateral shall be additional Liabilities of Borrower to Lender, payable in accordance with subsection 9.2, repaid as provided in subsection 2.7 hereof, and secured by the Collateral. 6.6 Borrower's Liability Insurance. In addition to insurance required by subsection 6.7 hereof, Borrower shall, and shall cause its Subsidiaries to, maintain, at their expense, such public liability, third party property damage and other insurance, in such amounts and with such deductibles as is ordinarily carried by other businesses engaged in the same or similar business and as is reasonably acceptable to Lender. 6.7 Business Interruption Insurance. Borrower shall, and shall cause its Subsidiaries to, at their expense, keep and maintain their respective assets insured against loss or damage by fire, theft, burglary, pilferage, loss in transit, explosion, spoilage and all other hazards and risks ordinarily insured against by other owners or users of such properties in similar businesses, and shall maintain business interruption insurance in each case in an amount at least equal to the lesser of (i) the outstanding principal balance of the Liabilities and (ii) the replacement value of all such property. All such policies of insurance shall be in form and substance reasonably satisfactory to Lender. Borrower shall deliver to Lender a certificate of insurance for each of its policies of insurance and evidence of payment of all premiums therefor. Such policies of insurance shall contain an endorsement, substantially in the form attached hereto as Exhibit C. If Borrower at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then Lender, without waiving or releasing any obligation or Default by Borrower hereunder, may at any time or times thereafter (but shall be under no obligation to do so) obtain and maintain such policies of 23 insurance and pay such premiums and take any other action with respect thereto which Lender deems advisable. 6.8 ERISA Reporting.Borrower shall deliver to Lender, at Borrower's expense, the following information, if applicable, as and when provided below: (i) as soon as possible, and in any event within ten (10) days after Borrower or an ERISA Affiliate of Borrower knows or has reason to know that a Termination Event has occurred, a written statement of an Authorized Officer of Borrower describing such Termination Event and the action, if any, which Borrower or such ERISA Affiliate of Borrower has taken, is taking or proposes to take with respect thereto, and when known, any action taken or threatened by the Internal Revenue Service ("IRS"), the Department of Labor ("DOL") or PBGC with respect thereto; (ii) as soon as possible, and in any event within thirty (30) days, after Borrower or an ERISA Affiliate of Borrower knows or has reason to know that a prohibited transaction (defined in Section 406 of ERISA and Section 4975 of the Internal Revenue Code) has occurred, a statement of an Authorized Officer of Borrower describing such transaction; (iii) promptly after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communications received by Borrower or any ERISA Affiliate of Borrower with respect to such request; (iv) promptly upon, and in any event within four (4) Business Days after, receipt by Borrower or an ERISA Affiliate of Borrower of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice; (v) promptly upon, and in any event within four (4) Business Days after, receipt by Borrower or an ERISA Affiliate of Borrower of a notice from a Multiemployer Plan regarding the imposition of withdrawal liability, copies of such notice; and (vi) promptly upon, and in any event within ten (10) Business Days after, either Borrower or an ERISA Affiliate of Borrower fails to make a required installment under Subsection (m) of Section 412 of the Code or any other payment required under Section 412 on or before the due date for such installment or payment, a notification of such failure. 6.9 Notice of Suit or Adverse Change in Business. Borrower shall, as soon as possible, and in any event within five (5) Business Days after any Authorized Officer of Borrower learns of the following, give written notice to Lender of (i) any material proceeding(s) (including, without limitation, litigation, investigations, arbitration or governmental proceedings) being instituted or threatened to be instituted by or against Borrower or any of its Subsidiaries in any federal, state, local or foreign court or before any commission or other regulatory body (federal, state, local or foreign), (ii) notice that Borrower's or any of its Subsidiaries' operations 24 are not in full compliance with all requirements of applicable federal, state or local environmental, health and safety statutes and regulations, except for notices as to matters which, either individually or in the aggregate, could not have a Material Adverse Effect, (iii) notice that Borrower or any of its Subsidiaries is subject to a federal or state investigation evaluating whether any remedial action is needed to respond to the release of any hazardous or toxic waste, substance or constituent, or other substance into the environment, (iv) notice that any properties or assets of Borrower or any of its Subsidiaries are subject to an Environmental Lien, and (v) any Material Adverse Change. 6.10 Environmental Safety and Health Laws. If Borrower or any of its Subsidiaries shall (a) receive any notice that any violation of any federal, state or local environmental law or regulation may have been committed or is about to be committed by Borrower or any of its Subsidiaries, (b) receive any notice that any administrative or judicial complaint or order has been filed or is about to be filed against Borrower or any of its Subsidiaries for a violation of any federal, state or local environmental law or regulation or requiring Borrower or any of its Subsidiaries to take any action in connection with the release of toxic or hazardous substances into the environment, or (c) receive any notice from a federal, state, or local governmental agency or private party alleging that Borrower or any of its Subsidiaries may be liable or potentially responsible for costs associated with a response to or cleanup of a release of a toxic or hazardous substance into the environment or any damages caused thereby, Borrower shall provide Lender with a copy of such notice or, in the event of any such verbal notice, a written description of such communication within fifteen (15) days of Borrower's receipt thereof. 6.11 Supplemental Disclosure. At any time that Borrower shall determine or at the request of Lender (in the event that such information is not otherwise delivered by Borrower to Lender, but not more frequently than every fiscal quarter), Borrower shall supplement each Schedule herein with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such schedule or as an exception to such representation or which is necessary to correct any information in such schedule or representation which has been rendered inaccurate in any material respect thereby; provided, however, that such supplement shall not be or be deemed a waiver of any Default or Unmatured Default disclosed therein or of any misrepresentation made prior to such time. 6.12 Collateral Records. Borrower shall keep proper books and records relating to the Collateral and shall, upon request of Lender, mark such material books and records to indicate Lender's security interests in the Collateral, for the benefit of Lender. 6.13 Endorsement. Borrower hereby constitutes and appoints Lender and all Persons designated by Lender for that purpose as Borrower's true and lawful attorney-in-fact, with power to endorse Borrower's name to any and all proceeds of Collateral that come into Lender's possession or under Lender's control. Both the appointment of Lender as Borrower's attorney and Lender's rights and powers are coupled with an interest and are irrevocable until payment in full and complete performance of all of the Liabilities. 6.14 Maintenance of Properties. Borrower will, and will cause each of 25 its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition (ordinary wear and tear excepted) all material properties necessary to the conduct of the business of any such Person and will make or cause to be made all appropriate repairs, renewals and/or replacements thereof. 6.15 Collateral Locations. Borrower will keep the Collateral at the locations specified on Schedule 5.5. With respect to any new location (which in any event shall be within the continental United States), Borrower will execute such documents and take such actions as Lender deems necessary to perfect and protect the security interests of Lender in the Collateral prior to the transfer or removal of any Collateral to such new location. 6.16 Use of Proceeds and Margin Security. Borrower shall use the proceeds of all Loans for proper business purposes (as described in the recitals to this Agreement) consistent with all applicable laws, statutes, rules and regulations. No portion of the proceeds of any Loan shall be used by Borrower or any of its Subsidiaries for the purpose of purchasing or carrying margin stock within the meaning of Regulation U, or in any manner that might cause the borrowing, the application of such proceeds, or the transactions contemplated hereby or by the other Financing Agreements to violate Regulation T or Regulation X or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange Act of 1934 or the rules and regulations thereunder. 6.17 Appraisals. Borrower shall, at the request of Lender, at any time after the occurrence of a Default, provide Lender, at Borrower's expense, with valuations or appraisals or updates thereof of any or all of the Collateral from an appraiser satisfactory to Lender. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that so long as any of the Commitments remain in effect and until payment in full of all Liabilities (other than indemnification Liabilities pursuant to subsection 9.19 hereof to the extent no claims giving rise thereto have then been asserted) and termination of this Agreement: 7.1 Encumbrances. Neither Borrower nor any of its Subsidiaries will create, incur, assume or suffer to exist any Liens on the Collateral, other than (collectively, "Permitted Liens"): (i) Liens securing the payment of taxes, either not yet due or the validity of which is being contested in good faith by appropriate proceedings, and as to which Borrower shall, if appropriate under GAAP, have set aside on its books and records adequate reserves, (ii) deposits under workmen's compensation, unemployment insurance, social security and other similar laws, or to secure the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure indemnity, performance or other similar bonds for the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure statutory obligations or surety or appeal bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business, (iii) Liens in favor of Lender, (iv) Liens which arise by operation of law, other than Environmental Liens, (v) Liens on the Collateral securing Borrower's indebtedness under the Working Capital Credit Facility, so long as such 26 Liens are perfected second in time and are subordinate to Lender's Liens on the Collateral; and (vi) other Liens (excluding Liens securing Indebtedness), which do not, in Lender's sole good faith determination, materially lessen the value of the Collateral or the value of Lender's Liens therein, or prohibit Lender's ability to foreclose on the Collateral. All such Liens existing on the Closing Date are identified on Schedule 7.1. Neither Borrower nor any of its Subsidiaries shall permit the filing of any financing statement covering the Collateral, except for financing statements filed with respect to Liens expressly permitted by this Agreement. 7.2 Restrictions on Distributions. Borrower will not, and will not permit any of its Subsidiaries to, create or otherwise become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to make distributions or make any other distribution on its stock, pay any Indebtedness or other obligation owed to Borrower, make loans or advances or other investments in Borrower, or sell, transfer or otherwise convey any of its property to Borrower, except as set forth in this Agreement. 8. DEFAULT, RIGHTS AND REMEDIES OF LENDER. 8.1 Defaults. If any of the following events ("Defaults") shall occur: (A) Borrower (i) fails to pay when due or declared due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) any of the Liabilities consisting of principal or interest with respect to the Loans or (ii) fails to pay within three (3) Business Days of the date when due or declared due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) any of the other Liabilities; (B) (i) a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed (a) against Borrower or any of Borrower's Subsidiaries and such proceeding remains undismissed for a period in excess of sixty (60) days, or an order for relief is entered, or (b) by Borrower or any of Borrower's Subsidiaries or (ii) Borrower or any of Borrower's Subsidiaries shall make an assignment for the benefit of creditors; or Borrower or any of Borrower's Subsidiaries shall take any corporate action to authorize any of the foregoing in this clause (G); (C) Borrower or any of Borrower's Subsidiaries shall become insolvent or shall fail generally to pay its debts as they become due; (D) A default, as defined under the documents evidencing the Working Capital Credit Facility, shall occur thereunder, which default shall give the lender thereunder the right to accelerate the indebtedness evidenced thereby. then Lender may, upon notice to Borrower (i) terminate Lender's obligation to make advances to Borrower pursuant to subsection 2.1 hereof, and/or (ii) declare all or any portion of the Liabilities to be immediately due and payable, whereupon all or such portion of the Liabilities shall become immediately due and payable and Lender shall not be obligated to make any further advances to Borrower, except that in the event a Default described in subsection 8.1(B) hereof shall exist or occur, all of the Liabilities shall automatically, without notice of any kind, be immediately due and 27 payable and Lender shall not be obligated to make any further advances to Borrower. 8.2 Rights and Remedies Generally. In the event of a Default, Lender shall have, in addition to any other rights and remedies contained in this Agreement or in any of the other Financing Agreements, all of the rights and remedies of a secured party under the Code or other applicable laws, all of which rights and remedies shall be cumulative, and non-exclusive, to the extent permitted by law. In addition to all such rights and remedies, the sale, lease or other disposition of the Collateral, or any part thereof, by Lender after Default may be for cash, credit or any combination thereof, and Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price, may setoff the amount of such purchase price against the Liabilities then owing. Any sales of the Collateral may be adjourned from time to time with or without notice. Lender may, in its sole discretion, cause the Collateral to remain on Borrower's premises, at Borrower's expense, pending sale or other disposition of the Collateral. Lender shall have the right to conduct such sales on Borrower's premises, at Borrower's expense, or elsewhere, on such occasion or occasions as Lender may see fit. 8.3 Entry Upon Premises and Access to Information. In the event of a Default, Lender shall have the right to enter upon the premises of Borrower or any of its Subsidiaries where the Collateral is, or books and records relating to the Collateral are, located (or is/are believed to be located) without any obligation to pay rent to Borrower or any of its Subsidiaries, or any other place or places where the Collateral or books and records are believed to be located and kept, and remove the Collateral therefrom to the premises of Lender or any agent of Lender, for such time as Lender may desire, in order effectively to collect or liquidate the Collateral, and/or Lender may require Borrower to assemble the Collateral and make it available to Lender at a place or places to be designated by Lender. 8.4 Sale or Other Disposition of Collateral by Lender. Any notice required to be given by Lender of a sale, lease or other disposition or other intended action by Lender with respect to any of the Collateral which is delivered to Borrower in accordance with subsection 9.17 hereof, at least ten (10) Business Days prior to such proposed action, shall constitute fair and reasonable notice to Borrower of any such action. The net proceeds realized by Lender upon any such sale or other disposition, after deduction for the expense of retaking, holding, preparing for sale, selling or the like and the reasonable attorneys' fees and legal expenses incurred by Lender in connection therewith, shall be applied as provided herein toward satisfaction of the Liabilities, including, without limitation, the Liabilities described in subsections 6.5 and 9.2 hereof. Lender shall account to Borrower for any surplus realized upon such sale or other disposition, and Borrower shall remain liable for any deficiency. The commencement of any action, legal or equitable, or the rendering of any judgment or decree for any deficiency shall not affect Lender's security interest in the Collateral until the Liabilities are fully paid. Borrower agrees that Lender has no obligation to preserve rights to the Collateral against any other parties. 8.5 Waiver of Demand. Demand, presentment, protest and notice of nonpayment are hereby waived by Borrower. Borrower also waives the benefit of all valuation, appraisal and exemption laws. 8.6 Waiver of Notice. UPON THE OCCURRENCE AND DURING 28 THE CONTINUANCE OF A DEFAULT, BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY LENDER OF ITS RIGHTS TO REPOSSESS THE COLLATERAL WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING. BORROWER ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH RESPECT TO THIS TRANSACTION AND THIS AGREEMENT. 9. MISCELLANEOUS. 9.1 Amendments and Waivers. (A) Except as otherwise provided herein, no amendment, modification, termination or waiver of any provision of this Agreement, the Term Note or any other Financing Agreement, or consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by Lender. (B) Each amendment, modification, termination or waiver shall be effective only in the specific instance and for the specific purpose for which it was given. No amendment, modification, termination or waiver shall be required for Lender to take additional Collateral pursuant to any Financing Agreement. 9.2 Costs and Attorneys' Fees. If at any time or times Lender employs counsel in connection with protecting or perfecting Lender's security interest in the Collateral or if at any time Lender employs counsel in connection with any matters contemplated by or arising out of this Agreement or any of the other Financing Agreements, whether (a) to prepare, negotiate or execute (i) this Agreement, the other Financing Agreements or any amendment to or modification or extension of this Agreement, any other Financing Agreements or any instrument, document or agreement executed by any Person in connection with the transactions contemplated by this Agreement, (ii) any new or supplemental Financing Agreements, or any instrument, document or agreement to be executed by any Person in connection with the transactions contemplated by this Agreement, or (iii) any instrument, document or agreement in connection with any sale or attempted sale of any interest herein to any participant or Lender, (b) to commence, defend, or intervene in any litigation or to file a petition, complaint, answer, motion or other pleadings, (c) to take any other action in or with respect to any suit or proceeding (bankruptcy or otherwise), (d) to consult with officers of Lender to advise Lender, (e) to protect, collect, sell, take possession of, release or liquidate any of the Collateral, or (f) to attempt to enforce or to enforce any security interest in any of the Collateral, or to enforce any rights of Lender, including, without limitation, Lender's rights to collect any of the Liabilities, then in any of such events, all of the attorneys' fees arising from such services, and any expenses, costs and charges relating thereto, including, without limitation, all reasonable fees of all paralegals and other staff employed by such attorneys, together with interest following demand for payment thereof at the rate from time to time prescribed in subsection 2.7(A) hereof, shall be part of the Liabilities and secured by the Collateral. All of the foregoing costs and expenses shall be payable on demand. 9.3 Expenditures by Lender. In the event Borrower shall fail to pay 29 taxes, insurance, assessments, costs or expenses which Borrower is, under any of the terms hereof, required to pay, or fails to keep the Collateral free from other security interests, liens or encumbrances, except as permitted herein, Lender may, in its sole discretion exercised in good faith, make expenditures for any or all of such purposes, and the amount so expended, together with interest thereon at the rate prescribed in subsection 2.7(A) hereof, shall be part of the Liabilities, payable on demand and secured by the Collateral. 9.4 Custody and Preservation of Collateral. Lender shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it takes such action for that purpose as Borrower shall request in writing, but failure by Lender to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure by Lender to preserve or protect any right with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by Borrower shall of itself be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral. 9.5 Reliance by Lender. All covenants, agreements, representations and warranties made herein by Borrower shall, notwithstanding any investigation by Lender, be deemed to be material to and to have been relied upon by Lender. 9.6 Assignment; Parties. Whenever in this Agreement there is reference made to any of the parties hereto, such reference shall be deemed to include, wherever applicable, a reference to the successors and assigns of Borrower and the successors and assigns of Lender, and the provisions of this Agreement shall be binding upon and shall inure to the benefit of said successors and assigns. Notwithstanding anything herein to the contrary, Borrower may not assign or otherwise transfer its rights or obligations under this Agreement without the prior written consent of Lender. 9.7 CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS AND NOT THE CONFLICT OF LAW PROVISIONS OF THE STATE OF ILLINOIS. ANY DISPUTE BETWEEN THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS AND NOT THE CONFLICTS OF LAW PROVISIONS OF THE STATE OF ILLINOIS. 9.8 CONSENT TO JURISDICTION. (A) EXCLUSIVE JURISDICTION. EXCEPT AS PROVIDED IN SUBSECTION 9.8(B) HEREOF LENDER AND BORROWER AGREE THAT ALL DISPUTES BETWEEN THEM ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR FEDERAL COURTS LOCATED IN COOK COUNTY, ILLINOIS, BUT LENDER AND 30 BORROWER ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF COOK COUNTY, ILLINOIS. BORROWER WAIVES IN ALL DISPUTES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE. (B) OTHER JURISDICTIONS. BORROWER AGREES THAT LENDER SHALL HAVE THE RIGHT TO PROCEED AGAINST BORROWER OR THE COLLATERAL IN A COURT IN ANY LOCATION TO ENABLE LENDER TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE LIABILITIES, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF LENDER. BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH LENDER HAS COMMENCED A PROCEEDING DESCRIBED IN THIS SUBSECTION 9.8(B). 9.9 SERVICE OF PROCESS. BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF THE COURTS REFERRED TO IN SUBSECTION 9.8 HEREOF IN ANY ACTION OR PROCEEDING BY MAILING COPIES OF SUCH SERVICE BY REGISTERED MAIL, POSTAGE PREPAID TO BORROWER AT ITS ADDRESS SET FORTH IN SUBSECTION 9.17 HEREOF. BORROWER HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID. NOTHING IN THIS AGREEMENT SHALL AFFECT THE RIGHT OF AGENT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 9.10 WAIVER OF JURY TRIAL AND BOND. (A) WAIVER OF JURY TRIAL. BORROWER AND LENDER WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LENDER AND BORROWER ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS RELATED THERETO. BORROWER AND LENDER HEREBY AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (B) WAIVER OF BOND. BORROWER WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF LENDER IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO OBTAIN POSSESSION OF, REPLEVY, ATTACH OR LEVY UPON COLLATERAL OR ANY OTHER SECURITY FOR THE LIABILITIES, TO ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF LENDER, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT INJUNCTION, THIS AGREEMENT, OR ANY OTHER AGREEMENT OR DOCUMENT BETWEEN 31 LENDER AND BORROWER. 9.11 ADVICE OF COUNSEL. BORROWER ACKNOWLEDGES AND REPRESENTS TO LENDER THAT IT HAS DISCUSSED THIS AGREEMENT WITH ITS LAWYERS. 9.12 SEVERABILITY. WHEREVER POSSIBLE, EACH PROVISION OF THIS AGREEMENT SHALL BE INTERPRETED IN SUCH MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF ANY PROVISION OF THIS AGREEMENT SHALL BE PROHIBITED BY OR INVALID UNDER APPLICABLE LAW, SUCH PROVISION SHALL BE INEFFECTIVE ONLY TO THE EXTENT OF SUCH PROHIBITION OR INVALIDITY, WITHOUT INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS AGREEMENT. 9.13 Application of Payments. Notwithstanding any contrary provision contained in this Agreement or in any of the other Financing Agreements, Borrower irrevocably waives upon the occurrence and during the continuance of a Default the right to direct the application of any and all payments at any time or times hereafter received by Lender from Borrower or with respect to any of the Collateral to the Liabilities then due and owing and Borrower does hereby irrevocably agree that Lender shall have the exclusive right to apply such payments against the Liabilities then due and owing in such manner as Lender may deem advisable. Borrower does hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all payments received at any time or times after the occurrence and during the continuance of a Default, whether with respect to the Collateral or otherwise, against the Liabilities in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. 9.14 Marshaling; Payments Set Aside. Lender shall not be under any obligation to marshall any assets in favor of Borrower or any other party or against or in payment of any or all of the Liabilities. To the extent that Borrower makes a payment or payments to Lender or Lender enforces its security interests or exercises its rights 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 party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 9.15 Section Titles. The section titles contained in this Agreement shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties. 9.16 Continuing Effect. This Agreement, Lender's security interests in the Collateral, and all of the other Financing Agreements shall continue in full force and effect so long as any Liabilities shall be owed to Lender, and (even if there shall be no Liabilities outstanding) so long as this Agreement has not been terminated as provided in subsection 2.9 32 hereof. 9.17 Notices. Except as otherwise expressly provided herein, any notice required or desired to be served, given or delivered hereunder shall be in writing, and shall be deemed to have been validly served, given or delivered (i) three (3) days after deposit in the United States mails, with proper first class postage prepaid (and by certified or registered mail, return receipt requested), (ii) when sent after receipt of confirmation or answerback if sent by telecopy, or other similar facsimile transmission, (iii) one (1) Business Day after deposited with a reputable overnight courier with all charges prepaid, or (iv) when delivered, if hand-delivered by messenger, all of which shall be properly addressed to the party to be notified and sent to the address or number indicated as follows: (i) If to Lender at: LaSalle Bank National Association 135 South LaSalle Street Chicago, Illinois 60603 Attn: Ms. Mary Lou Bartlett Telecopy: (312) 904-0432 Confirmation: (312) 904-0433 With a copy to: Schwartz, Cooper, Greenberger & Krauss 180 North LaSalle Street Suite 2700 Chicago, Illinois 60601 Attn: Andrew H. Connor, Esq. Telecopy: (312)782-8416 Confirmation:(312)845-5118 (ii) If to Borrower at: Allied Products Corporation 1355 East 93rd Street Chicago, Illinois 60619 Attn: Mr. Richard Drexler Telecopy: (___) ___-____ Confirmation: (__) ___-____ With a copy to: Mark C. Standefer, Esq. Allied Products Corporation 10 South Riverside Plaza Chicago, Illinois 60606 Telecopy: (___) ___-____ 33 Confirmation: (312)441-5214 And to: David A. Rubenstein, Esq. Gardner, Carton & Douglas Quaker Tower 321 North Clark Street Chicago, Illinois 60610-4795 Telecopy: (312)644-3381 Confirmation: (312)245-8499 or to such other address or number as each party designates to the other in the manner herein prescribed. 9.18 Equitable Relief. Borrower recognizes that, in the event Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy at law may prove to be inadequate relief to Lender; therefore, Borrower agrees that Lender, if Lender so requests, shall be entitled to temporary and permanent injunctive relief in any such case and the granting of any such relief shall not preclude Lender from pursuing any other relief or remedies for such breach. 9.19 Indemnification.(A) Borrower agrees to defend, protect, indemnify and hold harmless Lender, and its officers, directors, employees, Affiliates, attorneys, consultants and agents (collectively, the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for and consultants of such Indemnitees in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitees shall be designated a party thereto), which may be imposed on, incurred by, or asserted against such Indemnitees (whether direct, indirect, or consequential) arising out of or by reason of any litigation, investigation, claims or proceedings (whether based on any federal or state laws or other statutory regulations, including, without limitation, securities, environmental and commercial laws and regulations, under common law or at equitable cause or on contract or otherwise) commenced or threatened, which are in any manner relating to or arising out of this Agreement or the other Financing Agreements, or any act, event or transaction related or attendant thereto, the agreements of Lender contained herein, the making of any Loans or advances, the management of such Loans or advances or the Collateral (including any liability under federal, state or local environmental laws or regulations) or the use or intended use of the proceeds of such Loans or advances (collectively, the "Indemnified Matters"); provided that Borrower shall have no obligation to any Indemnitee hereunder with respect to Indemnified Matters caused by or resulting from the wilful misconduct or gross negligence of such Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this subsection 9.19 may be unenforceable because it is violative of any law or public policy, Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all Indemnified Matters incurred by the Indemnitees. 34 (B) Borrower further agrees to assert no claim against any of the Indemnitees on any theory of liability for consequential, special, indirect, exemplary or punitive damages. No settlement shall be entered into by Borrower or any of its Subsidiaries with respect to any claim, litigation, arbitration or other proceeding relating to or arising out of the transaction evidenced by this Agreement or the other Financing Agreements (whether or not Lender or any Indemnitee is a party thereto) unless such settlement releases all Indemnitees from any and all liability with respect thereto. 9.20 Counterparts. This Agreement may be executed and accepted in any number of counterparts, each of which shall be an original with the same effect as if the signatures were on the same instrument. The delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. 9.21 Entire Agreement. This Agreement, including the Financing Agreements and all exhibits and other documents attached hereto or incorporated by reference herein, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all other understandings, oral or written, with respect to the subject matter hereof. 9.22 Confidentiality. Lender shall hold all nonpublic information obtained pursuant to the requirements hereof in accordance with such Person's customary procedures for handling confidential information of this nature and in accordance with safe and sound business practices and in any event may make disclosure reasonably required by a bona fide offeree or assignee (or participant), or as required or requested by any governmental authority or representative thereof, or pursuant to legal process, or in connection with the exercise of rights and remedies, or enforcement of obligations, under this Agreement and the other Financing Agreements or to its accountants, lawyers and other advisors, and shall require any such offeree or assignee (or participant) to agree (and require any of its offerees, assignees or participants to agree) to comply with this subsection 9.22. In no event shall Lender be obligated or required to return any materials furnished by Borrower, provided, however, each proposed offeree, assignee and participant shall be required to agree that if it does not become an assignee (or participant) it shall return all materials furnished to it by Borrower in connection herewith. The provisions of this subsection 9.22 shall survive the termination of this Agreement. 9.23 Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. 9.24 Amendment of Loan Agreement. Lender hereby agrees with Bush Hog Investors, L.L.C. and CC Industries, Inc. that, without the prior written consent of Bush Hog Investors, L.L.C. and CC Industries, Inc., Lender will not amend, modify or otherwise change in any way this Agreement or the Term Note (i) to increase the principal amount of the Term Loan, (ii) to increase the rate of interest applicable thereunder (except as provided therein with respect to a default rate of interest), (iii) to shorten the maturity of the Term Loan or any installment thereof, (iv) to change the amortization of the Term Loan, or (v) to make the provisions thereof more restrictive as to Borrower, or (vi) in any other manner which is materially 35 adverse to Borrower, Bush Hog Investors, L.L.C. or CC Industries, Inc. [Balance of page intentionally left blank; signature page follows.] 36 IN WITNESS WHEREOF, this Loan and Security Agreement has been duly executed as of the day and year first above written. ALLIED PRODUCTS CORPORATION By: /s/ Richard A. Drexler ------------------------------------- Name: Richard A. Drexler Title: Chairman, President and Chief Executive Officer LASALLE BANK NATIONAL ASSOCIATION By: /s/ Mary Lou Bartlett ------------------------------------- Name: Mary Lou Bartlett Title: Vice President 37 SCHEDULE 3.1 Conditions to Initial Loans 38 SCHEDULE 5.1 Jurisdiction of Incorporation; Qualification SCHEDULE 5.2 Governmental Consents and Restrictions SCHEDULE 5.4(A) Financials SCHEDULE 5.4(B) Projections SCHEDULE 5.4(C) Pro Forma SCHEDULE 5.5 Locations of Collateral SCHEDULE 5.7 Chief Place of Business SCHEDULE 5.8 Other Names SCHEDULE 5.9 Tax Audits SCHEDULE 5.12 Litigation and Proceedings SCHEDULE 5.14 Employee Controversies SCHEDULE 5.15(B) Environmental Matters SCHEDULE 5.16 Patents, Trademarks and Licenses SCHEDULE 5.17 ERISA SCHEDULE 5.20 Bank Accounts SCHEDULE 5.21 Capitalization; Subsidiaries SCHEDULE 5.24 Insurance SCHEDULE 5.25 Contingent Obligations SCHEDULE 7.1 Liens EX-10.2 6 EXHIBIT 10.2 EXHIBIT 10.2 ALLIED PRODUCTS CORPORATION 10 South Riverside Plaza - Chicago, Illinois 60606 - Direct (312) 441-5221 - Fax (312) 464-1511 RICHARD A. DREXLER Chairman, President and Chief Executive Officer March 23, 2000 Mr. William Crown CC Industries, Inc. 222 North LaSalle Street, Suite 1000 Chicago, IL 60601 Dear Bill: This will confirm our telephone conversation of yesterday. We have jointly agreed that Allied will sell, and Bush Hog Investors and/or its affiliates will purchase, Allied's 19.9% membership interest in Bush Hog, L.L.C. effective on or before June 30, 2000 (the actual date herein in "Closing Date") for a purchase price equal to $31,426,134 adjusted as follows: (i) plus (or minus) 19.9% of the net amount received by (or paid) by Allied pursuant to Section 1.5(a)(iv)(D) of the Limited Liability Interest Purchase and Contribution Agreement dated October 21, 1999 between Allied Products Corporation, Bush Hog, L.L.C. and Bush Hog Investors, L.L.C., as amended, ("Purchase Agreement"), (ii) plus 19.9% of the cash of Bush Hog, L.L.C. on the Closing Date, (iii) minus 19.9% of the bank debt of Bush Hog, L.L.C. as of the Closing Date, (iv) plus (or minus) the increase (or decrease) in the Closing Date Adjusted Working Capital, as defined below, over the Final Adjusted Working Capital under the Purchase Agreement, (v) plus 19.9% of any increase in the Closing Date Adjusted Net Tangible Investment, as defined below, over the Final Adjusted Net Tangible Investment under the Purchase Agreement, and (vi) minus 19.9% of any increase in the Closing Date Long Term Liabilities, as defined below, over the Final Long Term Liabilities, as defined in the Purchase Agreement and (vii) minus any distributions of Distributable Cash to Allied after March 8, 2000 pursuant to the Operating Agreement, as defined below. The purchase and sale will be consummated as provided in Section 7 of the Limited Liability Company Agreement of Bush Hog, L.L.C. by and between Allied, Bush Hog Investors and Bush Hog, L.L.C. ("Operating Agreement". The Closing Date Adjustment Working Capital, Closing Date Net Tangible Investment and Closing Date Long Term Liabilities shall be determined in the same manner as the Final Adjusted Working Capital, Final Adjusted Net Tangible Investment and Final Long Term Cash __________ under the Purchase Agreement. Mr. William Crown March 23, 2000 Page 2 Please acknowledge our agreement by signing on the space indicated below. Sincerely yours, Allied Products Corporation /S/ Richard A. Drexler ----------------------------------------- By: Richard A. Drexler, President & CEO We agree to purchase or to cause an affiliate to purchase Allied's membership interest in Bush Hog, L.L.C. pursuant to the terms outlined in this letter. Bush Hog Investors, L.L.C. By: Henry Crown & Company (Not Inc.) By: /S/ Richard C. Goodman ---------------------- Partner EX-10.3 7 EXHIBIT 10.3 EXHIBIT 10.3 ================================================================================ LOAN AND SECURITY AGREEMENT by and between ALLIED PRODUCTS CORPORATION and FOOTHILL CAPITAL CORPORATION Dated as of March 29, 2000 ================================================================================ TABLE OF CONTENTS 1. DEFINITIONS AND CONSTRUCTION...............................................1 1.1 Definitions.........................................................1 1.3 Code...............................................................19 1.4 Construction.......................................................19 1.5 Schedules and Exhibits.............................................20 2. LOAN AND TERMS OF PAYMENT.................................................20 2.1 Revolving Advances.................................................20 2.2 Letters of Credit..................................................21 2.3 Intentionally Omitted..............................................24 2.4 Intentionally Omitted..............................................24 2.5 Overadvances.......................................................24 2.6 Interest and Letter of Credit Fees: Rates, Payments, and Calculations......................................................24 2.7 Collection of Accounts.............................................26 2.8 Crediting Payments; Application of Collections.....................26 2.9 Designated Account.................................................27 2.10 Maintenance of Loan Account; Statements of Obligations.............27 2.11 Fees...............................................................27 3. CONDITIONS; TERM OF AGREEMENT.............................................28 3.1 Conditions Precedent to the Initial Advance, Letter of Credit, and the Term Loan Subline.........................................28 3.2 Conditions Precedent to all Advances, all Letters of Credit, and the Term Loan Subline.........................................31 3.3 Condition Subsequent...............................................32 3.4 Term...............................................................32 3.5 Effect of Termination..............................................32 3.6 Early Termination by Borrower......................................33 3.7 Termination Upon Event of Default..................................33 4. CREATION OF SECURITY INTEREST.............................................34 4.1 Grant of Security Interest.........................................34 4.2 Negotiable Collateral..............................................34 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral........................................................34 4.4 Delivery of Additional Documentation Required......................34 4.5 Power of Attorney..................................................34 4.6 Right to Inspect...................................................35 5. REPRESENTATIONS AND WARRANTIES............................................35 5.1 No Encumbrances....................................................36 5.2 Eligible Accounts..................................................36 5.3 Intentionally Omitted..............................................36 5.4 Equipment..........................................................36 5.5 Location of Inventory and Equipment................................36 5.6 Inventory Records..................................................36 5.7 Location of Chief Executive Office; FEIN...........................36 5.8 Due Organization and Qualification; Subsidiaries...................37 5.9 Due Authorization; No Conflict.....................................37 5.10 Litigation.........................................................38 5.11 No Material Adverse Change.........................................38 5.12 Solvency...........................................................39 5.13 Employee Benefits..................................................39 5.14 Environmental Condition............................................39 5.15 Intellectual Property..............................................39 5.16 Machinery and Equipment............................................39 6. AFFIRMATIVE COVENANTS.....................................................40 6.1 Accounting System..................................................40 6.2 Collateral Reporting...............................................40 6.3 Financial Statements, Reports, Certificates........................41 6.4 Tax Returns........................................................42 6.5 Guarantor Reports..................................................42 6.6 Returns............................................................42 6.7 Title to Equipment.................................................42 6.8 Maintenance of Equipment...........................................43 6.9 Taxes..............................................................43 6.10 Insurance..........................................................43 6.11 No Setoffs or Counterclaims........................................45 6.12 Location of Inventory and Equipment................................45 6.13 Compliance with Laws...............................................45 6.14 Employee Benefits..................................................45 6.15 Leases.............................................................46 6.16 Contracts Related to Eligible Special Project Accounts and Eligible Special GM Project Account...............................46 6.17 Price Adjustments in Bush Hog Sale.................................46 6.18 Labor Developments.................................................47 7. NEGATIVE COVENANTS........................................................47 7.1 Indebtedness.......................................................47 7.2 Liens..............................................................47 7.3 Restrictions on Fundamental Changes................................48 7.4 Disposal of Assets.................................................48 7.5 Change Name........................................................48 7.6 Guarantee..........................................................48 7.7 Nature of Business.................................................48 7.8 Prepayments and Amendments.........................................48 7.9 Change of Control..................................................49 7.10 Consignments.......................................................49 7.11 Distributions......................................................49 7.12 Accounting Methods.................................................49 7.13 Investments........................................................49 7.14 Transactions with Affiliates.......................................49 7.15 Suspension.........................................................49 7.16 Compensation.......................................................50 7.17 Use of Proceeds....................................................50 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees............................................50 7.19 No Prohibited Transactions Under ERISA.............................50 7.20 Financial Covenants................................................51 7.21 Capital Expenditures...............................................52 7.22 Availability for Payment to Existing Lender........................52 8. EVENTS OF DEFAULT.........................................................52 9. FOOTHILL'S RIGHTS AND REMEDIES............................................54 9.1 Rights and Remedies................................................54 9.2 Remedies Cumulative................................................57 10. TAXES AND EXPENSES........................................................57 11. WAIVERS; INDEMNIFICATION..................................................58 11.1 Demand; Protest; etc...............................................58 11.2 Foothill's Liability for Collateral................................58 11.3 Indemnification....................................................58 12. NOTICES...................................................................58 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER................................60 14. DESTRUCTION OF BORROWER'S DOCUMENTS.......................................61 15. GENERAL PROVISIONS........................................................61 15.1 Effectiveness......................................................61 15.2 Successors and Assigns.............................................61 15.3 Section Headings...................................................61 15.4 Interpretation.....................................................61 15.5 Severability of Provisions.........................................61 15.6 Amendments in Writing..............................................62 15.7 Counterparts; Telefacsimile Execution..............................62 15.8 Revival and Reinstatement of Obligations...........................62 15.9 Integration........................................................62 SCHEDULES AND EXHIBITS Schedule P-1 Permitted Liens Schedule R-1 Real Property Collateral Schedule 5.8 Subsidiaries Schedule 5.10 Litigation Schedule 5.13 ERISA Benefit Plans Schedule 5.14 Environmental Matters Schedule 5.15 Intellectual Property Schedule 5.16 Machinery and Equipment Schedule 6.12 Location of Inventory and Equipment Exhibit A Borrower Projections Exhibit C-1 Form of Compliance Certificate LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of March 29, 2000, between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), with a place of business located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333 and ALLIED PRODUCTS CORPORATION, a Delaware corporation ("Borrower"), with its chief executive office located at 10 South Riverside Plaza, Chicago, Illinois 60606. The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account. "Accounts" means the Eligible Special Projects Account, the Eligible Special GM Projects Accounts, Eligible Parts and Service Accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendition of services by Borrower, irrespective of whether earned by performance, and any and all credit insurance, guaranties, or security therefor. "Account Receivable Fee" has the meaning set forth in Section 2.11(f). "Advances" has the meaning set forth in Section 2.1(a). "Affiliate" means, as applied to any Person, any other Person who directly or indirectly controls, is controlled by, is under common control with or is a director or officer of such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to vote five percent (5%) or more of the securities having ordinary voting power for the election of directors or the direct or indirect power to direct the management and policies of a Person. "Agreement" has the meaning set forth in the preamble hereto. -1- "Authorized Person" means any officer or other employee of Borrower. "Average Unused Portion of Maximum Amount" means, as of any date of determination, (a) the Maximum Amount, less (b) the sum of (i) the average Daily Balance of Advances that were outstanding during the immediately preceding month, plus (ii) the average Daily Balance of the undrawn Letters of Credit that were outstanding during the immediately preceding month, plus (iii) the outstanding average Daily Balance of the Term Loan Subline outstanding during the immediately preceding month. "Bank of America" means Bank of America, N.A. "Bank of America Letter" means that letter from Bank of America addressed to Foothill indicating that all indebtedness due Bank of America from Borrower has been paid in full and that Bank of America has no further security interest in any assets of Borrower, whether Real Property Collateral or Personal Property Collateral, and said letter shall be in form and content acceptable to Foothill. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C.ss. 101 et seq.), as amended, and any successor statute. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrower's Books" means all of Borrower's books and records including: ledgers; records indicating, summarizing, or evidencing Borrower's properties or assets (including the Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "Borrowing Base" has the meaning set forth in Section 2.1(a). "Bush Hog" means Bush Hog, L.L.C., a Delaware limited liability company. "Bush Hog Investors" means Bush Hog Investors L.L.C. -2- "Bush Hog Letter" means that letter from Bush Hog Investors addressed to Foothill indicating that the only interest which Bush Hog Investors has in any assets of Borrower, whether Real Property Collateral or Personal Property Collateral, is an assignment from Borrower to Bush Hog Investors of one hundred percent (100%) of Borrower's membership interest in Bush Hog and one hundred percent (100%) of Borrower's right to distributions from Bush Hog as more particularly described in that certain Membership Interest Pledge and Indemnity Security Agreement dated March 7, 2000 between Bush Hog Investors and Borrower and said letter shall be in form and content acceptable to Foothill. "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close. "Change of Control" shall be deemed to have occurred at such time as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than twenty five percent (25%) of the total voting power of all classes of stock then outstanding of Borrower entitled to vote in the election of directors. "Closing Date" means the date of the first to occur of the making of the initial Advance, or the issuance of the initial Letter of Credit. "Code" means the Illinois Uniform Commercial Code. "Collateral" means each of the following: (a) the Accounts, (b) Borrower's Books, (c) the Equipment, (d) the General Intangibles, (e) the Inventory, (f) the Investment Property, (g) the Negotiable Collateral, -3- (h) the Real Property Collateral, (i) any money, or other assets of Borrower that now or hereafter come into the possession, custody, or control of Foothill, and (j) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Borrower's Books, Equipment, General Intangibles, Inventory, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Collateral Access Agreement" means a landlord waiver, mortgagee waiver, bailee letter, or acknowledgment agreement of any warehouseman, processor, lessor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance satisfactory to Foothill. "Collateral Assignment Agreement" means that certain collateral assignment of the Borrower's membership interest in Bush Hog, including an assignment of all of Borrower's rights to proceeds due Borrower upon any transfer or sale of any of Borrower's interest in Bush Hog in accord with Article 7 of Bush Hog's Operating Agreement which assignment shall be subject to prior liens in favor of the Existing Lender and Bush Hog Investors, L.L.C. "Collections" means all cash, checks, notes, instruments, and other items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds). "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 and delivered by the chief accounting officer of Borrower to Foothill. "Daily Balance" means the amount of an Obligation owed at the end of a given day. "deems itself insecure" means that the Person deems itself insecure in accordance with the provisions of Section 1-208 of the Code. "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. -4- "Designated Account" means account number 86665 00150 of Borrower maintained with Borrower's Designated Account Bank, or such other deposit account of Borrower (located within the United States) which has been designated, in writing and from time to time, by Borrower to Foothill. "Designated Account Bank" means Bank of America, whose office is located at 231 South LaSalle Street, Chicago, Illinois 60697, and whose ABA number is 071000039. "Dilution" means, in each case based upon the experience of the immediately prior ninety (90) days, the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising allowances, returns, promotions, credits, or other dilution with respect to the Accounts, by (b) Borrower's Collections (excluding extraordinary items) plus the Dollar amount of clause (a). "Dilution Reserve" means, as of any date of determination, an amount sufficient to reduce Foothill's advance rate against Eligible Accounts by one percentage point for each percentage point by which Dilution is in excess of five percent (5%). "Disbursement Letter" means an instructional letter executed and delivered by Borrower to Foothill regarding the extensions of credit to be made on the Closing Date, the form and substance of which shall be satisfactory to Foothill. "Dollars or $" means United States dollars. "Early Termination Premium" has the meaning set forth in Section 3.6. "EBITDA" means, for any period, the net income (or net loss) of Borrower on a consolidated basis with any Subsidiaries for such period as determined in accordance with GAAP, (a) plus, to the extent reflected in the changes in the statement of net income for such period, the sum of, without duplication, the following (i) interest expense, (ii) depreciation and amortization expense, and (ii) taxes, and (b) minus, to the extent reflected in the changes in the statement of net income for such period, extraordinary gains. "Eligible Accounts" means those Accounts created by Borrower in the ordinary course of business, net of customer deposits and unapplied cash payments to the Borrower that arise out of Borrower's sale of goods or rendition of services, that comply with each and all of the representations and warranties respecting Accounts made by Borrower to Foothill in the Loan Documents, and that are not excluded as ineligible by virtue of one or more -5- of the criteria set forth below; provided, however, that such criteria may be fixed and revised from time to time by Foothill in its reasonable discretion to address the results of any audit performed from time to time after the Closing Date by or on behalf of Foothill. Eligible Accounts shall not include the following: (a) Accounts that the Account Debtor has failed to pay within sixty (60) days of invoice date or Accounts with selling terms of more than thirty (30) days; (b) Accounts owed by an Account Debtor or its Affiliates where fifty percent (50%) or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above; (c) Accounts with respect to which the Account Debtor is an employee, Affiliate, or agent of Borrower; (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional; (e) Accounts that are not payable in Dollars or with respect to which the Account Debtor: (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any State thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit satisfactory to Foothill (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Foothill and is directly drawable by Foothill, or (z) the Account is covered by credit insurance in form and amount, and by an insurer, satisfactory to Foothill; (f) Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which Borrower has complied, to the satisfaction of Foothill, with the Assignment of Claims Act, 31 U.S.C. ss. 3727), or (ii) any State of the United States (exclusive, however, of Accounts owed by any State that does not have a statutory counterpart to the Assignment of Claims Act); (g) Accounts with respect to which the Account Debtor is a creditor of Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to the Account; -6- (h) Accounts with respect to an Account Debtor whose total obligations owing to Borrower exceed ten percent (10%) of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage; (i) Accounts with respect to which the Account Debtor is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; (j) Accounts the collection of which Foothill, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition; (k) Accounts with respect to which the goods giving rise to such Account have not been shipped and billed to the Account Debtor, the services giving rise to such Account have not been performed and accepted by the Account Debtor, or the Account otherwise does not represent a final sale; (l) Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other state that requires a creditor to file a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice of Business Activities Report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement; and (m) Accounts that represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services. "Eligible Parts and Service Accounts" means Accounts which: (a) meet each of the requirements set forth in the definition of Eligible Accounts; (b) arise out of service and delivery of spare parts to Account Debtors; and (c) are reflected in a reporting system reasonably acceptable to Foothill sufficient to allow Foothill to conduct an audit of said accounts in order to determine eligibility for Advances. -7- "Eligible Special GM Project Accounts" shall be limited to the Accounts arising out of the design and manufacture of the following items for GM as specified on the Purchase Order for each item: Description of Item and Serial Number Purchase Order No. and Date ------------------------------------- --------------------------- A3 Transfer Press System 29329 WHS 14587 April 4, 1997 A3 Transfer Press System 29328 WHS 14588 April 4, 1997 In order to be an Eligible Special GM Project Account said account shall meet each of the requirements set forth in the definition of Eligible Accounts except for (a), (h) and (k), and Borrower shall: (a) not have received any notification from GM of non compliance with the Purchase Order upon which Advances are being sought by Borrower which has not been cured which cure is evidenced by a written acknowledgment from GM; (b) be in compliance with that certain Amendment to Purchase Orders between Borrower and GM dated October 4, 1999 as amended by a Second and Third Amendment with respect to Press No. 3 and Press No. 4 as outlined therein; (c) not seek any Advance which would result in funds being advanced in excess of the amounts set forth on the financial projections set forth on Exhibit A; and (d) have furnished evidence to Foothill of the renewal of its existing labor contract, or have provided evidence satisfactory to Foothill, in its sole discretion, that labor issues will not impede Borrower from compliance with the terms of the Purchase Order for which Advances are being sought; and (e) demonstrate to Foothill to its reasonable satisfaction that Borrower has sufficient liquidity, including Advances, to complete the work required under each of the Purchase Orders set forth above. "Eligible Special GM Project Billed Accounts" means an Account which: (a) meets each of the requirements set forth in the definition of Eligible Special GM Project Accounts; and -8- (b) Borrower has invoiced GM in which event the Account shall be an Eligible Special GM Project Account for sixty (60) days from the invoice date provided that the selling terms for the Account are not in excess of thirty (30) days. "Eligible Special GM Project Unbilled Accounts" means an Account which: (a) meets each of the requirements set forth in the definition of Eligible Special GM Project Accounts; and (b) evidences a machine or a press being manufactured for GM which is within sixty (60) days of shipment pursuant to the required terms of the Purchase Order, and has not been invoiced to GM and shall be deemed an Eligible Special GM Project Unbilled Account for seventy-five (75) days from first becoming an Eligible Special GM Project Unbilled Account. "Eligible Special Project Accounts" means an Account which: (a) meets such of the requirements set forth in the definition of Eligible Accounts except for (a) and (k); (b) is subject to a written Purchase Order or Contract from an Account Debtor; (c) arises from the design and manufacture of a machine or press pursuant to a Purchase Order or Contract which is at least eighty percent (80%) complete and has been manufactured in accord with the terms of the Purchase Order or Contract; (d) Borrower has not received any notification from an Account Debtor of non compliance with the Purchase Order or Contract upon which Advances are being sought by the Borrower; (e) Borrower has demonstrated to Foothill to its reasonable satisfaction that Borrower has sufficient liquidity, including Advances, to complete the work required under each of the Purchase Orders or Contract for which Advances are being sought by the Borrower; and (f) eligibility for Special Project Accounts Advances shall be determined by Foothill on a case by case basis. -9- "Eligible Special Project Billed Accounts" means an Account which: (a) meets each of the requirements set forth in the definition of Eligible Special Project Accounts; and (b) Borrower has invoiced the Account Debtor in which event the Account shall be an Eligible Special Project Account for sixty (60) days from the invoice date provided that the selling terms of the Account are not in excess of thirty (30) days. "Eligible Special Project Unbilled Accounts" means an Account which: (a) meets each of the requirements set forth in the definition of Eligible Special Project Accounts; and (b) evidences a machine or press being manufactured which is within sixty (60) days of shipment pursuant to the required terms of the Purchase Order or Contract between the Borrower and the Account Debtor and shall be deemed an Eligible Special Project Unbilled Account only for seventy-five (75) days from first becoming an Eligible Special Project Unbilled Account. "Environmental Reserve" means the sum of Eight Hundred Ninety Thousand Dollars ($890,000) which will be reserved against the Term Loan Subline by Foothill until it has received all environmental information requested by it with respect to the Hobart, Indiana portion of the Real Property Collateral. Foothill must be satisfied in its sole discretion with respect to the environmental status of the Hobart, Indiana real estate before releasing the Environmental Reserve. "Equipment" means all of Borrower's present and hereafter acquired machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including, (a) any assets acquired by Borrower with the proceeds of a Capital Expenditure Loan, (b) any interest of Borrower in any of the foregoing, and (c) all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, 29 U.S.C.ss.ss.1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. -10- "ERISA Affiliate" means (a) any corporation subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "ERISA Event" means (a) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to any Plan under Section 401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA Affiliates. "Event of Default" has the meaning set forth in Section 8. "Existing Lender" means LaSalle Bank, N.A. "FEIN" means Federal Employer Identification Number. "Fiscal Projections" has the meaning set forth in Section 3.3(b). "Foothill" has the meaning set forth in the preamble to this Agreement. "Foothill Account" has the meaning set forth in Section 2.7. "Foothill Expenses" means all: costs or expenses (including taxes, and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by Foothill; fees or charges paid or incurred by Foothill in connection with -11- Foothill's transactions with Borrower, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Personal Property Collateral or Real Property Collateral appraisals), real estate surveys, real estate title policies and endorsements, and environmental audits; costs and expenses incurred by Foothill in the disbursement of funds to Borrower (by wire transfer or otherwise); charges paid or incurred by Foothill resulting from the dishonor of checks; costs and expenses paid or incurred by Foothill to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Personal Property Collateral or the Real Property Collateral, or any portion thereof, irrespective of whether a sale is consummated; costs and expenses paid or incurred by Foothill in examining Borrower's Books; costs and expenses of third party claims or any other suit paid or incurred by Foothill in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or Foothill's relationship with Borrower or any guarantor; and Foothill's reasonable attorneys fees and expenses incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or any guarantor of the Obligations), defending, or concerning the Loan Documents, irrespective of whether suit is brought. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all of Borrower's present and future general intangibles and other personal property (including contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts, and Negotiable Collateral. "GM" means General Motors Corporation. "Governing Documents" means the certificate or articles of incorporation, by-laws, or other organizational or governing documents of any Person. -12- "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified or regulated pursuant to, any environmentally related federal, state or local government applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," "pollutant or contaminant," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", including but not limited to the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. ss.9601(14) as amended by the Superfund Amendments, and Reauthorization Act and including the judicial interpretations thereof, (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Indebtedness" means: (a) all obligations of Borrower for borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of Borrower under capital leases, (d) all obligations or liabilities of others secured by a Lien on any property or asset of Borrower, irrespective of whether such obligation or liability is assumed, and (e) any obligation of Borrower guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intangible Assets" means, with respect to any Person, that portion of the book value of all of such Person's assets that would be treated as intangibles under GAAP. "Inventory" means all present and future inventory in which Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located. -13- "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Investment Property" has the meaning as set forth in the Code. "L/C" has the meaning set forth in Section 2.2(a). "L/C Guaranty" has the meaning set forth in Section 2.2(a). "LaSalle Letter" means that letter from Existing Lender addressed to Foothill indicating that the only interest which Existing Lender has in any assets of Borrower, whether Real Property Collateral or Personal Property Collateral, is an assignment of all right, title and interest of Borrower's membership interest in Bush Hog, including, without limitation, Borrower's interest in the capital, income, profits, and all other property hereafter delivered to Borrower in substitution for, as proceeds of, or in addition to any of the foregoing, all certificates, instruments and documents representing or evidencing such property, and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof, all of the foregoing whether now owned or hereafter acquired by Borrower and wheresoever located and said letter shall be in form and content acceptable to Foothill. "Letter of Credit" means an L/C or an L/C Guaranty, as the context requires. "Lien" means any interest in property securing an obligation owed to, or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "Loan" means any portion of the Maximum Amount advanced pursuant to the Loan Documents. -14- "Loan Account" has the meaning set forth in Section 2.10. "Loan Documents" means this Agreement, the Disbursement Letter, the Letters of Credit, the Lockbox Agreements, the Mortgages, the Collateral Assignment, the Pledge Agreements, any note or notes executed by Borrower and payable to Foothill, and any other agreement entered into, now or in the future, in connection with this Agreement. "Lockbox Account" shall mean a depositary account established pursuant to one of the Lockbox Agreements. "Lockbox Agreements" means those certain Lockbox Operating Procedural Agreements and those certain Depository Account Agreements, in form and substance satisfactory to Foothill, each of which is among Borrower, Foothill, and one of the Lockbox Banks. "Lockbox Banks" means LaSalle Bank, N.A. or such other banks as may be agreed to by Borrower and Foothill from time to time. "Lockboxes" has the meaning set forth in Section 2.7. "Material Adverse Change" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower, (b) the material impairment of Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of Foothill to enforce the Obligations or realize upon the Collateral because of Borrower's action or inaction, (c) a material adverse effect on the value of the Collateral or the amount that Foothill would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral, or (d) a material impairment of the priority of Foothill's Liens with respect to the Collateral. "Maximum Amount" means the sum of Thirty Million Dollars ($30,000,000). "Mortgages" means one or more mortgages, deeds of trust, or deeds to secure debt, executed by Borrower in favor of Foothill, the form and substance of which shall be satisfactory to Foothill, that encumber the Real Property Collateral and the related improvements thereto. -15- "Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "Negotiable Collateral" means all of Borrower's present and future letters of credit, notes, drafts, instruments, investment property, security entitlements, securities (including the shares of stock of Subsidiaries of Borrower), documents, personal property leases (wherein Borrower is the lessor), chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations under any outstanding Letters of Credit, premiums (including Early Termination Premiums), liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees, charges, costs, or Foothill Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties owing by Borrower to Foothill of any kind and description (whether pursuant to or evidenced by the Loan Documents or pursuant to any other agreement between Foothill and Borrower, and irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from Borrower to others that Foothill may have obtained by assignment or otherwise, and further including all interest not paid when due and all Foothill Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "Overadvance" has the meaning set forth in Section 2.5. "Participant" means any Person to which Foothill has sold a participation interest in its rights under the Loan Documents. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "Permitted Liens" means (a) Liens held by Foothill, (b) Liens for unpaid taxes that either (i) are not yet due and payable or (ii) are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases and purchase money Liens of lessors under capital leases to the extent that the acquisition or lease of the underlying asset is permitted under Section 7.21 and so long as the Lien only attaches to the asset purchased or acquired and only secures the purchase price of the asset, (e) Liens arising -16- by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet due and payable, or (ii) are the subject of Permitted Protests, (f) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (g) Liens or deposits to secure performance of bids, tenders, or leases (to the extent permitted under this Agreement), incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, (h) Liens arising by reason of security for surety or appeal bonds in the ordinary course of business of Borrower, (i) Liens of or resulting from any judgment or award that would not have a Material Adverse Effect and as to which the time for the appeal or petition for rehearing of which has not yet expired, or in respect of which Borrower is in good faith prosecuting an appeal or proceeding for a review, and in respect of which a stay of execution pending such appeal or proceeding for review has been secured, (j) Liens with respect to the Real Property Collateral that are exceptions to the commitments for title insurance issued in connection with the Mortgages, as accepted by Foothill, and (k) with respect to any Real Property that is not part of the Real Property Collateral, easements, rights of way, zoning and similar covenants and restrictions, and similar encumbrances that customarily exist on properties of Persons engaged in similar activities and similarly situated and that in any event do not materially interfere with or impair the use or operation of the Collateral by Borrower or the value of Foothill's Lien thereon or therein, or materially interfere with the ordinary conduct of the business of Borrower. "Permitted Protest" means the right of Borrower to protest any Lien other than any such Lien that secures the Obligations, tax (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the books of Borrower in an amount that is reasonably satisfactory to Foothill, (b) any such protest is instituted and diligently prosecuted by Borrower in good faith, and (c) Foothill is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Liens of Foothill in and to the Collateral. "Person" means and includes natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Personal Property Collateral" means all Collateral other than the Real Property Collateral. -17- "Plan" means any employee benefit plan, program, or arrangement maintained or contributed to by Borrower or with respect to which it may incur liability. "Pledge Agreements" means those certain Pledge Agreements executed by the Borrower in favor of Foothill and pledging to Foothill all of the Borrower's joint venture interest in Verson Pressentechnik GmbH and all of its rights as a member of High Production Technology, L.L.C., a Delaware limited liability company which it created with Automatic Feed Co. "Real Property" means any estates or interests in real property now owned or hereafter acquired by Borrower. "Real Property Collateral" means the parcel or parcels of real property and the related improvements thereto identified on Schedule R-1, and any Real Property hereafter acquired by Borrower. "Reference Rate" means the rate of interest announced within Wells Fargo Bank, N.A. at its principal office in San Francisco, California from time to time as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. "Renewal Date" has the meaning set forth in Section 3.4. "Reportable Event" means any of the events described in Section 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of thirty (30) days notice to the PBGC is waived under applicable regulations. "Retiree Health Plan" means an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by Section 601 of ERISA. "Revolving Note" has the meaning as set forth in Section 2.1. "SEC Reports" means (i) Borrower's 10-K Report as filed with the Securities and Exchange Commission (the "SEC") for each of its fiscal years after December -18- 31, 1999, and (ii) all of the Borrower's forms 10-Q and 8-K filed with the SEC since January 1, 2000. "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and after funding of the Loan pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of stock or other ownership interests having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Term Loan Subline" means a subline in the amount of Ten Million Six Hundred Thousand Dollars ($10,600,000), minus the amount of the Environmental Reserve. The Term Loan Subline shall be reduced by One Hundred Seventy Six Thousand Six Hundred Sixty Seven Dollars ($176,667) per month commencing on September 1, 2000. "Voidable Transfer" has the meaning set forth in Section 15.8. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrower on a consolidated basis unless the context clearly requires otherwise. -19- 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. An Event of Default shall "continue" or be "continuing" until such Event of Default has been waived in writing by Foothill. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to this Agreement or any of the Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, and supplements, thereto and thereof, as applicable. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolving Advances. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to make advances ("Advances") to Borrower in an amount outstanding not to exceed at any one time the lesser of (i) the Maximum Amount, less the outstanding balance of all undrawn or unreimbursed Letters of Credit, or (ii) the Borrowing Base, less the outstanding balance of all undrawn or unreimbursed Letters of Credit. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean the result of: (w) eighty five percent (85%) of Eligible Parts and Service Accounts, less the amount, if any, of the Dilution Reserve, plus (x) sixty five percent (65%) of Eligible Special Project Unbilled Accounts, plus sixty five percent (65%) of Eligible Special GM Project Unbilled Accounts, plus eighty five percent (85%) of Eligible Special Project Billed Accounts, plus eighty five percent (85%) of Eligible Special GM Project Billed Accounts, less the amount, if any, of the Dilution Reserve, plus -20- (y) the maximum amount of the Term Loan Subline, minus (z) the aggregate amount of reserves, if any, established by Foothill under Section 2.1(b). (b) Anything to the contrary in this Section 2.1(a) notwithstanding, Foothill shall have the right to establish reserves in such amounts, and with respect to such matters as Foothill in its reasonable discretion shall deem necessary or appropriate, against the Borrowing Base, including reserves with respect to (i) dismantling shipping and installation of any machines or presses, (ii) sums that Borrower is required to pay (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases if the failure to pay same would result in the lessor obtaining a prior lien ahead of Foothill with respect to any Collateral) and has failed to pay under any Section of this Agreement or any other Loan Document, and (iii) amounts owing by Borrower to any Person to the extent secured by a Lien on, or trust over, any of the Collateral, which Lien or trust, in the sole discretion of Foothill would be likely to have a priority superior to the Liens (such as landlord liens, ad valorem taxes, or sales taxes where given priority under applicable law) in and to such item of the Collateral. (c) Foothill shall have no obligation to make Advances hereunder to the extent they would cause the outstanding Obligations to exceed the Maximum Amount. (d) Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. (e) Other than Eligible Special GM Project Accounts or Eligible Parts and Service Accounts or the Term Loan Subline, Borrower may not obtain any Advances until Borrower has complied with the requirements of Section 3.3(b) by delivering the Fiscal Projections. (f) Except for Advances under the Term Loan Subline, Borrower may not obtain any Advances pursuant to this Section 2.1 until Borrower has sold its nineteen and nine tenths percent (19.9%) membership interest in Bush Hog to Bush Hog Investors or its Affiliates and paid in full all indebtedness due to Existing Lender and provided further that there is no Event of Default. -21- 2.2 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to issue letters of credit for the account of Borrower (each, an "L/C") or to issue guarantees of payment (each such guaranty, an "L/C Guaranty") with respect to letters of credit issued by an issuing bank for the account of Borrower. Foothill shall have no obligation to issue a Letter of Credit if any of the following would result: (i) the sum of one hundred percent (100%) of the aggregate amount of all undrawn and unreimbursed Letters of Credit, would exceed the Borrowing Base less the amount of outstanding Advances less the aggregate amount of reserves established under Section 2.1(b); or (ii) the aggregate amount of all undrawn or unreimbursed Letters of Credit would exceed the lower of: (x) the Maximum Amount less the amount of outstanding Advances less the aggregate amount of reserves established under Section 2.1(b); or (y) Two Million Dollars ($2,000,000); or (iii) the outstanding Obligations would exceed the Maximum Amount. (b) Borrower expressly understands and agrees that Foothill shall have no obligation to arrange for the issuance by issuing banks of the letters of credit that are to be the subject of L/C Guarantees. Borrower and Foothill acknowledge and agree that certain of the letters of credit that are to be the subject of L/C Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall have an expiry date no later than sixty (60) days prior to the date on which this Agreement is scheduled to terminate under Section 3.4 (without regard to any potential renewal term) and all such Letters of Credit shall be in form and substance acceptable to Foothill in its sole discretion. If Foothill is obligated to advance funds under a Letter of Credit, Borrower immediately shall reimburse such amount to Foothill and, in the absence of such reimbursement, the amount so advanced immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances under Section 2.6. (c) Borrower hereby agrees to indemnify, save, defend, and hold Foothill harmless from any loss, cost, expense, or liability, including payments made by Foothill, expenses, and reasonable attorneys fees incurred by Foothill arising out of or in connection with any Letter of Credit. Borrower agrees to be bound by the issuing bank's regulations and interpretations of any Letters of Credit guaranteed by Foothill and opened to or for Borrower's account or by Foothill's interpretations of any L/C issued by Foothill to or for -22- Borrower's account, even though this interpretation may be different from Borrower's own, and Borrower understands and agrees that Foothill shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. Borrower understands that the L/C Guarantees may require Foothill to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify, save, defend, and hold Foothill harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by Foothill under any L/C Guaranty as a result of Foothill's indemnification of any such issuing bank. (d) Borrower hereby authorizes and directs any bank that issues a letter of credit guaranteed by Foothill to deliver to Foothill all instruments, documents, and other writings and property received by the issuing bank pursuant to such letter of credit, and to accept and rely upon Foothill's instructions and agreements with respect to all matters arising in connection with such letter of credit and the related application. Borrower may or may not be the "applicant" or "account party" with respect to such letter of credit. (e) Any and all charges, commissions, fees, and costs incurred by Foothill relating to the letters of credit guaranteed by Foothill shall be considered Foothill Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrower to Foothill. (f) Immediately upon the termination of this Agreement, Borrower agrees to either (i) provide cash collateral to be held by Foothill in an amount equal to one hundred five percent (105%) of the maximum amount of Foothill's obligations under Letters of Credit, or (ii) cause to be delivered to Foothill releases of all of Foothill's obligations under outstanding Letters of Credit. At Foothill's discretion, any proceeds of Collateral received by Foothill after the occurrence and during the continuation of an Event of Default may be held as the cash collateral required by this Section 2.2(e). (g) If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application by any governmental authority of any such applicable law, treaty, rule, or regulation, or (ii) compliance by the issuing bank or Foothill with any direction, request, or requirement (irrespective of whether having the force of law) of any governmental authority or monetary authority including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect (and any successor thereto): -23- (A) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letters of Credit issued hereunder, or (B) there shall be imposed on the issuing bank or Foothill any other condition regarding any letter of credit, or Letter of Credit, as applicable, issued pursuant hereto; and the result of the foregoing is to increase, directly or indirectly, the cost to the issuing bank or Foothill of issuing, making, guaranteeing, or maintaining any letter of credit, or Letter of Credit, as applicable, or to reduce the amount receivable in respect thereof by such issuing bank or Foothill, then, and in any such case, Foothill may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Borrower, and Borrower shall pay on demand such amounts as the issuing bank or Foothill may specify to be necessary to compensate the issuing bank or Foothill for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate set forth in Section 2.6(a)(i) or (c)(i), as applicable. The determination by the issuing bank or Foothill, as the case may be, of any amount due pursuant to this Section 2.2(f), as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. 2.3 Intentionally Omitted. 2.4 Intentionally Omitted. 2.5 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Foothill pursuant to Sections 2.1, 2.2 and 2.4 is greater than either the Dollar or percentage limitations set forth in Sections 2.1 or 2.2 (an "Overadvance"), Borrower immediately shall pay to Foothill, in cash, the amount of such excess to be used by Foothill first, to repay Advances outstanding under Section 2.1 and, thereafter, to be held by Foothill as cash collateral to secure Borrower's obligation to repay Foothill for all amounts paid pursuant to Letters of Credit. 2.6 Interest and Letter of Credit Fees: Rates, Payments, and Calculations. (a) Interest Rate. Except as provided in clause (b) below, (i) all Obligations (except for undrawn Letters of Credit and borrowings under the Term Loan Subline) shall bear interest on the Daily Balance at a per annum rate of one and one quarter percentage points (1.25%) above the Reference Rate, and (ii) borrowings under the Term Loan -24- Subline shall bear interest at a per annum rate of two percentage points (2.0%) above the Reference Rate. For purposes of interest calculation, Advances under Section 2.1 shall first be made under the Term Loan Subline. (b) Letter of Credit Fee. Borrower shall pay Foothill a fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.2(e)) equal to one and one half percent (1.50%) per annum times the Daily Balance of the aggregate undrawn amount of all outstanding Letters of Credit. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default, (i) all Obligations (except for undrawn Letters of Credit) shall bear interest at a per annum rate equal to three percentage points (3.0%) above the Interest Rate otherwise charged in Section 2.6(a), and (ii) the Letter of Credit fee provided in Section 2.6(b) shall be increased to five percent (5%) per annum times the Daily Balance of the amount of the undrawn Letters of Credit that were outstanding during the immediately preceding month. (d) Minimum Interest. In no event shall the rate of interest chargeable hereunder for any day be less than eight percent (8%) per annum. To the extent that interest accrued hereunder at the rate set forth herein would be less than the foregoing minimum daily rate, the interest rate chargeable hereunder for such day automatically shall be deemed increased to the minimum rate. To the extent that interest accrued hereunder at the rate set forth herein (including the minimum interest rate) would yield less than the foregoing minimum amount, the interest rate chargeable hereunder for the period in question automatically shall be deemed increased to that rate that would result in the minimum amount of interest being accrued and payable hereunder. (e) Payments. Interest and Letter of Credit fees payable hereunder shall be due and payable, in arrears, on the first day of each month during the term hereof. Borrower hereby authorizes Foothill, at its option, without prior notice to Borrower, to charge such interest and Letter of Credit fees, all Foothill Expenses (as and when incurred), the charges, commissions, fees, and costs provided for in Section 2.2(d) (as and when accrued or incurred), the fees and charges provided for in Section 2.11 (as and when accrued or incurred), and all installments or other payments due under the Term Loan Subline, or any Loan Document to Borrower's Loan Account, which amounts thereafter shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded and shall thereafter accrue interest at the rate then applicable to Advances hereunder. (f) Computation. The Reference Rate as of the date of this Agreement is nine percent (9%) per annum. In the event the Reference Rate is changed from -25- time to time hereafter, the applicable rate of interest hereunder automatically and immediately shall be increased or decreased by an amount equal to such change in the Reference Rate. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. (g) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrower and Foothill, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 Collection of Accounts. Borrower shall at all times maintain lockboxes (the "Lockboxes") and, immediately after the Closing Date, shall instruct all Account Debtors with respect to the Accounts, General Intangibles, and Negotiable Collateral of Borrower to remit all Collections in respect thereof to such Lockboxes. Borrower, Foothill, and the Lockbox Banks shall enter into the Lockbox Agreements, which among other things shall provide for the opening of a Lockbox Account for the deposit of Collections at a Lockbox Bank. Borrower agrees that all Collections and other amounts received by Borrower from any Account Debtor or any other source immediately upon receipt shall be deposited into a Lockbox Account. No Lockbox Agreement or arrangement contemplated thereby shall be modified by Borrower without the prior written consent of Foothill. Upon the terms and subject to the conditions set forth in the Lockbox Agreements, all amounts received in each Lockbox Account shall be wired each Business Day into an account (the "Foothill Account") maintained by Foothill at a depositary selected by Foothill. 2.8 Crediting Payments; Application of Collections. The receipt of any Collections by Foothill (whether from transfers to Foothill by the Lockbox Banks pursuant to the Lockbox Agreements or otherwise) immediately shall be applied provisionally to reduce the Obligations outstanding under Section 2.1, but shall not be considered a payment on account unless such Collection item is a wire transfer of immediately available federal funds and is made to the Foothill Account or unless and until such Collection item is honored when presented for payment. From and after the Closing Date, Foothill shall be entitled to charge Borrower for one -26- (1) Business Day of `clearance' or `float' at the rate set forth in Section 2.6(a)(i) or Section 2.6(c)(i), as applicable, on all Collections that are received by Foothill (regardless of whether forwarded by the Lockbox Banks to Foothill, whether provisionally applied to reduce the Obligations under Section 2.1, or otherwise). This across-the-board one (1) Business Day clearance or float charge on all Collections is acknowledged by the parties to constitute an integral aspect of the pricing of Foothill's financing of Borrower, and shall apply irrespective of the characterization of whether receipts are owned by Borrower or Foothill, and whether or not there are any outstanding Advances, the effect of such clearance or float charge being the equivalent of charging one (1) Business Days of interest on such Collections. Should any Collection item not be honored when presented for payment, then Borrower shall be deemed not to have made such payment, and interest shall be recalculated accordingly. Anything to the contrary contained herein notwithstanding, any Collection item shall be deemed received by Foothill only if it is received into the Foothill Account on a Business Day on or before 11:00 a.m. California time. If any Collection item is received into the Foothill Account on a non-Business Day or after 11:00 a.m. California time on a Business Day, it shall be deemed to have been received by Foothill as of the opening of business on the immediately following Business Day. 2.9 Designated Account. Foothill is authorized to make the Advances, the Letters of Credit, and the Term Loan Subline, under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.6(e). Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by Foothill hereunder. Unless otherwise agreed by Foothill and Borrower, any Advance requested by Borrower and made by Foothill hereunder shall be made to the Designated Account. 2.10 Maintenance of Loan Account; Statements of Obligations. Foothill shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances, and the Term Loan Subline made by Foothill to Borrower or for Borrower's account, including, accrued interest, Foothill Expenses, and any other payment Obligations of Borrower. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Foothill from Borrower or for Borrower's account, including all amounts received in the Foothill Account from any Lockbox Bank. Foothill shall render statements regarding the Loan Account to Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Foothill Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and Foothill unless, within thirty (30) days after receipt -27- thereof by Borrower, Borrower shall deliver to Foothill written objection thereto describing the error or errors contained in any such statements. 2.11 Fees. Borrower shall pay to Foothill the following fees: (a) Closing Fee. On the Closing Date, a closing fee of Three Hundred Thousand Dollars ($300,000); (b) Unused Line Fee. On the first day of each month during the term of this Agreement, an unused line fee in an amount equal to one half percent (0.5%) per annum times the Average Unused Portion of the Maximum Amount; (c) Intentionally Omitted; (d) Financial Examination, Documentation, and Appraisal Fees. Foothill's customary fee of Seven Hundred Fifty Dollars ($750) per day per examiner, plus out-of-pocket expenses for each financial analysis and examination (i.e., audits) of Borrower performed by personnel employed by Foothill; Foothill's customary appraisal fee of One Thousand Five Hundred Dollars ($1,500) per day per appraiser, plus out-of-pocket expenses for each appraisal of the Collateral performed by personnel employed by Foothill; and, the actual charges paid or incurred by Foothill if it elects to employ the services of one or more third Persons to perform such financial analyses and examinations (i.e., audits) of Borrower or to appraise the Collateral. It is agreed that so long as no Event of Default shall be in existence or event which with the passage of time would become an Event of Default be in existence, Foothill shall not audit Borrower more often than quarterly during any calendar year; (e) Servicing Fee. On the first day of each month during the term of this Agreement, and thereafter so long as any Obligations are outstanding, a servicing fee in an amount equal to Five Thousand Dollars ($5,000) provided, however that the Servicing Fee shall be Four Thousand Dollars ($4,000) if the Borrower uses electronic reporting acceptable to Foothill; and (f) Account Receivable Fee. On the first day of each month during the term of this Agreement, a fee of Fifty Thousand Dollars ($50,000) (the "Account Receivable Fee") if (i) during the preceding month prior to establishing Eligible Parts and Service Accounts, Borrower had any Advances outstanding on Eligible Special Project Unbilled Accounts or Eligible Special Project Billed Accounts or Eligible Special GM Project Unbilled Accounts or Eligible Special GM Project Billed Accounts or there were Letters of Credit outstanding and the foregoing in the aggregate, exceeded the sum of One Million Five Hundred -28- Thousand Dollars ($1,500,000) for more than one day, or (ii) during the preceding month after the establishment of Eligible Parts and Service Accounts, Borrower had any Advances including Letter of Credit exposure outstanding hereunder against Eligible Special Project Unbilled Accounts or Eligible Special Project Billed Accounts or Eligible Special GM Project Unbilled Accounts or Eligible Special GM Project Billed Accounts. For purposes of determining Advances outstanding initial Advances shall be made against the Term Loan Subline, then against Eligible Parts and Service Accounts and then against Eligible Special Project Unbilled Accounts and then against Eligible Special Project Billed Accounts and then against Eligible Special GM Project Unbilled Accounts and then against Eligible Special GM Project Billed Accounts. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Advance, Letter of Credit, and the Term Loan Subline. The obligation of Foothill to make the initial Advance, to issue the initial Letter of Credit, or to make the Term Loan Subline is subject to the fulfillment, to the satisfaction of Foothill and its counsel, of each of the following conditions on or before the Closing Date: (a) the Closing Date shall occur on or before March 31, 2000; (b) Foothill shall have received searches reflecting the filing of its financing statements and fixture filings as a first lien on the Collateral except for the liens in favor of the Existing Lender and Bush Hog, which liens shall be limited only to a lien in favor of the Existing Lender and Bush Hog Investors, L.L.C. in the Borrower's interest in Bush Hog; (c) Foothill shall have received each of the following documents, duly executed, and each such document shall be in full force and effect: (i) the Lockbox Agreements; (ii) the Disbursement Letter; (iii) the Pay-Off Letter, together with UCC termination statements and other documentation evidencing the termination by Bank of America National Trust and Savings Association of its Liens in and to the properties and assets of Borrower; (iv) the Mortgages; -29- (v) the Collateral Assignment; (vi) the Pledge Agreements; (vii) the Trademark, Patent and Copyright Pledge Agreements; (viii) copy of a letter to GM requesting that Notice of any non compliance with any purchase order be sent to Foothill. (d) Foothill shall have received a certificate from the Secretary of Borrower attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of Borrower to execute the same; (e) Foothill shall have received copies of Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Borrower; (f) Foothill shall have received a certificate of status with respect to Borrower, dated within ten (10) days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Borrower, which certificate shall indicate that Borrower is in good standing in such jurisdiction; (g) Foothill shall have received certificates of status with respect to Borrower, each dated within fifteen (15) days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Borrower is in good standing in such jurisdictions; (h) Foothill shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be satisfactory to Foothill and its counsel; (i) Foothill shall have received duly executed certificates of title with respect to that portion of the Collateral that is subject to certificates of title; (j) Foothill shall have received an opinion of Borrower's counsel in form and substance satisfactory to Foothill and its counsel in its sole discretion; -30- (k) Foothill shall have received (i) appraisals of the Real Property Collateral and appraisals of the Equipment, in each case satisfactory to Foothill, and (ii) mortgagee title insurance policies (or marked commitments to issue the same) for the Real Property Collateral issued by a title insurance company satisfactory to Foothill and its counsel (each a "Mortgage Policy" and, collectively, the "Mortgage Policies") in amounts satisfactory to Foothill assuring Foothill that the Mortgages on such Real Property Collateral are valid and enforceable first priority mortgage Liens on such Real Property Collateral free and clear of all defects and encumbrances except Permitted Liens, and the Mortgage Policies shall otherwise be in form and substance reasonably satisfactory to Foothill and its counsel; (l) Foothill shall have received phase-I environmental reports on the Real Property Collateral and real estate surveys shall have been completed with respect to the Real Property Collateral and copies thereof delivered to Foothill; the environmental consultants and surveyors retained for such reports or surveys, the scope of the reports or surveys, and the results thereof shall be acceptable to Foothill in its reasonable discretion; (m) Foothill shall have received reasonably satisfactory evidence that all tax returns required to be filed by Borrower have been timely filed and all taxes upon Borrower or its properties, assets, income, and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (n) Foothill shall have received all SEC Reports; (o) Foothill shall have received from Borrower a balance sheet reflecting its financial position after the sale of its Bush Hog division to Bush Hog. (p) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Foothill and its counsel; (q) Borrower shall have availability of not less than Two Million Five Hundred Thousand Dollars ($2,500,000) of the Maximum Amount after payment of all other items required hereunder; (r) Foothill shall have received final background checks on the principal officers of Borrower which shall be satisfactory to Foothill; and -31- (s) Foothill shall have received the Bush Hog Letter, the LaSalle Letter and the Bank of America Letter. 3.2 Conditions Precedent to all Advances, all Letters of Credit, and the Term Loan Subline. The following shall be conditions precedent to all Advances, all Letters of Credit, and the Term Loan Subline hereunder: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; and (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any governmental authority against Borrower, Foothill, or any of their Affiliates. (d) Foothill shall have reviewed and approved the Fiscal Projections (as defined below) except that this requirement shall not apply for Advances made against Eligible Special GM Project Billed Accounts or Eligible Special GM Project Unbilled Accounts or Eligible Service and Parts Accounts or the Term Loan Subline. 3.3 Condition Subsequent. As a condition subsequent to initial closing hereunder, Borrower shall perform or cause to be performed the following (the failure by Borrower to so perform or cause to be performed constituting an Event of Default): (a) within thirty (30) days of the Closing Date, deliver to Foothill the certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be satisfactory to Foothill and its counsel; (b) on or before October 31, 2000, delivery to Foothill updated financial projections for fiscal year 2001 (the "Fiscal Projections"); (c) within sixty (60) days of the Closing Date, deliver to Foothill a Phase I Environmental Audit or such other information as Foothill shall request with respect to -32- the environmental status of the Real Property Collateral located in Hobart, Indiana. Until delivery of said material and approval of same by Foothill in its sole discretion Foothill shall retain the Environmental Reserve; (d) within a reasonable time after the Closing Date, develop a spare parts and service accounts ledger. Foothill will not make any Advances for Service and Parts Accounts until an acceptable ledger system is developed by Borrower and approved by Foothill; and (e) Prior to an Advance, excluding Advances under the Term Loan Subline, Foothill shall have conducted an updated audit of Borrower which audit shall not disclose any Material Adverse Changes from the date hereof. 3.4 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower and Foothill and subject to Section 3.6 hereof, shall continue in full force and effect for a term ending on the date that is three (3) years from the Closing Date (the "Termination Date"). The foregoing notwithstanding, Foothill shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrower with respect to any outstanding Letters of Credit) immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of Borrower's duties, Obligations, or covenants hereunder, and Foothill's continuing security interests in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and Foothill's obligation to provide additional credit hereunder is terminated. 3.6 Early Termination by Borrower. The provisions of Section 3.4 notwithstanding, Borrower has the option, at any time upon ninety (90) days prior written notice to Foothill, to terminate this Agreement by paying to Foothill, in cash, the Obligations (including an amount equal to one hundred and five percent (105%) of the undrawn amount of the Letters of Credit), in full, together with a premium (the "Early Termination Premium") equal to the following: (a) Three percent (3%) of the Maximum Amount with respect to any prepayments made on or before the one (1) year anniversary date of the Closing Date; -33- (b) Two percent (2%) of the Maximum Amount with respect to any prepayments made after the one (1) year anniversary date of the Closing Date and on or before the two (2) year anniversary date of the Closing Date; and (c) One percent (1%) of the Maximum Amount for any prepayment made after the two year anniversary date of the Closing Date. Notwithstanding anything to the contrary in this Section 3.6, in the event that the Borrower refinances the Obligations in full with the proceeds received from the sale of its interest in Bush Hog, L.L.C. or the sale of its Verson division, or a secondary public offering of its securities, then the Early Termination Premium shall be equal to one half of one percent (0.50%) of the amount prepaid. There will be no Early Termination Premium if the Borrower refinances the Obligations in full with Wells Fargo Bank. 3.7 Termination Upon Event of Default. If Foothill terminates this Agreement upon the occurrence of an Event of Default, in view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Foothill's lost profits as a result thereof, Borrower shall pay to Foothill upon the effective date of such termination, a premium in an amount equal to the Early Termination Premium. The Early Termination Premium shall be presumed to be the amount of damages sustained by Foothill as the result of the early termination and Borrower agrees that it is reasonable under the circumstances currently existing. The Early Termination Premium provided for in this Section 3.7 shall be deemed included in the Obligations. 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. Borrower hereby grants to Foothill a continuing security interest in all currently existing and hereafter acquired or arising Personal Property Collateral and Real Property Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Foothill's security interests in the Personal Property Collateral shall attach to all Personal Property Collateral without further act on the part of Foothill or Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for the sale of Inventory to buyers in the ordinary course of business, Borrower has no authority, express or implied, to dispose of any item or portion of the Personal Property Collateral or the Real Property Collateral. 4.2 Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Borrower, immediately upon the -34- request of Foothill, shall endorse and deliver physical possession of such Negotiable Collateral to Foothill. 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. At any time, Foothill or Foothill's designee may (a) notify customers or Account Debtors of Borrower that the Accounts, General Intangibles, or Negotiable Collateral have been assigned to Foothill or that Foothill has a security interest therein, and (b) after an Event of Default, collect the Accounts, General Intangibles, and Negotiable Collateral directly and charge the collection costs and expenses to the Loan Account. Borrower agrees that it will hold in trust for Foothill, as Foothill's trustee, any Collections that it receives and immediately will deliver said Collections to Foothill in their original form as received by Borrower. 4.4 Delivery of Additional Documentation Required. At any time upon the request of Foothill, Borrower shall execute and deliver to Foothill all financing statements, continuation financing statements, fixture filings, security agreements, pledges, assignments, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Foothill reasonably may request, in form reasonably satisfactory to Foothill, to perfect and continue perfected Foothill's security interests in the Collateral, and in order to fully consummate all of the transactions contemplated hereby and under the other the Loan Documents. Foothill is hereby authorized to execute any of the foregoing on behalf of Borrower or to file same electronically pursuant to the Code. 4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes, and appoints Foothill (and any of Foothill's officers, employees, or agents designated by Foothill) as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure, sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse Borrower's name on any Collection item that may come into Foothill's possession, (e) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Foothill, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower, (f) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure, make, settle, and adjust all claims under Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (g) at any time that an Event of Default has occurred -35- and is continuing or Foothill deems itself insecure, settle and adjust disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms that Foothill determines to be reasonable, and Foothill may cause to be executed and delivered any documents and releases that Foothill determines to be necessary. The appointment of Foothill as Borrower's attorney, and each and every one of Foothill's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and Foothill's obligation to extend credit hereunder is terminated. 4.6 Right to Inspect. Foothill (through any of its officers, employees, or agents) shall have the right, from time to time hereafter to inspect Borrower's Books and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral, provided however, that unless there is an Event of Default or an event, the occurrence of which but for the passage of time would be an Event of Default, any such inspection as set forth herein shall be after reasonable notice to the Borrower and shall take place during the Borrower's normal business hours. 5. REPRESENTATIONS AND WARRANTIES. In order to induce Foothill to enter into this Agreement, Borrower makes the following representations and warranties which shall be true, correct, and complete in all respects as of the date hereof, and shall be true, correct, and complete in all respects as of the Closing Date, and at and as of the date of the making of each Advance, Letter of Credit, Term Loan Subline, or Capital Expenditure Loan made thereafter, as though made on and as of the date of such Advance, Letter of Credit, Term Loan Subline, or Capital Expenditure Loan (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens except for Permitted Liens. 5.2 Eligible Accounts. The Eligible Special GM Project Billed Accounts and Eligible Special Project Billed Accounts and Eligible Parts and Service Accounts are bona fide existing obligations created by the sale and/or delivery of Inventory or the rendition of services to Account Debtors in the ordinary course of Borrower's business, unconditionally owed to Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. Borrower has not received notice of actual or imminent bankruptcy, insolvency, or material impairment of the financial condition of any Account Debtor regarding any Eligible Special Project Account or Eligible Parts and Service Account and Borrower has not received -36- any notice from GM of non compliance with any Eligible Special GM Project Accounts and Borrower is in compliance with all terms of each Special GM Project Account or any other Eligible Special Project Account. Borrower has sufficient liquidity (including Advances) to complete all required work on any Eligible Special GM Project Account or any Eligible Special Project Account. 5.3 Intentionally Omitted. 5.4 Equipment. All of the Equipment is used or held for use in Borrower's business. 5.5 Location of Inventory and Equipment. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (without Foothill's prior written consent) and are located only at the locations identified on Schedule 6.12 or otherwise permitted by Section 6.12. 5.6 Inventory Records. Borrower keeps correct and accurate records itemizing and describing the kind, type, quality, and quantity of the Inventory, and Borrower's cost therefor. 5.7 Location of Chief Executive Office; FEIN. The chief executive office of Borrower is located at the address indicated in the preamble to this Agreement and Borrower's FEIN is 36-4323354. 5.8 Due Organization and Qualification; Subsidiaries. (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified reasonably could be expected to have a Material Adverse Change. (b) Set forth on Schedule 5.8, is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their incorporation; (ii) the number of shares of each class of common and preferred stock authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding capital stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. -37- (c) Except as set forth on Schedule 5.8, no capital stock (or any securities, instruments, warrants, options, purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for capital stock) of any direct or indirect Subsidiary of Borrower is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. (d) Except as set forth on Schedule 5.8, none of Borrower's subsidiaries own any assets and Borrower will not create any new subsidiaries or make any current subsidiary operational or transfer or acquire assets for any subsidiary without Foothill's prior written consent. 5.9 Due Authorization; No Conflict. (a) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary corporate action. (b) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations G, T, U, and X of the Federal Reserve Board) applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material lease of Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of Borrower. (c) Other than the filing of appropriate financing statements, fixture filings, and mortgages, the execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) This Agreement and the Loan Documents to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against -38- Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Liens granted by Borrower to Foothill in and to its properties and assets pursuant to this Agreement and the other Loan Documents are validly created, perfected, and first priority Liens, subject only to Permitted Liens. 5.10 Litigation. There are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower or any guarantor of the Obligations, except for: (a) ongoing collection matters in which Borrower is the plaintiff; (b) matters disclosed on Schedule 5.10; and (c) matters arising after the date hereof that, if decided adversely to Borrower, would not have a Material Adverse Change. 5.11 No Material Adverse Change. All financial statements relating to Borrower or any guarantor of the Obligations that have been delivered by Borrower to Foothill have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present Borrower's (or such guarantor's, as applicable) financial condition as of the date thereof and Borrower's results of operations for the period then ended. All financial statements delivered by Borrower after the sale of its Bush Hog division to Bush Hog, fairly present Borrower's financial condition after said sale. There has not been a Material Adverse Change with respect to Borrower (or such guarantor, as applicable) since the date of the latest financial statements submitted to Foothill on or before the Closing Date, including financial statements reflecting the sale of Borrower's Bush Hog division. 5.12 Solvency. Borrower is Solvent. No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower. 5.13 Employee Benefits. None of Borrower, any of its Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan, other than those listed on Schedule 5.13. Borrower, each of its Subsidiaries and each ERISA Affiliate have satisfied the minimum funding standards of ERISA and the IRC with respect to each Benefit Plan to which it is obligated to contribute. No ERISA Event has occurred nor has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a -39- Material Adverse Change. None of Borrower or its Subsidiaries, any ERISA Affiliate, or any fiduciary of any Plan is subject to any direct or indirect liability with respect to any Plan under any applicable law, treaty, rule, regulation, or agreement. None of Borrower or its Subsidiaries or any ERISA Affiliate is required to provide security to any Plan under Section 401(a)(29) of the IRC. 5.14 Environmental Condition. Except as disclosed on Schedule 5.14, none of Borrower's properties or assets has (a) ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, or (b) ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for closure pursuant to any environmental protection statute. No Lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by Borrower. Borrower has not during the past three (3) years received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15 Intellectual Property. Borrower is the owner of all Intellectual Property as set forth on Schedule 5.15 including all patents, trademarks, trade names and copyrights set forth on Schedule 5.15 and Schedule 5.15 accurately sets forth each patent, trademark, trade name and copyright owned by Borrower. 5.16 Machinery and Equipment. Borrower has reviewed that certain Machinery and Equipment Appraisal of its Verson Division prepared by Norman Levy Associates, Inc. dated as of October 27, 1999 (the "M&E Appraisal") and represents that all of the machinery and equipment set forth thereon, except as set forth on Schedule 5.16, is owned by Borrower and not subject to any lease. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, and unless Foothill shall otherwise consent in writing, Borrower shall do all of the following: 6.1 Accounting System. Maintain a standard and modern system of accounting that enables Borrower to produce financial statements in accordance with GAAP, and maintain records pertaining to the Collateral that contain information as from time to time -40- may be reasonably requested by Foothill. Borrower also shall keep a modern inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory. 6.2 Collateral Reporting. Provide Foothill with the following documents at the following times in form satisfactory to Foothill: (a) on each Business Day, a sales journal, collection journal, and credit register since the last such schedule and a calculation of the Borrowing Base as of such date, (b) on a monthly basis and, in any event, by no later than the tenth (10th) day of each month during the term of this Agreement, (i) a detailed calculation of the Borrowing Base, and (ii) a detailed aging, by total, of the Accounts, together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Foothill, (c) on a monthly basis and, in any event, by no later than the tenth (10th) day of each month during the term of this Agreement, a summary aging, by vendor, of Borrower's accounts payable and any book overdraft, (d) on a monthly basis, Inventory reports specifying Borrower's cost of its Inventory by category, with additional detail showing additions to and deletions from the Inventory, (e) on each Business Day, notice of all returns, disputes, or claims, (f) upon request, copies of invoices in connection with the Accounts, customer statements, credit memos, remittance advices and reports, deposit slips, shipping and delivery documents in connection with the Accounts and for Inventory and Equipment acquired by Borrower, purchase orders and invoices, (g) on a quarterly basis, a detailed list of Borrower's customers, (h) on a monthly basis, a calculation of the Dilution for the prior month; and (i) such other reports as to the Collateral or the financial condition of Borrower as Foothill may request from time to time. Original sales invoices evidencing daily sales shall be mailed by Borrower to each Account Debtor and, at Foothill's direction after an Event of Default or after the occurrence of an event but for the passage of time would be an Event of Default, the invoices shall indicate on their face that the Account has been assigned to Foothill and that all payments are to be made directly to Foothill. Borrower shall provide Foothill with access to its electronic data for all of the foregoing. 6.3 Financial Statements, Reports, Certificates. (a) Deliver to Foothill: (i) as soon as available, but in any event within forty-five (45) days after the end of the last month of each calendar quarter during each of Borrower's fiscal years and within thirty (30) days after the end of every other month during each of Borrower's fiscal years, a company prepared balance sheet, income statement, and statement of cash flow covering Borrower's operations during such period; and (ii) as soon as available, but in any event within ninety (90) days after the end of each of Borrower's fiscal years, financial statements of Borrower for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Foothill and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP, together -41- with a certificate of such accountants addressed to Foothill stating that such accountants do not have knowledge of the existence of any Default or Event of Default. Foothill acknowledges that PricewaterhouseCoopers L.L.P. is a public accountant acceptable to Foothill. Such audited financial statements shall include a balance sheet, profit and loss statement, and statement of cash flow and, if prepared, such accountants' letter to management. If Borrower is a parent company of one or more Subsidiaries, or Affiliates, or is a Subsidiary or Affiliate of another company, then, in addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on a consolidating basis so as to present Borrower and each such related entity separately, and on a consolidated basis. (b) Together with the above, Borrower also shall deliver to Foothill all SEC Reports including but not limited to Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other filings made by Borrower with the Securities and Exchange Commission, if any, as soon as the same are filed, or any other information that is provided by Borrower to its shareholders, and any other report reasonably requested by Foothill relating to the financial condition of Borrower. (c) Each month, together with the financial statements provided pursuant to Section 6.3(a), Borrower shall deliver to Foothill a certificate signed by its chief financial officer to the effect that: (i) all financial statements delivered or caused to be delivered to Foothill hereunder have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present the financial condition of Borrower, (ii) the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), (iii) for each month that also is the date on which a financial covenant in Section 7.20 is to be tested, a Compliance Certificate demonstrating in reasonable detail compliance at the end of such period with the applicable financial covenants contained in Section 7.20, and (iv) on the date of delivery of such certificate to Foothill there does not exist any condition or event that constitutes a Default or Event of Default (or, in the case of clauses (i), (ii), or (iii), to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto). (d) Borrower shall have issued written instructions to its independent certified public accountants authorizing them to communicate with Foothill and to release to Foothill whatever financial information concerning Borrower that Foothill may request. Borrower hereby irrevocably authorizes and directs all auditors, accountants, or other third -42- parties to deliver to Foothill, at Borrower's expense, copies of Borrower's financial statements, papers related thereto, and other accounting records of any nature in their possession, and to disclose to Foothill any information they may have regarding Borrower's business affairs and financial conditions. 6.4 Tax Returns. Deliver to Foothill copies of each of Borrower's future federal income tax returns, and any amendments thereto, within thirty (30) days of the filing thereof with the Internal Revenue Service. 6.5 Guarantor Reports. Cause any guarantor of any of the Obligations to deliver its annual financial statements at the time when Borrower provides its audited financial statements to Foothill and copies of all federal income tax returns as soon as the same are available and in any event no later than thirty (30) days after the same are required to be filed by law. 6.6 Returns. Cause returns and allowances, if any, as between Borrower and its Account Debtors to be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. If, at a time when no Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to Borrower, Borrower promptly shall determine the reason for such return and, if Borrower accepts such return, issue a credit memorandum (with a copy to be sent to Foothill) in the appropriate amount to such Account Debtor. If, at a time when an Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to Borrower, Borrower promptly shall determine the reason for such return and, if Foothill consents (which consent shall not be unreasonably withheld), issue a credit memorandum (with a copy to be sent to Foothill) in the appropriate amount to such Account Debtor. 6.7 Title to Equipment. Upon Foothill's request, Borrower immediately shall deliver to Foothill, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title to any items of Equipment. 6.8 Maintenance of Equipment. Maintain the Equipment in good operating condition and repair (ordinary wear and tear excepted), and make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Other than those items of Equipment that constitute fixtures on the Closing Date, Borrower shall not permit any item of Equipment to become a fixture to real estate or an accession to other property, and such Equipment shall at all times remain personal property. -43- 6.9 Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrower or any of its property to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrower shall make due and timely payment or deposit of all such federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Foothill, on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Foothill with proof satisfactory to Foothill indicating that Borrower has made such payments or deposits. 6.10 Insurance. (a) At its expense, keep the Personal Property Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as are ordinarily insured against by other owners in similar businesses. Borrower also shall maintain business interruption, public liability, product liability, and property damage insurance relating to Borrower's ownership and use of the Personal Property Collateral, as well as insurance against larceny, embezzlement, and criminal misappropriation. (b) At its expense, obtain and maintain (i) insurance of the type necessary to insure the Improvements and Property (as such terms are defined in the Mortgages), for the full replacement cost thereof, against any loss by fire, lightning, windstorm, hail, explosion, aircraft, smoke damage, vehicle damage, earthquakes, elevator collision, and other risks from time to time included under "extended coverage" policies, in such amounts as Foothill may require, but in any event in amounts sufficient to prevent Borrower from becoming a co-insurer under such policies, (ii) combined single limit liability insurance for claims arising from the Real Property Collateral, in an amount of not less than Ten Million Dollars ($10,000,000) in the aggregate; and (iii) insurance for such other risks as Foothill may require. Replacement costs, at Foothill's option, may be redetermined by an insurance appraiser, satisfactory to Foothill, not more frequently than once every 12 months at Borrower's cost. (c) All such policies of insurance shall be in such form, with such companies, and in such amounts as may be reasonably satisfactory to Foothill. All insurance required herein shall be written by companies which are authorized to do insurance business in the States of Indiana and Illinois. All hazard insurance and such other insurance as Foothill shall specify, shall contain a California Form 438BFU (NS) mortgagee endorsement, or an -44- equivalent endorsement satisfactory to Foothill, showing Foothill as sole loss payee thereof, and shall contain a waiver of warranties. Every policy of insurance referred to in this Section 6.10 shall contain an agreement by the insurer that it will not cancel such policy except after thirty (30) days prior written notice to Foothill and that any loss payable thereunder shall be payable notwithstanding any act or negligence of Borrower or Foothill which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment and notwithstanding (i) occupancy or use of the Real Property Collateral for purposes more hazardous than permitted by the terms of such policy, (ii) any foreclosure or other action or proceeding taken by Foothill pursuant to the Mortgages upon the happening of an Event of Default, or (iii) any change in title or ownership of the Real Property Collateral. Borrower shall deliver to Foothill certified copies of such policies of insurance and evidence of the payment of all premiums therefor. (d) Original policies or certificates thereof satisfactory to Foothill evidencing such insurance shall be delivered to Foothill at least thirty (30) days prior to the expiration of the existing or preceding policies. Borrower shall give Foothill prompt notice of any loss covered by such insurance, and Foothill shall have the right to adjust any loss. Foothill shall have the exclusive right to adjust all losses in excess of Twenty-five Thousand Dollars ($25,000) payable under any such insurance policies without any liability to Borrower whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy including the insurance policies mentioned above, shall be paid over to Foothill to be applied at the option of Foothill either to the prepayment of the Obligations without premium, in such order or manner as Foothill may elect, or shall be disbursed to Borrower under stage payment terms satisfactory to Foothill for application to the cost of repairs, replacements, or restorations. All repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction. Upon the occurrence of an Event of Default, Foothill shall have the right to apply all prepaid premiums to the payment of the Obligations in such order or form as Foothill shall determine. (e) Borrower shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.10, unless Foothill is included thereon as named insured with the loss payable to Foothill under a standard California 438BFU (NS) Mortgagee endorsement, or its local equivalent. Borrower immediately shall notify Foothill whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and originals of such policies immediately shall be provided to Foothill. 6.11 No Setoffs or Counterclaims. Make payments hereunder and under the other Loan Documents by or on behalf of Borrower without setoff or counterclaim and free and -45- clear of, and without deduction or withholding for or on account of, any federal, state, or local taxes. 6.12 Location of Inventory and Equipment. Keep the Inventory and Equipment only at the locations identified on Schedule 6.12; provided, however, that Borrower may amend Schedule 6.12 so long as such amendment occurs by written notice to Foothill not less than thirty (30) days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests in such assets and also provides to Foothill a Collateral Access Agreement. 6.13 Compliance with Laws. Comply in all material respects with the requirements of all applicable laws, rules, regulations, and orders of any governmental authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not have and could not reasonably be expected to have a Material Adverse Change. 6.14 Employee Benefits. (a) Promptly, and in any event within ten (10) Business Days after Borrower or any of its Subsidiaries knows or has reason to know that an ERISA Event has occurred that reasonably could be expected to result in a Material Adverse Change, a written statement of the chief financial officer of Borrower describing such ERISA Event and any action that is being taking with respect thereto by Borrower, any such Subsidiary or ERISA Affiliate, and any action taken or threatened by the IRS, Department of Labor, or PBGC. Borrower or such Subsidiary, as applicable, shall be deemed to know all facts known by the administrator of any Benefit Plan of which it is the plan sponsor, (ii) promptly, and in any event within three (3) Business Days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communications received by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate with respect to such request, and (iii) promptly, and in any event within three (3) Business Days after receipt by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate, of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice. (b) Cause to be delivered to Foothill, upon Foothill's request, each of the following: (i) a copy of each Plan (or, where any such plan is not in writing, complete -46- description thereof) (and if applicable, related trust agreements or other funding instruments) and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distributed to employees or former employees of Borrower or its Subsidiaries; (ii) the most recent determination letter issued by the IRS with respect to each Benefit Plan; (iii) for the three most recent plan years, annual reports on Form 5500 Series required to be filed with any governmental agency for each Benefit Plan; (iv) all actuarial reports prepared for the last three plan years for each Benefit Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by Borrower or any ERISA Affiliate to each such plan and copies of the collective bargaining agreements requiring such contributions; (vi) any information that has been provided to Borrower or any ERISA Affiliate regarding withdrawal liability under any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual payments made to former employees of Borrower or its Subsidiaries under any Retiree Health Plan. 6.15 Leases. Pay when due all rents and other amounts payable under any leases to which Borrower is a party or by which Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. To the extent that Borrower fails timely to make payment of such rents and other amounts payable when due under its leases, Foothill shall be entitled, in its discretion, to reserve an amount equal to such unpaid amounts against the Borrowing Base. 6.16 Contracts Related to Eligible Special Project Accounts and Eligible Special GM Project Account. Cause to be delivered to Foothill monthly status reports with respect to all work in process pursuant to Purchase Orders and contracts with respect to Eligible Special Project Accounts or Eligible Special GM Project Accounts. In addition, Borrower shall deliver to Foothill any notices received from GM with respect to any Eligible Special GM Project Accounts or from any other Account Debtors with respect to Eligible Special Project Accounts. 6.17 Price Adjustments in Bush Hog Sale. Cause to be delivered to Foothill all information relating to any price adjustments made with respect to the sale by Borrower of its Bush Hog division to Bush Hog as required pursuant to that certain Limited Liability Company Interest Purchase and Asset Contribution Agreement by and between Borrower and Bush Hog Investors, L.L.C. and Bush Hog dated as of October 21, 1999, as amended and cause to be delivered to Foothill copies of any amendments or modifications of the Bush Hog Amended and Restated Operating Agreement dated March 7, 2000. -47- 6.18 Labor Developments. Cause to be delivered to Foothill monthly status reports with respect to its labor negotiations from a new labor contract as well as a copy of its new labor contract after execution of same. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not do any of the following without Foothill's prior written consent: 7.1 Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement, together with Indebtedness to issuers of letters of credit that are the subject of L/C Guarantees; (b) Indebtedness set forth in the latest financial statements of Borrower submitted to Foothill on or prior to the Closing Date; (c) Indebtedness secured by Permitted Liens; and (d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 except that there may be no additional borrowings from the Existing Lender (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not materially impair the prospects of repayment of the Obligations by Borrower, (ii) the net cash proceeds of such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing Indebtedness must be at least as favorable to Foothill as those applicable to the refinanced Indebtedness. 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its property or assets, of any kind, whether now owned or hereafter acquired, including without limitation any of Borrower's interest in High Production Technology L.L.C. or Verson Pressentechnik GmbH, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that -48- the original Indebtedness is refinanced under Section 7.1(d) and so long as the replacement Liens only encumber those assets or property that secured the original Indebtedness). 7.3 Restrictions on Fundamental Changes. Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its property or assets. 7.4 Disposal of Assets. Sell, lease, assign, transfer, or otherwise dispose of any of Borrower's properties or assets other than sales of Inventory to buyers in the ordinary course of Borrower's business as currently conducted. 7.5 Change Name. Change Borrower's name, FEIN, corporate structure (within the meaning of Section 9-402(7) or any amendment thereto or revision thereof of the Code), or identity, or add any new fictitious name. 7.6 Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Foothill. 7.7 Nature of Business. Make any change in the principal nature of Borrower's business. 7.8 Prepayments and Amendments. (a) Except in connection with a refinancing permitted by Section 7.1(d) or payment of the indebtedness owed Existing Lender upon the sale by Borrower of its nineteen and nine tenths percent (19.9%) membership interest in Bush Hog, prepay, redeem, retire, defease, purchase, or otherwise acquire any Indebtedness owing to any third Person, other than the Obligations in accordance with this Agreement, and (b) Directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b), (c), or (d). 7.9 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. -49- 7.10 Consignments. Consign any Inventory or sell any Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale. 7.11 Distributions. Make any distribution or declare or pay any dividends (in cash or other property, other than capital stock) on, or purchase, acquire, redeem, or retire any of Borrower's capital stock, of any class, whether now or hereafter outstanding. 7.12 Accounting Methods. Except as set forth in Footnote 1 to the Report of Independent Accountants prepared by PriceWaterhouseCoopers, L.L.P. and dated April 15, 1999, modify or change its method of accounting or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm or service bureau agreeing to provide Foothill information regarding the Collateral or Borrower's financial condition. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Foothill pursuant to or in accordance with this Agreement, and agrees that Foothill may contact directly any such accounting firm or service bureau in order to obtain such information. 7.13 Investments. Directly or indirectly make, acquire, or incur any liabilities (including contingent obligations) for or in connection with (a) the acquisition of the securities (whether debt or equity) of, or other interests in, a Person, (b) loans, advances (excluding travel advances of up to One Hundred Thousand Dollars ($100,000) in the aggregate in any one year), capital contributions except for quarterly contributions to Verson Pressentechnik, GmbH pursuant to that certain Agreement dated August 27, 1998 and except for contributions to High Production Technology, L.L.C. as required pursuant to the terms of that certain Limited Liability Company Operating Agreement dated June 17, 1997, provided however that such contributions in the aggregate shall not exceed in any one year One Million and No/100 Dollars ($1,000,000), or transfers of property to a Person, or (c) the acquisition of all or substantially all of the properties or assets of a Person. 7.14 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Foothill, and that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate. 7.15 Suspension. Suspend or go out of a substantial portion of its business. -50- 7.16 Compensation. Increase the annual fee or per-meeting fees paid to directors during any year by more than fifteen percent (15%) over the prior year; pay or accrue total cash compensation, during any year, to officers and senior management employees in an aggregate amount in excess of one hundred fifteen percent (115%) of that paid or accrued in the prior year. 7.17 Use of Proceeds. Use (a) the proceeds of the Advances made hereunder for any purpose other than on the Closing Date to pay transactional costs and expenses incurred in connection with this Agreement, and thereafter, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes. Use of proceeds of the Advances may not be used to pay any amount due the Existing Lender. 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. Relocate its chief executive office to a new location without providing thirty (30) days prior written notification thereof to Foothill and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests and also provides to Foothill a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Foothill's prior written consent. 7.19 No Prohibited Transactions Under ERISA. Directly or indirectly: (a) engage, or permit any Subsidiary of Borrower to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor; (b) permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the IRC), whether or not waived; (c) fail, or permit any Subsidiary of Borrower to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; -51- (d) terminate, or permit any Subsidiary of Borrower to terminate, any Benefit Plan where such event would result in any liability of Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of ERISA; (e) fail, or permit any Subsidiary of Borrower to fail, to make any required contribution or payment to any Multiemployer Plan; (f) fail, or permit any Subsidiary of Borrower to fail, to pay any required installment or any other payment required under Section 412 of the IRC on or before the due date for such installment or other payment; (g) amend, or permit any Subsidiary of Borrower to amend, a Plan resulting in an increase in current liability for the plan year such that either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the IRC; or (h) withdraw, or permit any Subsidiary of Borrower to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA; which, individually or in the aggregate, results in or reasonably would be expected to result in a claim against or liability of Borrower, any of its Subsidiaries or any ERISA Affiliate in excess of One Hundred Thousand Dollars ($100,000). 7.20 Financial Covenants. Fail to maintain: (a) For the prior three (3) months for the period ending June 30, 2000, EBITDA equal to or greater than negative One Million Three Hundred Thousand Dollars (-$1,300,000); (b) For the prior six (6) months for the period ending September 30, 2000, EBITDA equal to or greater than negative Three Million Five Hundred Thousand Dollars (-$3,500,000); (c) For the prior nine (9) months for the period ending December 31, 2000, EBITDA equal to or greater than negative Four Million Six Hundred Thousand Dollars (-$4,600,000); -52- (d) For the prior twelve (12) months for the following periods ending, as set forth below, EBITDA equal to or greater than: March 31, 2001 - $3,900,000 June 30, 2001 - $3,000,000 September 30, 2001 $1,300,000 December 31, 2001 $7,600,000; or (e) For each period ending after the period ending December 31, 2001 and thereafter, for each period ending on the last day of each calendar quarter, EBITDA equal to or greater than Seven Million, Six Hundred Thousand Dollars ($7,600,000). 7.21 Capital Expenditures. Make capital expenditures in the fiscal year ending December 31, 2000 with respect to that certain G&L Horizontal Mill being purchased by Borrower (the "G&L Mill") in excess of Five Million, Two Hundred Thousand Dollars ($5,200,000) or any other capital expenditures ending in December 31, 2000 in excess of One Million, Five Hundred Thousand Dollars ($1,500,000) or make any capital expenditures in the fiscal year ending in December 31, 2001 in excess of Two Million, Seven Hundred Fifty Thousand Dollars ($2,750,000) with respect to the G&L Mill, or in excess of Two Million, Six Hundred Fifty Dollars ($2,650,000) to rebuild an existing horizontal boring mill or in excess of One Million Dollars ($1,000,000) for other capital expenditures, provided, however, that non-financed capital expenditures for fiscal year ending December 31, 2001 may not exceed Two Million Dollars ($2,000,0000) in the aggregate. 7.22 Availability for Payment to Existing Lender. Make any payment to Existing Lender unless Borrower has availability hereunder after giving effect to such payment of not less than Five Million Dollars ($5,000,000). 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: (a) If Borrower fails to pay when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due Foothill, reimbursement of Foothill Expenses, or other amounts constituting Obligations); -53- (b) If Borrower fails to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Foothill, provided however, that Borrower shall have five (5) days to cure its failure to perform, keep or observe any term, provision, condition, covenant or agreement with respect to Section Nos. 6.2, 6.3, 6.4, 6.6, 6.12 or 6.15; (c) If there is a Material Adverse Change; (d) If any material portion of Borrower's properties or assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any third Person; (e) If an Insolvency Proceeding is commenced by Borrower; (f) If an Insolvency Proceeding is commenced against Borrower and any of the following events occur: (a) Borrower consents to the institution of the Insolvency Proceeding against it; (b) the petition commencing the Insolvency Proceeding is not timely controverted; (c) the petition commencing the Insolvency Proceeding is not dismissed within forty five (45) calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Foothill shall be relieved of its obligation to extend credit hereunder; (d) an interim trustee is appointed to take possession of all or a substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower; or (e) an order for relief shall have been issued or entered therein; (g) If Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; (h) If a notice of Lien, levy, or assessment is filed of record with respect to any of Borrower's properties or assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any of Borrower's properties or assets and the same is not paid on the payment date thereof but excluding taxes not yet due and payable; (i) If a judgment in excess of Fifty Thousand Dollars ($50,000) or other claim becomes a Lien or encumbrance upon any material portion of Borrower's properties or assets; -54- (j) If there is a default in any material agreement to which Borrower is a party with one or more third Persons and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder; (k) If Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; (l) If any misstatement or misrepresentation of a material fact exists now or hereafter in any warranty, representation, statement, or report made to Foothill by Borrower or any officer, employee, agent, or director of Borrower, or if any such warranty or representation is withdrawn; (m) If the obligation of any guarantor under its guaranty or other third Person under any Loan Document is limited or terminated by operation of law or by the guarantor or other third Person thereunder, or any such guarantor or other third Person becomes the subject of an Insolvency Proceeding; or (n) failure of Borrower to sell to Bush Hog Investors its Nineteen and nine tenths percent (19.9%) membership interest in Bush Hog on or before June 30, 2000 with Borrower receiving net proceeds of not less than Six Million Dollars ($6,000,000) for said sale after payment of all obligations to Existing Lender and to Bush Hog Investors and after all adjustments to the purchase price between Borrower and Bush Hog Investors and net of all amounts to be held under any escrow arrangement. 9. FOOTHILL'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. (a) Upon the occurrence, and during the continuation, of an Event of Default Foothill may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (i) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; -55- (ii) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower and Foothill; (iii) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Foothill, but without affecting Foothill's rights and security interests in the Personal Property Collateral or the Real Property Collateral and without affecting the Obligations; (iv) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Foothill considers advisable, and in such cases, Foothill will credit Borrower's Loan Account with only the net amounts received by Foothill in payment of such disputed Accounts after deducting all Foothill Expenses incurred or expended in connection therewith; (v) Cause Borrower to hold all returned Inventory in trust for Foothill, segregate all returned Inventory from all other property of Borrower or in Borrower's possession and conspicuously label said returned Inventory as the property of Foothill; (vi) Without notice to or demand upon Borrower or any guarantor, make such payments and do such acts as Foothill considers necessary or reasonable to protect its security interests in the Collateral. Borrower agrees to assemble the Personal Property Collateral if Foothill so requires, and to make the Personal Property Collateral available to Foothill as Foothill may designate. Borrower authorizes Foothill to enter the premises where the Personal Property Collateral is located, to take and maintain possession of the Personal Property Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or Lien that in Foothill's determination appears to conflict with its security interests and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned or leased premises, Borrower hereby grants Foothill a license to enter into possession of such premises and to occupy the same, without charge, for up to one hundred twenty (120) days in order to exercise any of Foothill's rights or remedies provided herein, at law, in equity, or otherwise; (vii) Without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Section 9-505 and any amendments thereof -56- of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Foothill (including any amounts received in the Lockbox Accounts), or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Foothill; (viii) Hold, as cash collateral, any and all balances and deposits of Borrower held by Foothill, and any amounts received in the Lockbox Accounts, to secure the full and final repayment of all of the Obligations; (ix) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Personal Property Collateral. Foothill is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Personal Property Collateral, in completing production of, advertising for sale, and selling any Personal Property Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Foothill's benefit; (x) Sell the Personal Property Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Foothill determines is commercially reasonable. It is not necessary that the Personal Property Collateral be present at any such sale; (xi) Foreclose on the Real Property Collateral in accord with the terms of the Mortgages; and (xii) Direct Borrower to sell all of its membership interest in Bush Hog in accord with Article 7 of Bush Hog's Amended and Restated Operating Agreement dated March 7, 2000. (b) Foothill shall give notice of the disposition of the Personal Property Collateral as follows: (i) Foothill shall give Borrower and each holder of a security interest in the Personal Property Collateral who has filed with Foothill a written request for notice, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made -57- of the Personal Property Collateral, then the time on or after which the private sale or other disposition is to be made; (ii) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least five (5) days before the date fixed for the sale, or at least five (5) days before the date on or after which the private sale or other disposition is to be made; no notice needs to be given prior to the disposition of any portion of the Personal Property Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market. Notice to Persons other than Borrower claiming an interest in the Personal Property Collateral shall be sent to such addresses as they have furnished to Foothill; (iii) If the sale is to be a public sale, Foothill also shall give notice of the time and place by publishing a notice one time at least five (5) days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (iv) Foothill may credit bid and purchase at any public sale; and (v) Any deficiency that exists after disposition of the Personal Property Collateral as provided above or after disposition of the Real Property Collateral will be paid immediately by Borrower. Any excess will be returned, without interest and subject to the rights of third Persons, by Foothill to Borrower. 9.2 Remedies Cumulative. Foothill's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Foothill shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Foothill of one right or remedy shall be deemed an election, and no waiver by Foothill of any Event of Default shall be deemed a continuing waiver. No delay by Foothill shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, to the extent that -58- Foothill determines that such failure by Borrower could result in a Material Adverse Change, in its discretion and without prior notice to Borrower, Foothill may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in Borrower's Loan Account as Foothill deems necessary to protect Foothill from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type described in Section 6.10, and take any action with respect to such policies as Foothill deems prudent. Any such amounts paid by Foothill shall constitute Foothill Expenses. Any such payments made by Foothill shall not constitute an agreement by Foothill to make similar payments in the future or a waiver by Foothill of any Event of Default under this Agreement. Foothill need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Foothill on which Borrower may in any way be liable. 11.2 Foothill's Liability for Collateral. So long as Foothill complies with its obligations, if any, under Section 9-207 of the Code, Foothill shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person. All risk of loss, damage, or destruction of the Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold Foothill, each Participant, and each of their respective officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, -59- litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, or telefacsimile to Borrower or to Foothill, as the case may be, at its address set forth below: If to Borrower: Allied Products Corporation 10 South Riverside Plaza Chicago, Illinois 60606 Attn: Corporate Secretary Fax No. 312/454-9608 with copies to: Gardner Carton & Douglas Quaker Tower 321 N. Clark Street Chicago, Illinois 60610 Attn: David Rubenstein, Esq. Fax No. 312/644-3381 If to Foothill: FOOTHILL CAPITAL CORPORATION 11111 Santa Monica Boulevard Suite 1500 Los Angeles, California 90025-3333 Attn: Business Finance Division Manager Fax No. 310/478-9788 -60- with copies to: Foothill Capital Corporation 60 State Street, Suite 1150 Boston, Massachusetts 02109 Attn: Loan Portfolio Manager Fax No. 617/624-4400 Kenneth A. Latimer Duane, Morris & Heckscher LLP 227 W. Monroe Street Suite 3400 Chicago, Illinois 60606 Fax No. 312/499-6701 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. All notices or demands sent in accordance with this Section 12, other than notices by Foothill in connection with Sections 9-504 or 9-505 of the Code, shall be deemed received on the earlier of the date of actual receipt or three (3) days after the deposit thereof in the mail. Borrower acknowledges and agrees that notices sent by Foothill in connection with Sections 9-504 or 9-505 of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted telefacsimile or other similar method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN AN ANOTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF COOK, STATE OF ILLINOIS OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE -61- LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. DESTRUCTION OF BORROWER'S DOCUMENTS. All documents, schedules, invoices, agings, or other papers delivered to Foothill may be destroyed or otherwise disposed of by Foothill 4 months after they are delivered to or received by Foothill, unless Borrower requests, in writing, the return of said documents, schedules, or other papers and makes arrangements, at Borrower's expense, for their return. 15. GENERAL PROVISIONS. 15.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower and Foothill. 15.2 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without Foothill's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Foothill shall release Borrower from its Obligations. Foothill may assign this Agreement and its rights and duties hereunder and no consent or approval by Borrower is required in connection with any such assignment. Foothill reserves the right to sell, assign, transfer, negotiate, or grant participations in all or any part of, or any interest in Foothill's rights and benefits hereunder. In connection with any such assignment or participation, Foothill may disclose all documents and information which Foothill now or hereafter may have relating to Borrower or Borrower's business. To the extent that Foothill assigns its rights and obligations hereunder to a third Person, Foothill thereafter shall be released from such assigned obligations -62- to Borrower and such assignment shall effect a novation between Borrower and such third Person. 15.3 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 15.4 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Foothill or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 15.5 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 15.6 Amendments in Writing. This Agreement can only be amended by a writing signed by both Foothill and Borrower. 15.7 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 15.8 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower or any guarantor of the Obligations or the transfer by either or both of such parties to Foothill of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Foothill is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Foothill is -63- required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of Foothill related thereto, the liability of Borrower or such guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 15.9 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. (Signature page to follow.) -64- IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security Agreement to be executed in Los Angeles, California. ALLIED PRODUCTS CORPORATION, a Delaware corporation By: /S/ Mark Standefer ------------------------------------- Title: Vice President & Secretary FOOTHILL CAPITAL CORPORATION, a California corporation By: /S/ Patricia McLoughlin ------------------------------------- Title: Vice President -65- ================================================================================ FACILITY ADDRESS CITY COUNTY STATE FOOTHILL NAME AMOUNT - - -------- ------- ---- ------ ----- -------- ---- ------ NAME AND ZIP LIEN OF OF PRIOR - - ---- ------- ---- -- -------- CODE POSITION PRIOR LIEN ---- -------- ----- ---- LIENOR - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- ================================================================================ Schedule R-1 EX-21 8 EXHIBIT 21 EXHIBIT 21 State or Other % Of Jurisdiction Securities In Which Owned by Subsidiaries of Registrant (1) Incorporated Registrant - - -------------------------------------------------------------------------------- Verson Pressentechnik GmbH.......... Germany 60% (2) (1) Unnamed subsidiaries considered in the aggregate do not constitute a significant subsidiary. (2) Subsidiary included in consolidated financial statements. 04/06/00 EX-23 9 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Allied Products Corporation registration statement on Form S-8 (File No. 33-60058) of our report, dated April , 2000, on our audits of the consolidated financial statements and financial statement schedule of Allied Products Corporation and consolidated subsidiaries as of December 31, 1999 and 1998 and for the three years in the period ended December 31, 1999, which report is included in the 1999 Annual Report of Form 10-K. /s/PricewaterhouseCoopers LLP Chicago, Illinois April 14, 2000 EX-24 10 EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY WHEREAS, ALLIED PRODUCTS CORPORATION, a Delaware corporation (herein referred to as the "Company"), is about to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its annual report on Form 10-K for the year ended December 31, 1999 and WHEREAS, each of the undersigned holds the office or offices in the Company hereinbelow set opposite his name, respectively; NOW THEREFORE, each of the undersigned hereby constitutes and appoints Mark C. Standefer as his attorney, with full power to act for him and in his name, place and stead, to sign his name in the capacity or capacities set forth below to said Form 10-K and to any and all amendments thereto, and hereby ratifies and confirms all said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 13th day of April, 2000. /s/[RICHARD A. DREXLER] ------------------------------------ Richard A. Drexler, Chairman of the Board, President and Chief Executive Officer; Director /s/[ROBERT J. FLECK] ------------------------------------ Robert J. Fleck, Vice President - Accounting, Chief Accounting and Administrative Officer /s/[LLOYD A. DREXLER] ------------------------------------ Lloyd A. Drexler, Director /s/[STANLEY J. GOLDRING] ------------------------------------ Stanley J. Goldring, Director /s/[JOHN E. JONES] ------------------------------------ John E. Jones, Director /s/[MITCHELL I. QUAIN] ------------------------------------ Mitchell I. Quain, Director /s/[S. S. SHERMAN] ------------------------------------ S. S. Sherman, Director EX-27.1 11 EXHIBIT 27.1
5 THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED STATEMENT OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,054 0 21,590 1,130 46,665 161,475 90,709 32,023 256,611 204,907 378 0 0 140 42,930 256,611 143,775 143,775 147,961 147,961 30,154 1,367 6,205 (34,340) 0 (34,340) 7,575 0 0 (26,765) (2.26) (2.26)
EX-27.2 12 EXHIBIT 27.2
5 THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED STATEMENT OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 727 0 25,967 266 67,207 181,864 83,587 26,971 275,804 196,819 572 0 0 140 71,590 275,804 137,020 137,020 147,114 147,114 25,905 179 3,732 (35,999) (6,213) (29,786) 15,673 0 0 (14,113) (1.19) (1.19)
EX-27.3 13 EXHIBIT 27.3
5 THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED STATEMENT OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 609 0 20,770 231 50,937 141,949 60,729 30,090 195,064 95,736 419 0 0 140 88,413 195,064 151,091 151,091 123,099 123,099 20,311 30 1,889 7,681 2,841 4,840 10,806 0 0 15,646 1.29 1.27
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