-----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, JR6vYj/ujya5Loctnu7EehsU4sUhe6ryyG4HrvOQYZX01HpxGY+Ss9MomdNcjB90 GoGXVJ+5WlFo+86UZDyyww== 0000889697-99-000002.txt : 19990114 0000889697-99-000002.hdr.sgml : 19990114 ACCESSION NUMBER: 0000889697-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECOM GENERAL CORP CENTRAL INDEX KEY: 0000790375 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 870410875 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14299 FILM NUMBER: 99505785 BUSINESS ADDRESS: STREET 1: 46035 GRAND RIVER AVENUE CITY: NOVI STATE: MI ZIP: 48374 BUSINESS PHONE: 2483059410 MAIL ADDRESS: STREET 1: 46035 GRAND RIVER CITY: NOVI STATE: MI ZIP: 48374 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1998 Commission file number 0-14299 SECOM GENERAL CORPORATION (exact name of registrant as specified in its charter) DELAWARE 87-0410875 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 46035 GRAND RIVER AVENUE, NOVI, MICHIGAN 48374 (Address of principal executive offices) Registrant's telephone number, including area code: (248) 305-9410 Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: None (Title of class and name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: Common Stock, par value $.10 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes __ X __ No _______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in a definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] -1- As of January 5, 1999, 5,335,400 shares of the Registrant's Common Stock were outstanding and the aggregate market value of such Common Stock held by non-affiliates (based on the closing price on that date as reported on the NASDAQ National Market System) was approximately $1,544,000. DOCUMENTS INCORPORATED BY REFERENCE None -2- TABLE OF CONTENTS PART I Page ---- Item 1. Business 4 Item 2. Properties 9 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17 PART III Item 10. Directors and Executive Officers of the Registrant 17 Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial Owners and Management 22 Item 13. Certain Relationships and Related Transactions 24 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25 -3- PART I ITEM 1. BUSINESS GENERAL Secom General Corporation, a Delaware corporation (the "Company") is a holding company with the following wholly owned operating subsidiaries: Metal Parts Forming Segment: * Uniflow Corporation ("Uniflow") acquired in 1991 Tooling Segment: * Form Flow, Inc. ("Form Flow") acquired in 1987 * L&H Die, Inc. ("L&H") acquired in 1987 * Micanol, Inc. ("Micanol") acquired in 1990 Production Machining Segment - Discontinued Operations: * MMC Manufacturing Corp., formerly known as Milford Manufacturing Corporation ("Milford") acquired in November 1996 and discontinued during 1998 In transactions occurring in March, July and October 1998, the Company sold all of the assets of Milford. Refer to "Discontinued Operations - Production Machining Segment" on page 8 for a description of the foregoing. In October 1998, the Company engaged the investment banking firm of Goldsmith, Agio, Helms Securities, Inc. ("GAHS") to assist the Company in a possible merger, sale or similar transaction related to the Company or its subsidiaries. The engagement is for a minimum six month period and gives the Company the right to reject any and all offers submitted by GAHS. The Company's corporate mailing address is 46035 Grand River Avenue, Novi, Michigan 48374; its telephone number is (248) 305-9410 and its facsimile number is (248) 347-2829. Except as otherwise indicated by the context, any reference to the "Company" shall mean the Company and its subsidiaries. The Company's fiscal year-end is September 30. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company (who serve as such at the pleasure of the Board of Directors), their ages and the position or office held by each, are as follows: -4- Name Age Positions with the Company ---- --- -------------------------- Robert A. Clemente 45 Chairman of the Board since 1994 and Director since 1993 Martin J. Eidemiller 41 Vice President since 1994, Member of the Operating Committee and Director since June 1998 Paul D. Clemente 35 Vice President since 1997 and Member of the Operating Committee since June 1998 Terry L. Hamilton 51 President of Uniflow since 1997 and Member of the Operating Committee since June 1998. Scott J. Konieczny 34 Secretary and Treasurer since June 1998 In June 1998, Robert Clemente relinquished his position as president and chief executive officer of the Company. The Company's board of directors appointed Martin Eidemiller, Paul Clemente and Terry Hamilton to an operating committee which, since June, has fulfilled the duties of the Company's president on an interim basis until a new president is appointed. FORWARD-LOOKING STATEMENTS Statements herein concerning expectations for the future constitute forward-looking statements within the meaning of the Securities Exchange Act of 1934 and are subject to a number of known and unknown risks, uncertainties and other factors which might cause actual results to differ materially from those expressed or implied by such forward-looking statements. Long term growth of the Company may be affected by changes in the automotive, trucking and construction industries, relations with collective bargaining unit employees, general economic trends (including inflation and unemployment rates), interest rates, and the availability and cost of financing. Long-term profitability will be dependent on management's ability to control its costs of operations for its respective areas of base sales, thereby providing adequate margins to maintain and expand its various businesses. Forward-looking statements herein include, but are not limited to, those concerning anticipated growth in sales and profitability, greater than expected declines in sales, inability to secure additional sources of working capital if and when needed, the ability to obtain price concessions if and when needed, and inability to manage growth. -5- BACKLOG AND SEASONALITY Customer releases generally cover a period of three months or less. Because the Company receives successive customer releases of products which are subject to continual change in the short-term, management believes that its backlog is not a relevant indicator of the level of its present or future sales. Sales of the Company's parts, tooling and services are not considered seasonal. METAL PARTS FORMING SEGMENT GENERAL The Metal Parts Forming Segment is comprised of Uniflow, a QS 9000 certified company, which primarily manufactures automotive and truck parts from steel bar, coil and tubing using cold forging and forming machines and various types of secondary machining, such as CNC lathes, threadrolling and piercing equipment. During 1998, the Company restructured Uniflow's operations. Major steps undertaken in the restructuring effort included discontinuing certain product lines, the emphasis of Uniflow's traditional cold forging business, the consolidation of its operations from three facilities to two, and the sale of its FX 1250 cold former. SALES AND COMPETITION Uniflow's fiscal 1998 sales were comprised as follows: 22% wheel studs for heavy and light duty trucks (original equipment manufacturers or "OEM" and service part manufacturers or "aftermarket"); 35% transmission gear housings and component shaft parts; 29% automobile ball joint suspension housings (OEM and aftermarket); and 14% miscellaneous cold headed and cold forged parts (OEM). Competition within the cold forging and forming business varies with each product line and customer volume requirements. Generally, Uniflow specializes in smaller volumes, although it supplies higher volume OEM part requirements as well. Competitors are numerous in each segment and includes subsidiaries of large corporations as well as smaller independent entities. Uniflow's sales are concentrated with a few customers, as five customers comprised 78% of revenue for the fiscal year ended September 30, 1998. If Uniflow were to lose a significant customer, management believes that it could replace that business within an estimated timeframe of 6 to 18 months, although its gross profit margin could be adversely affected. Uniflow's sales backlog usually covers a period of approximately three months of work; actual sales vary with final release instructions from customers. Uniflow sells principally to customers in the United States. MANUFACTURING AND ENGINEERING Uniflow manufactures parts from steel bar, coil and tubing using cut-off machines, cold forging hydraulic presses, cold heading machines, CNC turning centers, threadrollers, broaching -6- and piercing machines. Although part production can involve up to 14 different production steps, primary equipment consists of cold forging presses and cold forming (header) machines, which form the parts into their general size and shape. After parts are forged or formed, they are routed to various secondary machining operations for finishing, such as CNC turning, threadrolling, piercing and drilling. External steps completed by outside processors typically include specialized machining, heat-treating, annealing and plating. Production order turnaround time can vary from 4 to 16 weeks, depending on engineering requirements, lead times from outside vendors and the production backlog. Uniflow's tooling department makes and repairs some of the perishable tooling used in production, while the Company's Tooling Segment also supplies Uniflow with some of its production tooling. The engineering staff offers tool design and production development services to customers for new or modified parts as well as continuing support for production operations. EMPLOYEES As of September 30, 1998, Uniflow employed a total of 145 full-time employees compared to 189 in the prior year, as follows: 126 direct and indirect labor (including factory floor supervision), 6 engineering, 1 sales, 6 office and 6 management. Approximately 120 employees are subject to a collective bargaining agreement that expires in April 2000. TOOLING SEGMENT GENERAL The Company's Tooling Segment ("Tooling Operations" or "Tooling Units") is comprised of Form Flow, L&H and Micanol. In July 1998, the Company significantly reduced the size of Micanol by selling certain equipment and transferring the remaining assets and business to L&H. In 1995, the Company sold most of the assets and operations of its Triple tooling subsidiary, while Form Flow absorbed its remaining operating assets, principally its electro-diode machining capability. The Tooling Operations manufacture close tolerance tooling for the hot and cold metal forming industry. Hot and cold metal forming companies typically make metal parts from steel coil that is automatically fed through various stations on a "header forming" machine. A header machine cuts steel coil and moves it through each die station progressively, using tool inserts to form the part. Tool life is dependent on the type of material used to make the part and the size and shape of the part, among other things. As part of its sales and service, the Tooling Operations design and development staff will advise customers about tooling issues and other engineering matters related to the production of hot and cold formed parts. Tool orders (without design services) typically can take 4 to 10 weeks to complete, while design and development orders can span over a period of months. -7- SALES AND COMPETITION The Tooling Unit's customers are numerous and cover a wide variety of industries, although the six largest customers comprised 49% of revenues for the fiscal year ended September 30, 1998. If a significant customer was lost, management believes that it could be replaced within an estimated timeframe of 6 to 18 months, although its gross profit margin could be adversely affected. The Tooling Operation's customers manufacture items such as industrial fasteners, hand tools, automotive parts, tubing, consumer items, munitions and a wide array of OEM assembly parts. The Tooling Unit's customers include OEM and aftermarket suppliers and are predominantly related to the automotive industry. Continuing customer relations are important, as significant revenue is derived from tooling reorders. The Tooling Operations operate in fragmented markets with numerous competitors. Generally, independent competitors are smaller companies ranging in size from 10 employees to up to 100 employees. The Tooling Units also compete with its customers internal tooling capabilities, as customers typically have their own tool facilities to support production. Management believes consistent success is dependent principally on tool quality and durability, on-time delivery and price competitiveness. The Tooling Unit's design and engineering services allow it to compete for tool development work; management believes these services provide the Company a significant advantage in attracting new customer business. The Tooling Units sell principally to customers in the United States. MANUFACTURING AND ENGINEERING All tooling orders are manufactured to customer specifications as indicated on tool drawings. Tools are made from bar stock steel or carbide blanks and generally are routed through a production sequence that includes cutting, turning (CNC/lathe work), heat treating, grinding, polishing and coating. Form Flow and L&H have separate plant facilities. Design and engineering services are located at a Form Flow facility, and are offered by all three of the Tooling Units. EMPLOYEES As of September 30, 1998, the Tooling Operations employed a total of 134 full-time employees compared to 155 in the prior year, as follows: 109 direct and indirect labor (including factory floor supervision), 4 engineering, 3 sales, 12 office and 6 management. DISCONTINUED OPERATIONS - PRODUCTION MACHINING SEGMENT The Company's Production Machining Segment was comprised of the its' wholly owned subsidiary, MMC Manufacturing Corp., f/k/a Milford Manufacturing Corporation ("Milford"), which was acquired in November 1996. Milford manufactured various aluminum brake components and a type of starter motor shaft for the automotive industry. In separate transactions occurring in March, July and October 1998, all of Milford's assets were sold due to its deteriorating operating results. (See Note 2 to the consolidated financial statements included elsewhere in this Form 10-K for a description of the disposition.) -8- ITEM 2. PROPERTIES The Company's mailing address is 46035 Grand River Avenue, Novi, Michigan 48374. The subsidiaries operate in the following facilities, all of which are owned by the Company: 1. Form Flow is located in two 12,600 square foot adjacent buildings on approximately four acres of land at 6901 and 6999 Cogswell in Romulus, Michigan 48174. Its telephone number is (734) 729-3100. 2. L&H and Micanol are located in a 17,400 square foot building on approximately two acres of land at 38200 Ecorse Road, Romulus, Michigan 48174 and its telephone number is (734) 722-8011. 3. Uniflow is located in three buildings on approximately six acres of land in Novi, Michigan 48374: (1) 12,400 square feet at 46001 Grand River Avenue, (2) 16,700 square feet at 46035 Grand River Avenue and (3) 32,000 square feet at 46039 Grand River Avenue. Its telephone number is (248) 348-9370. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising in the normal course of business. In the opinion of management (based on the opinion of counsel) the outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No items were submitted to a vote of the Company's stockholders during its fourth fiscal quarter. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock (trading symbol "SECM") traded on NASDAQ from June 1987 and on the NASDAQ National Market System (NMS) from January 1992. In November 1998, the Company's common stock was scheduled to be delisted from trading on NASDAQ as a result of the Company failing to meet certain minimum listing requirements. The Company has requested a hearing to appeal the proposed delisting action and the delisting action has been stayed pending the outcome of the Company's appeal. The appeal is scheduled to occur in January 1999. The following table sets forth (for the respective period indicated) the high and low trade for the -9- common stock as reported by NASDAQ. Trade prices do not include retail markups, markdowns or commissions. QUARTER ENDED HIGH TRADE LOW TRADE ------------- ---------- --------- 12/31/96 3.06 2.50 3/31/97 3.31 2.19 6/30/97 2.94 2.00 9/30/97 2.69 2.19 12/31/97 2.50 1.69 3/31/98 2.25 1.50 6/30/98 2.50 1.38 9/30/98 1.72 .31 On September 30, 1998 there were approximately 800 nominees/persons of record that held the Company's common stock. Of those listed of record, approximately 2.6 million shares were held by brokers and nominees representing an undetermined number of beneficial stockholders. Owners of common stock are entitled to receive dividends declared by the Board of Directors out of funds legally available therefor. The Company has never paid a cash dividend and does not anticipate paying cash dividends in the foreseeable future. Its policy is to retain earnings so it can provide funds for operations of its business. In addition, bank loan agreements prohibit the payment of cash dividends. ITEM 6. SELECTED FINANCIAL DATA. See page F-23 of the consolidated financial statements for selected financial data as of September 30, 1998, 1997, 1996, 1995, and 1994 and for the years then ended as required by this Item. This information should be read in conjunction with the consolidated financial statements and the footnotes thereto referred to in Item 14(a)(1) of this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in the Form 10-K. OVERVIEW This management's discussion and analysis of financial condition and results of operations includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below, that may cause results to differ -10- materially from historical results or those anticipated. In this report the words "expects", "anticipates", "believes", and similar expressions identify forward-looking statements, which speak only as to the date hereof. The Company's 1998 sales of $31.7 million were lower than 1997 sales of $35 million because of discontinued product lines at Uniflow and lower sales at the Tooling Group. The net loss from continuing operations was $6.1 million, or ($1.13) per share, compared to a loss from continuing operations in 1997 of ($47,000), or one cent per share. The increase in the loss was due primarily to increasing operating losses at Uniflow, which included certain restructuring charges. During 1998, management focused its efforts on curtailing the losses stemming from the Milford and Uniflow units. Management's plan was twofold: to discontinue Milford and restructure Uniflow's operations. Milford's primary operations were sold mid-year, while its starter-motor machining line was sold after the September 30, 1998 year-end. Uniflow's restructuring steps involved a series of major plant and equipment consolidation moves, which adversely affected productivity throughout the year. The Uniflow restructuring is still in process subsequent to the fiscal year end, with the primary focus on repricing parts to acceptable profit margin levels. Although the full impact of the parts repricing will not be known for a period of months, it appears that this effort has significantly narrowed Uniflow's operating losses based on operating results for October, November and December 1998. The Tooling Operations recorded lower operating income compared to the prior year due to a slowdown of orders and additional expenses associated with the consolidation of Micanol into L&H (see segment review below). The Company's cash flow from operations combined with cash generated from the sales of the Milford and Uniflow assets was sufficient to fund operations through the end of the fiscal year, including the timely payment of all scheduled debt obligations. Nevertheless, cash flow from operations was not sufficient to maintain compliance with certain bank covenants. The Company is working with its secured lenders closely and has continued to make all scheduled debt payments through December 1998. In November 1998, the Company entered into an amendment and extension agreement with its primary lender, which provides financing through February 1, 1999. Management believes that its cash flow outlook for 1999 has improved substantially with the culmination of certain events during and after fiscal 1998, as described above. Management believes it can extend current debt facilities with existing lenders or refinance with other lenders on a continuing basis. The Company believes that cash flow from operations and amounts available on its line of credit will be sufficient to fund continuing operations and debt service through fiscal 1999. While management is committed to continuing its efforts to improve operating results in the normal course of business over the long term, it nevertheless also retained the investment banking firm of Goldsmith, Agio, Helms Securities, Inc. in November 1998 to assist it in evaluating the prospects of selling all or a portion of the Company or its assets or effectuating a merger or partnership with another company. Although the Company will consider any meaningful offer on favorable terms in order to maximize shareholder value, the Company still considers continuing as an independent profitable entity as a viable alternative. -11- RESULTS OF OPERATIONS BY SEGMENT METAL PARTS FORMING SEGMENT Chart of three-year comparative operating results (in thousands):
1998 1997 1996 ---- ---- ---- AMOUNT % AMOUNT % AMOUNT % ------ --- ------ --- ------ --- Net Sales $17,186 100.0 $18,930 100.0 $14,748 100.0 Gross Profit (Differential) (2,613) (15.2) 331 1.8 1,197 8.1 Operating Expenses 3,765 21.9 1,726 9.1 1,898 12.9 Operating Loss 1/ (6,378) (37.1) (1,395) (7.4) (701) (4.8) - -------------------- 1/ Before interest, bad debt and corporate overhead expense.
The Metal Parts Forming Segment is comprised of the Company's Uniflow subsidiary. Uniflow currently manufactures suspension ball-joint housings, truck wheel fasteners, transmission shaft parts and a variety of OEM cold-formed and forged parts. Customers are primarily automotive and trucking-related original equipment manufacturers ("OEM") and service part manufacturers ("after-market"). In 1998 net sales decreased 9.2% from 1997 and increased 28.4% in 1997 from 1996. The sales decrease in 1998 from 1997 primarily reflects the discontinuation of various parts offerings, including airbag housings and various cold headed parts. Uniflow's existing business of suspension housings, transmission shafts, wheel studs and starter motor shafts increased 1.7% in 1998 over 1997 as significant increases in transmission shafts and starter motor shafts were offset by lower sales of wheel studs. Management is continuing to review all of its sales with the objective of retaining only profitable product lines. This review includes Uniflow's dedicated production effort for the manufacture of certain transmission shafts for an automotive OEM customer. Sales in 1998 for these parts totaled approximately $2.0 million. In 1996 and 1997 the Company invested over $3.0 million in new equipment for this project based on certain commitments made by the customer. Uniflow and the customer are currently negotiating a strategy to either continue with production of these parts at price levels mutually acceptable, or reach other terms for the Company to recoup its investment. Gross profit (differential) on sales was (15.2%) in 1998, 1.8% in 1997, and 8.1% in 1996. In 1998, the gross profit was adversely impacted largely due to a major restructuring effort. This endeavor required significant resources for the consolidation of production into two facilities from three, which resulted in higher labor and factory support costs during most of 1998. In addition, $900,000 of costs related to the restructuring plan were recorded in 1998, principally for discontinuing certain product lines and allowing for certain plant consolidation costs. Subsequent to year-end the Company negotiated significant price increases on suspension housings and wheel studs, which management believes will substantially improve Uniflow's gross profit. Operating expense as a percentage of sales was 21.9% in 1998, 9.1% in 1997, and 12.9% in 1996. The percentage increase in 1998 compared to 1997 was largely due to restructuring charges recorded mid year. Those charges totalling $3.1 million, primarily from the writedown of goodwill and machinery, were offset by the $758,000 gain realized from the sale of its FX 1250 cold former machine, for a net restructuring charge of $2.3 million. Without the restructuring charges, operating expense in 1998 decreased compared to 1997, due to lower personnel and professional expenses, while 1997 expense was lower than 1996 due primarily to lower personnel and sales related expense. In 1998, Uniflow's loss from operations was ($6.4) million, or (37.1%) of sales, compared to a loss of ($1.4) million, or (7.4%) of sales in 1997, while in 1996 the net loss was ($701,000), or (4.8%) of sales. The increase in loss in 1998 from 1997 is the result of the restructuring charges and related reductions in production efficiency realized during the plant consolidation period. The increase in loss in 1997 from 1996 was the result of increased factory costs associated with developing new jobs for production which contributed to lower production efficiency on Uniflow's traditional business. -12- TOOLING SEGMENT Chart of three-year comparable operating results (in thousands):
1998 1997 1996 ---- ---- ---- AMOUNT % AMOUNT % AMOUNT % ------ --- ------ --- ------ --- Net Sales 1/ $17,303 100.0 $18,474 100.0 $18,136 100.0 Gross Profit 3,789 21.9 4,879 26.4 4,317 23.8 Operating Expenses 2,366 13.7 2,292 12.4 2,224 12.3 Operating Profit 2/ 1,423 8.2 2,587 14.0 2.093 11.5 - -------------------- 1/ Before elimination of intercompany sales. 2/ Before interest, bad debt and corporate overhead expense.
The Tooling Segment is comprised of the Form Flow, L&H and Micanol units. The Tooling operations manufacture and sell customized tools and dies for use in the production of hot and cold-formed metal parts. Net sales decreased in 1998 by 6.3% compared to 1997, while increasing by 1.9% in 1997 over 1996. The sales decrease in 1998 was primarily the result of lower sales from the Micanol unit, which recorded lower sales orders from a few of its larger accounts. Form Flow also recorded lower sales, while L&H's sales were flat. Gross profit on sales was 21.9% in 1998; 26.4% in 1997, and 23.8% in 1996. The 1998 gross profit percentage decreased principally because of the lower sales volume and the consolidation expenses and lower production efficiencies resulting from moving Micanol's operation to the L&H facility. The improvement in 1997's gross profit over 1996 was principally due to management's focus on controlling shop floor labor and related support expense. Operating expense (as a percentage of sales) has remained steady for the periods shown, and was 13.7% in 1998, 12.4% in 1997, and 12.3% in 1996. The Tooling Segment's operating profit was $1.4 million in 1998, or 8.2% of sales, $2.6 million, or 14.0% of sales in 1997, and $2.1 million, or 11.5% of sales in 1996. The decrease in 1998 operating profit primarily results from the lower sales volume, along with the Micanol consolidation expense. The increase in operating profit in 1997 over 1996 primarily reflects the improved gross profit on sales. -13- DISCONTINUED OPERATIONS - PRODUCTION MACHINING SEGMENT During the Second Quarter of fiscal 1998 the Company decided to discontinue its Milford operation due to ongoing adverse operating results. In 1998 this segment recorded an operating loss of $891,000, prior to the decision to discontinue, compared to operating income of $356,000 in 1997. The decline in operating results in 1998 from 1997 was attributable primarily to lower product pricing, dictated by Milford's primary customer, and lower production efficiencies caused largely by new manufacturing projects that strained existing resources. In 1998, the Company recognized a $1 million disposal gain on the sale of Milford's assets and business in transactions involving Milford's two primary customers. CORPORATE EXPENSES Unallocated corporate overhead was $1.6 million in 1998, compared to $913,000 in 1997, and $712,000 in 1996. The increase in 1998 primarily reflects expense associated with the Company's newly operational computer information systems, higher personnel costs and higher professional fees associated with the disposal of various operating assets. The increase in 1997 expense reflects additional administrative and personnel expense, primarily related to the establishment of new corporate wide computer systems, higher amortization related to the debt financing completed mid-1996 and higher professional fee expense. INTEREST EXPENSE AND INCOME TAXES Interest expense was $954,000 in 1998, $1.1 million in 1997, and $848,000 in 1996. The decrease in interest expense in 1998 compared to 1997 resulted from a reduction of secured debt related to various asset sales for cash. In 1997, interest was higher than 1996 principally due to higher term debt to finance equipment purchases and higher line of credit borrowings used for working capital. Income tax benefit (expense) was $544,000 in 1998, ($29,000) in 1997, and ($18,000) in 1996. The higher income tax benefit reflects the substantial net loss. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital position was a negative $3.6 million at September 30, 1998, a positive $5.7 million at September 30, 1997 and $4.9 million at September 30, 1996. The negative working capital position largely resulted from the classification of long-term obligations to current, as the Company was in default of certain bank covenants as of September 30, 1998. Management believes that it will be able to refinance this debt on a continuing basis in the coming months. The increase in working capital in 1997 compared to 1996 was attributable to the addition of the -14- Milford operation, while in 1996 working capital increased from 1995 primarily from a major refinancing of long-term debt. Management believes that internally generated cash from operations and amounts available on the bank line of credit will be sufficient to cover scheduled debt payments during fiscal 1999 as well as fund continuing working capital requirements. The Company expects to improve its liquidity and reduce outstanding debt by selling noncore assets. These items total $1.4 million and are classified as "Property, plant and equipment held for sale" on the balance sheet. Cash flows for 1998, 1997 and 1996 are summarized as follows:
1998 1997 1996 ---- ---- ---- Cash flows from continuing operating activities $2,058,000 $1,173,000 $1,679,000 Cash flows from (used in) continuing investing activities 1,508,000 (3,025,000) (4,918,000) Cash flows from (used in) continuing financing activities (4,891,000) 4,327,000 7,475,000
CASH FLOWS FROM OPERATING ACTIVITIES In 1998, of the $3.1 million in cash flow from operating activities, working capital items and discontinued operations provided $2.9 million. Working capital items provided $1.8 million, as accounts receivable collections increased, while inventories were lowered due to better inventory management. Discontinued operations provided $1.1 million derived from the sale of the Milford assets. In 1998, cash flow from operations before working capital items and discontinued operations was $200,000 compared to $2.6 million in 1997. This decline is attributable to the decline in operating income from the Metal Parts Forming and Tooling Segments. In 1997, of the $1.4 million in cash flow from operating activities, working capital items and discontinued operations used $1.2 million. Working capital items used $1.4 million, primarily related to higher receivables inventories because of the increasing sales, partially offset by $200,000 provided by discontinued operations. In 1997, cash flow from operations before working capital items and discontinued operations was $2.6 million compared to $2.1 million in 1996. In 1996, of the $1.8 million in cash flow from operating activities, working capital items and discontinued operations used $200,000. Working capital items used $400,000, partially offset by $200,000 provided by discontinued operations. CASH FLOWS USED IN INVESTING ACTIVITIES In 1998, capital expenditures were $1.2 million. These expenditures primarily relate to the expansion of the L&H building and costs associated with the new corporate wide computer system. In 1997, capital expenditures totaled $3.1 million, primarily related to equipment additions for production in all segments and the installation of the new computer system. In 1996, capital expenditures totaled $5.5 million primarily for the manufacture of additional transmission component parts for sale to an automotive customer. The Company received $2.7 million in 1998, $42,000 in 1997, and $301,000 in 1996 from -15- the disposals of machinery and equipment. Disposals in 1998 reflect the sale of Uniflow's FX 1250 cold former machine while disposals in 1997 were negligible. The 1996 disposals reflect the sale of various Tooling Segment machines no longer used in its core business. Net cash used in discontinued operations was $207,000 in 1998, consisting of capital expenditures for new programs, offset by cash proceeds from the sale of assets. In 1997, discontinued operations used $7.2 million, primarily for the starter motor machining line and the acquisition of Milford. CASH FLOWS FROM FINANCING ACTIVITIES Cash flows provided by (used in) financing activities were ($5.2) million in 1998, $5.3 million in 1997, and $7.5 million in 1996. In 1998, the Company sold significant operating assets, including its Milford operations and Uniflow's FX 1250 cold former, allowing for the significant reduction in debt levels. In 1997, the $4.8 million increase in the bank line of credit provided funding for the Milford operation and acquisition, equipment deposits and general working capital purposes. Proceeds from term debt financing in 1997 were $1.1 million, which was principally utilized to finance computers in all business segments and machinery at Uniflow. Also in 1997, discontinued operations provided $900,000 from the financing of a manufacturing facility reduced by payments on long-term obligations. In 1996, the Company completed a major debt refinancing of its existing assets resulting in $7.9 million in proceeds offset by $5.5 million in principal payoffs. In addition, the Company received $7 million in industrial revenue bond financing to acquire machinery and equipment for two customer projects. Also in 1996, the Company received $1.9 million through the exercise of stock warrants in exchange for one million shares of common stock. Principal payments were $2.8 million in 1998, which included a $1.3 million one-time payment resulting from the sale of Uniflow's FX 1250, $1.5 million in 1997 and $1.3 million in 1996. YEAR 2000 DATE CONVERSION The Company has engaged a consultant who has reviewed all of the Company's software and hardware to determine whether such systems are capable of processing information pertaining to the year 2000. The initiative utilizes both Company resources and external resources to identify systems and applications affected, to correct existing systems or to acquire replacement systems, and to test the systems and applications for compliance with the requirements for processing year 2000 information. In addition, the Company is seeking certification of Year 2000 compliance from its' significant third party vendors. The Company is in the process of determining the total cost associated with the required modifications and conversions but does not believe such costs will be material. IMPACT FROM INFLATION Management does not believe that inflation had a significant impact on the Company's operations during the prior three years ended September 30, 1998. -16- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14(a)(1) for a list of the financial statements included in this Form 10-K. Refer to page F-22 of the consolidated financial statements of this Form 10-K for the supplementary quarterly financial data required by this Item. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In November 1998 the Company filed an 8-K stating that it has changed its auditors to Rehman Robson PC from Deloitte & Touche LLP. There have been no disagreements with either firm. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following is a listing of the members of the Board of Directors of the Company and includes information regarding the individual's age, principal occupation, other business experience, directorships in other publicly-held companies and term of service with the Company. Directors are elected at each Annual Meeting of Stockholders or until his successor is elected and qualified. Information regarding executive officers is included under "Item 1. Business" pursuant to General Instruction G. NAME AND AGE POSITION AND PRINCIPAL OCCUPATION - ------------ --------------------------------- Robert A. Clemente, 45 Director of the Company since December 1993 and Chairman since December 1994. Mr. Clemente is an attorney and certified public accountant and, since January 1997, Of Counsel to the firm of Munro & Munro, PC, Troy, Michigan where Mr. Clemente practices law, specializing in corporate, commercial and tax law. From December 1993 through May 1998, Mr. Clemente was President and Chief Executive Officer of the Company and from December 1993 to December 1996, Mr. Clemente was Of Counsel to the law firm of Hardy, Lewis and Page, PC, Birmingham, Michigan, Gregory Adamczyk, 44 Director of the Company since December 1993. President and owner of Future Planning Corp. since December 1980, Mr. Adamczyk is also Chairman, Director and founder of Forward Planning Corp. Both Future Planning Corp. and Forward Planning Corp. are based in Livonia and specialize in manufacturing and engineering, primarily for automotive factories. Rocco Pollifrone, 42 Director of the Company since December 1993. Mr. Pollifrone is President and Chief Executive Officer of Forward Planning Corp. and has been employed there or with affiliated companies for over 20 years in various management positions. -17- Richard Thompson, 29 Director of the Company since December 1993. Mr. Thompson has been the President of MST Steel Corp. since 1998 and was Vice President of MST Steel Corporation since 1991. MST Steel Corp. is a steel service center that warehouses, processes and sells flat-rolled steel, primarily for the automotive industry. Martin J. Eidemiller, 41 Director of the Company since June 1998. Mr. Eidemiller has been a member of the Company's Operating Committee since June 1998 and a Vice President of the Company since 1994. Mr. Eidemiller has been engaged in various management positions with the Company for over ten (10) years. Orville (Ken) Thompson, a director of the Company since 1993, died November 28, 1998 at the age of 50. Mr. Thompson had been the President and owner of MST Steel Corp., based in Warren, Michigan, for over fifteen (15) years. Richard Thompson, Director, is the son of Orville (Ken) Thompson. Robert Clemente, Director and Chairman of the Board, is the brother of Paul Clemente, who is a Vice President and a member of the Company's Operating Committee. There are no other family relationships among the Directors and Officers listed above. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY OF COMPENSATION The following summary compensation table sets forth information concerning cash and non-cash compensation for services in all capacities awarded to, earned by or paid during the last three (3) fiscal years to the Company's Chief Executive Officer and officers whose cash compensation exceeded One Hundred Thousand ($100,000) Dollars in any such fiscal year. -18-
Summary Compensation Table Long-Term Compensation Awards ------------ Annual Compensation Other Securities Name and Principal Position ------------------------- Annual Underlying All Other Compensation Year Salary Bonus Compensation Bonus Options (#) - --------------------------- ---- ------ ----- ------------ ------------ ----------- Robert A. Clemente Chairman of the Board 1998 $150,000 __ __ __ __ 1997 150,000 __ __ __ __ 1996 150,000 __ __ __ __ Martin J. Eidemiller Vice President 1998 $117,500 $25,000 $15,000(1) __ __ and Member of the 1997 110,000 20,000 __ __ __ Operating Committee 1996 107,501 30,000 __ __ __ Terry Hamilton President - Metal 1998 $100,000 __ __ __ __ Parts Forming Group and Member of the Operating Committee - ------ (1) Paid in consideration of Mr. Eidemiller executing a noncompetition agreement with the Company.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUED The following table provides information on option exercises in fiscal 1998 by the Named Executive Officers and the value of such officers' unexercised options at September 30, 1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN THE MONEY OPTIONS OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR END($) ----------------------------- --------------------- Shares Acquired Value Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- ----------- ------------- Robert A. Clemente __ __ 90,000 135,000 __ __ Martin J. Eidemiller __ __ 20,000 30,000 __ __ Terry Hamilton __ __ __ __ __ __
COMPENSATION PURSUANT TO STOCK OPTIONS During fiscal 1998, no options were awarded to any of the Company's Named Executive Officers. As of January 5, 1999, 175,000 options were outstanding to the Company's Named Executive Officers. 1991 NON-QUALIFIED STOCK OPTION PLAN On August 1, 1991, Secom's Board adopted a non-qualified stock option plan (the "1991 Plan"). The 1991 Plan authorizes the Board to grant stock options for a maximum total of 400,000 shares of Common Stock to those employees of Secom and its subsidiaries, including officers and directors, who have performed well in their capacities and who have potential for assuming higher levels of responsibility with Secom. The 1991 Plan is administered by the Board, which determines the persons who are to receive options and the terms of the options granted under the -19- 1991 Plan. The option price of all options granted under the 1991 Plan shall not be less than the fair market value of the Common Stock at the date of grant. Under the 1991 Plan, options may be granted only during the recipient's employment, and must be exercised within a period fixed by the Board, which may not exceed ten (10) years from the date of grant unless earlier terminated as a result of the termination of the recipient's employment. However, if the recipient's employment is terminated as a result of death, total and permanent disability, retirement after age 65 or other reasons approved by the Board, those options may be exercised for specified periods up to twelve (12) months after that termination. Options granted under the 1991 Plan may not be transferred except by reason of death. The 1991 Plan provides that the Board may establish a vesting schedule with respect to any options granted under the 1991 Plan which would limit the exercisability of those options and/or the sale or transfer of any shares purchased upon exercise of those options. As of January 5, 1999, stock options for 239,000 shares were outstanding to employees, including certain officers, pursuant to the 1991 Plan. During fiscal 1998, options to purchase shares of Common Stock were not awarded to any of the Company's Named Executive Officers. COMPENSATION OF DIRECTORS The Directors of the Company do not receive compensation for attending Board Meetings or for being Board Members. During fiscal 1998, the Board of Directors authorized payment of $24,600 to Gregory Adamczyk, a Director of the Company, in consideration of services he perfored in completing certain special projects. These fees were not paid as of September 30, 1998. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee (the "Committee") was established as a standing committee of the Board in August 1992. Its purpose is to annually fix the salaries of the Chief Executive Officer and other Executive Officers of the Company, determine periodic bonuses and stock options for such executives, and administers other programs that would provide compensation to such executives. Rocco Pollifrone and Gregory Adamczyk were appointed to the Compensation Committee in March 1998. GENERAL It is the philosophy of the Committee to ensure that executive compensation is directly linked to continuous improvement in the Company's financial performance and stockholder value. The following objectives represent the underlying principles which support all compensation decisions: * Allow the Company to attract and retain quality professional talent among its executive officer group by establishing executive compensation that is competitive within its industry peer group. * Integrate compensation practices that promote the successful execution of the Company's long-term plans and goals. * Encourage Company stock ownership by its executive officers and enhance stockholder value through periodic stock option awards or other stock-based compensation arrangements. -20- Executive compensation is reviewed on an annual basis by the Committee in conjunction with an analysis of each individual's performance. In addition, corporate performance is evaluated in a manner to ensure that compensation levels support the continued focus on increasing profitability and stockholder value. Conversely, in periods when corporate performance goals are not achieved, the Committee may decrease the level of overall individual compensation. The Committee also reviews independent compensation survey information from national and regional organizations that report compensation practices and salary levels for various executive positions at comparably sized companies that operate in similar lines of businesses of the Company. SALARIES AND BONUSES The Committee's policy is to determine salaries and to award discretionary bonuses to key employees each year based on their individual performance and the overall performance of the Company during the immediately preceding year. The Committee's review of individual performance of an executive is largely a subjective test; the Committee considers the potential of the individual executive and the executive's performance in his or her position. In addition, the Committee consults with financial and other professionals who have experience with respect to the compensation levels of various executives at comparably sized companies that operate in similar lines of business as the Company. These professionals also utilize relevant independent compensation surveys for executive positions at comparably sized companies. Salaries for the Company's executives generally fall near the mean of salaries for similarly-situated companies. The Compensation Committee generally uses different criteria in determining each of the three components of an executive's compensation; base salary, options and bonuses. To determine the base salary, the Compensation Committee reviews the executive's past performance and prospects for future performance and establishes a fair and equitable base salary. The Compensation Committee rewards long-term performance through the granting of stock options. The Committee believes that the issuance of stock options provides an incentive to executives to increase the overall long-term financial performance of the Company. Cash bonuses are used to reward the short-term accomplishments of specific executives for favorable performance of the business units under their management. In granting bonuses, the Compensation Committee reviews recommendations from management, the executive's current base salary and the overall financial condition of the Company. STOCK OPTIONS The Committee utilizes the 1991 Plan as a long term stock incentive plan to compensate executives based on the Company's long term growth. Since the option price on options granted under the 1991 Plan can not be less than the fair market value on the date of the grant, the Committee believes that this provides the Company's executives with the incentive to increase the Company's earnings and increase stockholder value. -21- FISCAL 1998 COMPENSATION CONCERNING CHIEF EXECUTIVE OFFICER In May 1998, Mr. Clemente relinquished his position as Chief Executive Officer and the Board appointed an Operating Committee comprised of Martin Eidemiller, Terry Hamilton and Paul Clemente to fulfill the role of CEO. As CEO through May 1988, Mr. Clemente's base salary remained at $150,000 and he was not paid a bonus or paid any other compensation as CEO during fiscal 1998. The Compensation Committee concluded that Mr. Clemente's salary represented a low base salary for similar industry positions and, therefore did not make any changes to it. Given the Company's performance Messrs. Eidemiller and Hamilton remained at their current compensation level after becoming members of the Operating Committee while Paul Clemente's compensation was increased to an annual rate of $100,000 in recognition of his increased responsibilities as a member of the Operating Committee. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Both members of the Compensation Committee are Directors. There were no interlocks of executive officers or Board Members of the Compensation or equivalent Committee of another entity, which has any executive officers serving on the Compensation Committee of the Company. No executive officer of the Company serves as a director of another entity, one of whose executive officers served on the Compensation Committee of the Company. No executive officer of the Company served as a member of the Compensation Committee of another entity, one of whose executive officers served as a director of the Company. See also "Item 13 - Certain Relationships and Related Transactions" herein. COMPANY PERFORMANCE The following graph depicts a five (5) year comparison of cumulative total returns, assuming $100 was invested on September 30, 1993 in (a) Secom's Common Stock; (b) the NASDAQ Stock Market -- U.S. (as a broad equity market index) and (c) the NASDAQ non-financial index (as a peer group index utilizing a published industry index).
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG SECOM GENERAL CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE NASDAQ NON-FINANCIAL INDEX [ Performance Graph ] Cumulative Total Return ------------------------------------------------------------ 9/93 9/94 9/95 9/96 9/97 9/98 ---- ---- ---- ---- ---- ---- SECOM GENERAL CORPORATION 100.00 96.00 100.00 88.00 75.00 13.00 NASDAQ STOCK MARKET (U.S.) 100.00 100.83 139.28 165.24 226.81 231.84 NASDAQ NON-FINANCIAL 100.00 99.44 138.60 161.82 217.34 220.01 * $100 INVESTED ON 9/30/93 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING SEPTEMBER 30.
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 12. SECURITY PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to those persons who are -22- known by management of the Company to have been a beneficial owner of more than five (5%) percent of the Company's outstanding Common stock as of the January 5, 1999.
NAME AND ADDRESS AMOUNT AND NATURE OF OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OWNED 1/ - ------------------- -------------------- ---------------- Manubusiness Opportunities, Inc. c/o 24417 Groesbeck Highway Warren, Michigan 48089............... 1,630,428 1/ 30.56% Secom General Corporation 401(k) Plan 46035 Grand River Avenue Novi, Michigan 48374................. 507,589 2/ 9.51% John Cocke 46657 Arboretum Plymouth, Michigan 48170 ............. 410,730 7.70% - ------------------------- 1/ Three Stockholders of Manubusiness Opportunities, Inc. ("MOI"), Gregory Adamczyk, Rocco Pollifrone and Richard Thompson, are Directors of Secom. 2/ Participants of the Company's 401(k) Plan can vote their pro rata portion of the shares owned by the Plan. Shares not voted by participants may be voted by the Plan's trustee, Scott Konieczny. Shares owned by the 401(k) Plan for the account of persons who are not officers or directors are not included in the shares as shown beneficially owned by all directors and officers as a group. Of the shares owned by the Company's 401(k) Plan, approximately 38,852 are owned for the account of officers and directors and are treated as being owned directly. See "Security Ownership of Management."
SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth information with respect to the beneficial ownership of shares of the Company's Common stock by the present Directors and Named Executive Officers of the Company.
NUMBER OF SHARES BENEFICIALLY NAME OWNED AS OF JANUARY , 1999 1/ PERCENT OWNED 2/ - ---- ------------------------------ ---------------- Robert A. Clemente.......... 185,078 3/4/ 3.41% Gregory Adamczyk............ 321,194 3/5/ 6.02% Rocco Pollifrone............ 114,130 3/6/ 2.14% Richard Thompson............ 532,798 3/7/ 9.99% Martin J. Eidemiller........ 47,561 3/8/ * Terry Hamilton.............. 449 * Current Directors and Officersas a Group (totaling 6)................ 1,201,210 9/ 22.06% -23- - ------------- * Less than 1% of the outstanding shares. 1/ To the best of the Company's knowledge based on information reported by the Directors or executive officers or contained in the Company's shareholder records. Each of the named persons is presumed to have sole voting and sole investment power with respect to all shares shown, except as otherwise indicated by additional information included in the footnotes to this table. 2/ For the purposes of this table, shares indicated as being beneficially owned include shares for which the person has the direct or indirect: (i) voting power, which includes the power to vote or to direct the voting, and/or (ii) investment power, which includes the power to dispose or to direct the disposition, of the shares of Common Stock indicated. Unless otherwise indicated, the beneficial owner has sole investment and voting power. Shares indicated as being beneficially owned also include shares not presently outstanding but which are subject to exercise within 60 days through options, warrants, rights or conversion privileges. For the purpose of computing the percentage of the outstanding shares beneficially owned by a stockholder, any shares issuable to such persons under stock options exercisable within 60 days are deemed to be outstanding securities of the class owned by the stockholder but are not deemed to be outstanding for the purpose of computing the percentage owned by any other person. 3/ A director of the Company. The address for all directors is c/o Secom General Corporation, 46035 Grand River Avenue, Novi, Michigan 48374. 4/ Includes (a) 90,000 shares which Mr. Clemente has the right to acquire within 60 days pursuant to the exercise of stock options, and (b) 31,556 shares which represents 49% of the 64,400 shares beneficially owned by Career Opportunities, a partnership of which Mr. Clemente is a general partner. 5/ Represents 19.7% of the 1,630,428 shares that are beneficially owned by MOI, as Mr. Adamczyk owns 19.7% of the Common Stock of MOI. See "Principal Stockholders - Manubusiness Opportunities, Inc." 6/ Represents 7% of the 1,630,428 shares that are beneficially owned by MOI, as Mr. Pollifrone owns 7% of the Common Stock of MOI. See "Principal Stockholders - Manubusiness Opportunities, Inc." 7/ Includes (a) 500,052 shares which represents 30.67% of the 1,630,428 shares that are beneficially owned by MOI, as Mr. Thompson owns 30.67% of the Common Stock of MOI, and (b) 32.844 shares which represents 51% of the 64,400 shares beneficially owned by Career Opportunities, a partnership of which the Orville K. Thompson Living Trust (the "Trust") is a partner and Mr. Thompson is a beneficiary of the Trust. Does not include 16,588 shares of Common Stock which are owned by Mr. Thompson's sister under the Michigan Uniform Gifts to Minors Act. Although Mr. Thompson is the custodian pursuant to such gift, he does not exercise the power to vote such shares and disclaims beneficial ownership of such shares. See "Principal Stockholders - Manubusiness Opportunities, Inc." 8/ Includes 20,000 shares of Common Stock which Mr. Eidemiller has the right to acquire within 60 days pursuant to the exercise of stock options. 9/ Shares shown as beneficially owned by more than one Director or officer are included only once in the total.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since January 1997, Robert Clemente has served in an "Of Counsel" capacity to the law firm of Munro & Munro, PC. During fiscal 1998, Munro & Munro was retained by the Company for professional legal services required in the normal course of business. During fiscal 1998 the Company paid Munro & Munro $84,000 in legal fees and expenses. Mr. Clemente does not receive any portion of the fees paid by the Company to Munro & Munro. In addition during 1998, Mr. Clemente provided legal services to MST Steel Corp., which is owned by Director Richard -24- Thompson, and to Future Planning Corp., and Forward Planning Corp., whose principal owners and officers are Directors Gregory Adamczyk and Rocco Pollifrone. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: PAGE Financial Statements............................................... F Independent Auditors' Reports...................................... F-1 Consolidated Balance Sheets as of September 30, 1998 and 1997...... F-2 Consolidated Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996.................................. F-3 Notes to Consolidated Financial Statements......................... F-6 The information required to be submitted in Schedule II - Valuation and Qualifying Accounts is included in the consolidated financial statements and notes thereto. Schedules other than those listed above are omitted because of the absence of the conditions under which they are required. (b) Reports filed on Form 8-K. None. (c) Exhibits. See the Exhibit Index on the following page. -25- EXHIBIT INDEX EXHIBIT DESCRIPTION PAGE* - ------- ----------- ----- 2.1 Agreement dated March 18, 1998 between Milford Manufacturing Corporation and Kelsey-Hayes Company.................................. 2.1 *(1) 2.2 Agreement dated March 18, 1998 between Milford and PGK Acquisition Corp.................................................. 2.2 *(1) 2.3 Asset Purchase Agreement between Uniflow Corporation and Horizon Technology, LLC dated February 5, 1998................ 2.3 *(1) 3.1 Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on August 25, 1987............... 3.1 *(2) 3.2 Amendment to Articles of Incorporation filed on August 31, 1990.............................. 3.2 *(3) 3.3 Certificate of Merger between the Company and Secom General Corporation, a Utah corporation filed with the Secretary of State of Delaware in December 1987............................. 3.2 *(2) 3.4 Certificate of Designation of Rights of the Class A Preferred Stock filed with the Secretary of State of Delaware in December 1987............................. 3.3 *(2) 3.5 Amendment to Articles of Incorporation filed on December 17, 1991............................ 3.5 *(5) -26- EXHIBIT DESCRIPTION PAGE* - ------- ----------- ----- 3.6 Bylaws of the Company................................. 3.4 *(2) 4.1 List of instruments defining the right of security holders............................................... 4.1 *(7) 10.1 Amended and Restated Revolving Credit and Loan Agreement between Secom General Corporation, Uniflow Corporation, Micanol, Inc., L&H Die, Inc. and Form Flow, Inc.......................... 10.2 *(8) 10.2 Master Equipment Lease Agreement between Secom General Corporation and KeyCorp Leasing Ltd............................... 10.3 *(8) 10.3 Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing between Secom General Corporation and Metlife Capital Financial Corporation................................. 10.4 *(8) 10.4 Loan Agreement among GE Capital Public Finance, Inc. as Lender, and Michigan Strategic Fund, as Issuer and Secom General Corporation as Borrower dated June 1, 1996........................... 10.5 *(8) 10.5 Loan Agreement among GE Capital Public Finance, Inc. as Lender, and Michigan Strategic Fund, as Issuer, and Secom General Corporation, as Borrower dated as of Sept. 1, 1996.................................................. 10.6 *(8) 10.6 1991 Nonqualified Stock Option Plan.................................................. 10.27*(4) 10.7 Form of Stock Option Agreement for Options granted under the 1991 Non-qualified Stock Option Plan.................................................. 10.28*(4) 10.8 Subordination Agreement dated December 15, 1993 between Larry McKnight as junior lender and NBD Bank, N.A. as senior lender................................................ 10.17*(6) 10.9 Agreement and Extension Agreement Dated November 25, 1998 between NBD Bank, as Lender and Secom General Corporation as Borrower........................................... E-1 - ------------ * See the footnotes on page 28 to locate these Exhibits. -27- EXHIBIT DESCRIPTION PAGE* - ------- ----------- ----- 22. Subsidiaries of the Registrant............................................ E-41 23.1 Consent of Deloitte & Touche LLP................................................... E-42 23.2 Consent of Rehmann Robson, PC......................... E-43 27. Financial Data Schedule All exhibits that have page numbers followed by an * are incorporated by reference from the filings set forth below. The numbers set forth as page numbers for those exhibits are the exhibit numbers those documents were given in those other filings. All other exhibits are included in this Form 10-K at the page numbers shown. * (1) Incorporated by reference from the Company's Current Report on Form 8-K dated April 2, 1998. * (2) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1987. * (3) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1990. * (4) Incorporated by reference from the Company's Registration Statement on Form S-4 (File No. 33-40865) that was declared effective on November 20, 1991. * (5) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1991. * (6) Incorporated by reference from the Company's Current Report on Form 8-K dated December 15, 1993. * (7) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1993. * (8) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1996. -28- SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SECOM GENERAL CORPORATION By: /s/ Martin J. Eidemiller ------------------------------ Dated: January 13, 1999 Martin J. Eidemiller Its: Vice President ----------------------------- 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. SIGNATURE TITLE DATE - --------- ----- ---- Principal Executive Officer: /s/ Martin J. Eidemiller - ------------------------ Martin J. Eidemiller Vice President January 13, 1999 Principal Financial and Accounting Officer: /s/ Scott J. Konieczny - ------------------------ Scott J. Konieczny Secretary/Treasurer January 13, 1999 /s/ Richard Thompson - ------------------------ Richard Thompson Director January 13, 1999 /s/ Gregory Adamczyk - ------------------------ Gregory Adamczyk Director January 13, 1999 /s/ Rocco Pollifrone - ------------------------ Rocco Pollifrone Director January 13, 1999 /s/ Robert A. Clemente - ------------------------ Robert A. Clemente Director January 13, 1999 -29- SECOM GENERAL CORPORATION NOVI, MICHIGAN FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 F SECOM GENERAL CORPORATION TABLE OF CONTENTS - ------------------------------------------------------------------------ Page ---- Independent Auditors' Report F-1 Financial Statements for the Years Ended September 30, 1998, 1997 and 1996 Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Stockholders' Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 - F-21 Supplementary Information Selected Quarterly Financial Data (Unaudited) F-22 Selected Financial Data (Unaudited) F-23 INDEPENDENT AUDITORS' REPORT Stockholders and Board of Directors SECOM GENERAL CORPORATION Novi, Michigan We have audited the accompanying consolidated balance sheet of Secom General Corporation and subsidiaries as of September 30, 1998 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Secom General Corporation and subsidiaries as of September 30, 1998, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. Farmington Hills, Michigan January 11, 1999 F-1(a) INDEPENDENT AUDITORS' REPORT Stockholders and Board of Directors Secom General Corporation Novi, Michigan We have audited the accompanying consolidated balance sheet of Secom General Corporation and subsidiaries as of September 30, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Secom General Corporation and subsidiaries at September 30, 1997, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Deloitte & Touche LLP /s/ Deloitte & Touche LLP December 5, 1997 (January 11, 1999 as to Note 2) F-1(b)
SECOM GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------ ASSETS September 30, ----------------------------- 1998 1997 ---- ---- Current assets Cash $ 104,600 $ 346,800 Accounts receivable Trade 4,139,000 6,772,100 Other 163,500 222,200 Inventories 4,044,800 6,136,900 Prepaid expenses 286,500 465,900 Deferred tax assets 603,900 651,000 Property, plant and equipment held for sale 1,440,000 -- Machinery and equipment of discontinued subsidiary 4,200,000 -- ------------ ------------ Total current assets 14,982,300 14,594,900 Cash restricted for equipment -- 526,500 Property, plant and equipment, net 12,189,200 28,002,300 Intangible assets 146,700 1,857,800 Other assets 549,500 1,226,800 ------------ ------------ Total assets $ 27,867,700 $ 46,208,300 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY September 30, ----------------------------- 1998 1997 ---- ---- Current liabilities Current maturities of long-term debt $ 4,724,900 $ 3,435,500 Long-term debt classified as current 6,623,300 -- Accounts payable 2,925,800 3,678,700 Accrued wages and benefits 779,000 1,338,200 Accrued restructuring costs 416,000 -- Other accrued expenses 746,700 453,500 Debt secured by assets of discontinued subsidiary 2,349,800 -- ------------ ------------ Total current liabilities 18,565,500 8,905,900 Long-term debt obligations -- 17,710,600 Post retirement health care benefits -- 3,396,100 Pension and other liabilities -- 485,100 Deferred tax liabilities 960,100 1,411,000 ------------ ------------ Total liabilities 19,525,600 31,908,700 ------------ ------------ Commitments and contingencies (Note 10) Stockholders' equity Common stock, $.10 par value, authorized 10,000,000 shares; outstanding 5,335,400 shares; (5,340,400 shares in 1997) 533,500 534,000 Additional paid-in capital 18,400,800 18,412,400 Accumulated deficit (10,592,200) (4,646,800) ------------ ------------ Total stockholders' equity 8,342,100 14,299,600 ------------ ------------ Total liabilities and stockholders' equity $ 27,867,700 $ 46,208,300 ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
F-2
SECOM GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------ Year Ended September 30, --------------------------------------- 1998 1997 1996 ---- ---- ---- Net sales $31,725,500 $35,037,200 $30,877,100 Cost of sales: Production 28,946,700 29,234,900 25,064,900 Restructuring charges 900,000 -- -- ----------- ----------- ----------- Gross profit 1,878,800 5,802,300 5,812,200 Selling, general and administrative expenses 5,352,700 4,910,000 4,920,700 Other restructuring charges 2,312,000 -- -- ----------- ----------- ----------- (Loss) income from operations (5,785,900) 892,300 891,500 ----------- ----------- ----------- Other income (expense) Interest (953,700) (1,071,800) (847,600) Other, net 129,600 161,000 14,600 ----------- ----------- ----------- Other (expense) - net (824,100) (910,800) (833,000) ----------- ----------- ----------- (Loss) income from continuing operations before income taxes (6,610,000) (18,500) 58,500 Income tax benefit (expense) 543,900 (28,700) (17,900) ----------- ----------- ----------- (Loss) income from continuing operations (6,066,100) (47,200) 40,600 Discontinued operations (Loss) income from operations of discontinued subsidiary (890,600) 355,800 -- Gain on disposal of subsidiary, net of applicable income taxes of $248,700 1,011,300 -- -- ----------- ----------- ----------- Net (loss) income $(5,945,400) $ 308,600 $ 40,600 =========== =========== =========== (Loss) income per common share (basic and diluted): Continuing operations $ (1.13) $ (0.01) $ 0.01 Discontinued operations 0.02 0.07 -- ----------- ------------ ----------- Net (loss) income per common share $ (1.11) $ 0.06 $ 0.01 =========== ============ =========== The accompanying notes are an integral part of these consolidated financial statements.
F-3
SECOM GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------ Common Stock Additional ----------------------- Paid-In Accumulated Shares Amount Capital Deficit Total ------ ------- ---------- ----------- ----- Balance at October 1, 1995 4,276,200 $ 427,600 $ 16,478,900 $ (4,996,000) $ 11,910,500 Exercise of stock warrants 1,000,000 100,000 1,900,000 -- 2,000,000 Issuances to 401(k) plan (employer match and employee elections) 35,700 3,600 77,600 -- 81,200 Stock issued for note receivable 25,000 2,500 35,000 -- 37,500 Stock repurchases, net (14,300) (1,400) (32,500) -- (33,900) Stock issued for settlement of stock guarantees 19,600 1,900 (1,900) -- -- Net income -- -- -- 40,600 40,600 --------- --------- ------------ ------------ ------------ Balance at September 30, 1996 5,342,200 534,200 18,457,100 (4,955,400) 14,035,900 Stock repurchases, net (20,000) (2,000) (48,000) -- (50,000) Exercise of stock options 2,600 300 4,800 -- 5,100 Stock issued for settlement of stock guarantees 15,600 1,500 (1,500) -- -- Net income -- -- -- 308,600 308,600 --------- --------- ------------ ------------ ------------ Balance at September 30, 1997 5,340,400 534,000 18,412,400 (4,646,800) 14,299,600 Stock repurchases, net (5,000) (500) (11,600) -- (12,100) Net loss -- -- -- (5,945,400) (5,945,400) --------- --------- ------------ ------------ ------------ Balance at September 30, 1998 5,335,400 $ 533,500 $ 18,400,800 $(10,592,200) $ 8,342,100 ========= ========= ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-4
SECOM GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------ Year Ended September 30, ---------------------------------- 1998 1997 1996 ---- ---- ---- Cash from operating activities: Net (loss) income $ (5,945,400) $ 308,600 $ 40,600 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 2,692,700 2,234,900 1,983,900 Deferred income taxes (benefit) (403,800) (1,500) (214,700) Provision for doubtful accounts 104,500 62,000 51,400 (Gain) loss on sale of assets (23,900) (3,000) 115,800 Restructuring charges 3,788,500 -- -- Stock issuances to 401(k) plan -- -- 32,000 Write-off of intangibles -- -- 84,200 Changes in operating assets and liabilities which provided (used) cash: Trade and other receivables 1,288,100 (983,500) 388,600 Inventories 1,070,000 (454,000) (1,234,800) Prepaids 7,500 229,300 (36,000) Other assets (372,600) (215,600) (192,000) Trade accounts payable (65,000) (229,800) 842,000 Accrued liabilities (83,000) 226,100 (181,800) Net cash provided by discontinued operations 1,081,500 249,900 158,600 ------------ ------------ ------------ Net cash provided by operating activities 3,139,100 1,423,400 1,837,800 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from disposal of property, plant and equipment 2,655,800 42,400 301,000 Collections on notes receivable 101,800 22,100 259,800 Capital expenditures (1,249,100) (3,089,700) (5,479,100) Net cash used in discontinued operations (207,200) (7,188,900) -- ------------ ------------ ------------ Net cash provided by (used in) investing activities 1,301,300 (10,214,100) (4,918,300) ------------ ------------ ------------ Cash flows from financing activities: Net change in bank line of credit (2,442,600) 4,766,300 (3,603,600) Proceeds from long-term obligations 395,900 1,134,600 8,205,500 Proceeds from refinancing of long-term obligations -- -- 7,887,500 Proceeds from issuances of stock -- 5,100 1,918,800 Payments on long-term obligations due to refinancing -- -- (5,535,800) Retirements of common stock (12,100) (50,000) (33,900) Payments on long-term obligations (2,832,000) (1,529,400) (1,314,600) Payments on capital lease obligations -- -- (48,500) Net cash (used in) provided by discontinued operations (318,300) 928,800 -- ------------ ------------ ------------ Net cash (used in) provided by financing activities (5,209,100) 5,255,400 7,475,400 ------------ ------------ ------------ Net (decrease) increase in cash and restricted cash (768,700) (3,535,300) 4,394,900 Cash and restricted cash, beginning of year 873,300 4,408,600 13,700 ------------ ------------ ------------ Cash and restricted cash, end of year $ 104,600 $ 873,300 $ 4,408,600 ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
F-5 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The accompanying consolidated financial statements include the accounts of Secom General Corporation and its wholly-owned subsidiaries, Form Flow, Inc.; L&H Die, Inc.; Micanol, Inc.; Uniflow Corporation; and MMC Manufacturing Corp. f/k/a Milford Manufacturing Corporation ("Milford"). All significant intercompany accounts and transactions have been eliminated. Nature of Business Secom General Corporation (the "Company") is a publicly-traded holding company with five wholly-owned subsidiaries supplying the automotive, truck and construction markets. The Company currently operates in two business segments: tooling and metal parts forming. In March 1998 the Company discontinued its production machining segment (see Note 2). Restructuring and Realignment of Business During the year ended September 30, 1998, management significantly reduced the size of the Company's consolidated business in order to stem negative operating cash flows and reduce secured debt obligations. Those efforts culminated in the sale of various operating assets, including the discontinued Milford subsidiary and various machinery and equipment of Uniflow, as well as revised part pricing or product discontinuation on low margin sales and production. Management believes that these efforts have substantially reduced the operational circumstances which created the negative cash flows and significant operating losses. As this trend continues, management believes internally generated cash from operations and amounts available on the line of credit will be sufficient to cover scheduled debt payments as well as fund continuing working capital requirements, and restore normal banking relations including compliance with ongoing debt covenants. While management is committed to continuing its efforts to improve operating results in the normal course of business over the long term, it nevertheless has also engaged an investment banking firm in October 1998 to assist in the development of other strategic alternatives, such as the possible sale or merger of all or part of the Company's continuing business. As such, although the Company would consider any meaningful offer on favorable terms, continuing as an independent profitable going concern is considered a viable alternative to maximizing shareholder value. Significant Customer and Concentration Risks The Company has one customer which comprised approximately 19% of total revenues in 1998, one customer which comprised approximately 13% of total revenues in 1997, and one customer which comprised approximately 12% of total revenues in 1996. The loss of a significant customer could have an adverse impact on short-term operating results. F-6 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company grants trade credit to customers in the normal course of business and at September 30, 1998 has receivables of $2,359,400 from companies in the automotive industry. Ongoing credit evaluations of customers' financial condition are conducted and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's expectations. Use of Estimates The preparation of consolidated 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 consolidated financial statements and the reported amounts of income and expenses during the reporting period. Significant estimates include fair value of assets held for sale, realization of tax benefits associated with net operating losses and tax credit carryforwards, and impairment of property and goodwill assets. Inventory Valuation Inventories are stated at the lower of cost determined using the first-in, first-out method, or market. Revenue Recognition Revenues are recognized upon shipment of customer products. Property, Plant and Equipment Property, plant and equipment used in conducting the business are stated at cost. Major improvements and renewals are capitalized while ordinary maintenance and repairs are expensed. Management reviews these assets on an ongoing basis to determine whether carrying values have been impaired. Property, plant and equipment held for sale are reported at estimated fair value less estimated costs to sell. Depreciation Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from 2 to 30 years. F-7 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Intangible Assets Intangible assets consisting of goodwill (cost in excess of net assets acquired) is currently amortized on a straight-line basis over 5 years. Accumulated amortization was $508,600 and $799,000 as of September 30, 1998 and 1997, respectively. Management reviews the carrying value of goodwill on an ongoing basis to assess its recoverability. Income Taxes Deferred income tax assets and liabilities are computed annually for differences between the financial statement and federal income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred income taxes arise from temporary basis differences principally related to tax carryforwards, various accruals and allowances, certain assets acquired in business combinations and property, plant and equipment. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities. Earnings (Loss) Per Common Share Earnings (loss) per share is computed using the weighted average number of common shares outstanding during the year. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", effective October 1, 1997. This statement requires a dual presentation and reconciliation of "basic" and "diluted" per share amounts. Diluted reflects the potential dilution of all common stock equivalents. At September 30, 1998, 1997 and 1996 options to purchase 614,000, 576,700 and 696,700 shares, respectively, were excluded from the computation of earnings per share because the options' exercise prices were greater than the average market price of the common shares. A reconciliation of the denominators used in the basic and diluted share calculation for continuing operations follows for the years ended September 30:
1998 1997 1996 ---- ---- ---- Denominator: Weighted average shares outstanding, basic 5,335,400 5,350,000 4,782,300 Incremental shares from assumed conversion of options -- 111,300 92,300 --------- --------- --------- Weighted average shares outstanding, diluted 5,335,400 5,461,300 4,874,600 ========= ========= =========
F-8 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Values of Financial Instruments The carrying amount of accounts receivable and accounts payable approximate their fair values due to the short-term maturity of these financial instruments. The carrying amounts of long-term debt approximate their fair values because the interest rates are representative of, or change with, market rates. Recently Issued Financial Accounting Standards In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components, amending various prior SFAS. Management believes that the adoption of SFAS No. 130 in fiscal 1999 will not have a significant impact on results of operations or financial position. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", which establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires selected information in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers, superseding SFAS No. 14. Management believes that the adoption of SFAS No. 131 in fiscal 1999 will not have a significant impact on the disclosure of financial information. 2. DISCONTINUED OPERATIONS - PRODUCTION MACHINING SEGMENT Effective March 18, 1998, the Company sold all of its assets relating to Milford's machined brake valve parts business in transactions with Varity Kelsey-Hayes Corporation ("VKH") and PGK Acquisition Corp. ("PGK"). VKH was Milford's primary customer and Secom had acquired the assets and business of Milford from VKH effective November 1, 1996. Milford sold back to VKH, for $3 million in cash, the machinery, equipment and tooling used in connection with the manufacture of machined brake valve body parts along with its industrial facility. In addition to the cash portion of the purchase price, VKH also assumed any funding contributions required to be made to the Milford pension plan. PGK acquired other machined valve related assets in exchange for the assumption of approximately $1.2 million in accounts payable, other accruals of approximately $700,000, and the bargaining unit employee retiree health care obligation, recorded at $3.4 million. PGK now operates the Milford business and also assumed Milford's obligations under a supply agreement with VKH. In July 1998, the Company also received $450,000 for the sale of certain Milford equipment associated with the machining of various automotive seating components. F-9 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 2. DISCONTINUED OPERATIONS - PRODUCTION MACHINING SEGMENT (Continued) On October 27, 1998, the Company sold the remaining assets and business of Milford to Delco Remy America, Inc. ("DRA"), for the purchase price of $4.2 million dollars, receiving $2.7 million in cash and a $1.5 million promissory note. DRA purchased all of Milford's machinery, equipment and certain inventories that were used to produce machined starter motor shafts for DRA. The remaining inventory was sold to Horizon Technology Group, L.L.C. in a separate transaction. Accordingly, these assets are recorded at their net realizable values as of September 30, 1998. The disposal of Milford has been accounted for as a discontinued operation and, accordingly, the results of the Production Machining segment have been reported separately as discontinued operations in the accompanying consolidated statements of operations and cash flows, and its net assets have been segregated from continuing operations in the accompanying consolidated balance sheets. Summarized results of the Production Machining segment prior to the March 1998 disposal decision are as follows (in thousands):
Year Ended September 30, ------------------------ 1998 1997 ---- ----- Net sales $ 7,935 $ 12,718 Cost of sales 7,580 10,479 -------- -------- Gross profit 355 2,239 Operating expenses 985 1,287 Nonoperating expenses, net 364 398 -------- -------- (Loss) income before income taxes (994) 554 Income tax benefit (expense) 103 (198) -------- -------- Net (loss) income $ (891) $ 356 ======== ========
The gain on the disposal of the production machining segment is net of operating losses of $630,000 sustained in the months following the March 1998 disposal decision. F-10 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 2. DISCONTINUED OPERATIONS - PRODUCTION MACHINING SEGMENT (Continued) The net assets and liabilities of the discontinued production machining operations included in the accompanying consolidated balance sheets are as follows (in thousands):
September 30, --------------------- 1998 1997 ---- ---- Current assets Accounts receivable $ 658 $ 1,978 Inventory 41 512 Machinery and equipment to be sold 4,200 -- ------- ------- Total current assets 4,899 2,490 ------- ------- Current liabilities Debt 2,350 769 Accounts payable and accrued liabilities 549 1,732 ------- ------- Total current liabilities 2,899 2,501 ------- ------- Net current assets (liabilities) $ 2,000 $ (11) ======= ======= September 30, --------------------- 1998 1997 ---- ---- Noncurrent assets Restricted cash $ -- $ 526 Intangible and other assets -- 849 Property, plant and equipment -- 9,692 ------- ------- Total noncurrent assets -- 11,067 Noncurrent liabilities Notes payable -- 4,160 Post retirement benefits -- 3,881 ------- ------- Total noncurrent liabilities -- 8,041 ------- ------- Net noncurrent assets $ -- $ 3,026 ======= =======
F-11 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 3. RESTRUCTURING CHARGES - METAL PARTS FORMING SEGMENT The Company's Metal Parts Forming segment is comprised of the Uniflow subsidiary. During the second quarter ended March 31, 1998, the Company began implementing a restructuring plan at Uniflow. The plan includes emphasizing the cold forging business, while selling off much of its cold heading capacity and business. As a result, the Company recorded asset writedowns in connection with the restructuring during the year ended September 30, 1998. Those charges covered costs of discontinuing certain product lines, including related machinery writedowns, and costs associated with the consolidation of production into two facilities from three. Also, in conjunction with the restructuring, the Company recorded writedowns of goodwill and machinery and equipment consistent with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Major components of the Uniflow restructuring charges recorded during the year ended September 30, 1998 are summarized as follows (in thousands):
Amount ------- Discontinued product lines - inventories and related costs $ 680 Plant consolidation costs 220 ------ Cost of sales - restructuring costs $ 900 ====== Amount ------ Machinery and asset writedowns $1,450 Goodwill impairment 1,620 Less gain on sale of cold former machine (758) ------ Other restructuring costs $2,312 ======
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE The following is a summary of changes in the allowance for doubtful accounts receivable during each of the three years in the period ended September 30:
1998 1997 1996 ---- ---- ----- Balance, beginning of year $ 52,800 $ 21,000 $ 93,500 Add provision charged against income 104,500 62,000 51,400 Less uncollected accounts written off, net of recoveries (22,800) (30,200) (123,900) -------- -------- --------- Balance, end of year $134,500 $ 52,800 $ 21,000 ======== ======== =========
F-12 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 5. INVENTORIES Inventories at September 30 consist of the following components (in thousands):
1998 1997 ---- ---- Raw materials $ 562 $1,102 Work-in-process 1,366 2,772 Finished goods 2,117 2,263 ------ ------ Total $4,045 $6,137 ====== ======
The following is a summary of changes in the inventory valuation allowance during each of the three years in the period ended September 30:
1998 1997 1996 ---- ---- ---- Balance, beginning of year $ 232,500 $ 147,500 $ 76,000 Add provision charged against income 127,000 96,000 101,500 Less writeoffs (20,000) (11,000) (30,000) --------- --------- --------- Balance, end of year $ 339,500 $ 232,500 $ 147,500 ========= ========= =========
6. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment consists of the following assets at September 30 (in thousands) (see Note 3):
1998 1997 Life ---- ---- ---- Machinery and equipment $14,344 $26,678 2 to 20 years Building and improvements 4,705 6,581 3 to 30 years Land and improvements 448 897 -- Furniture and fixtures 1,716 1,735 3 to 7 years Vehicles 123 149 3 years Construction-in-progress and deposits -- 1,334 -- ------- ------- Total 21,336 37,374 Less accumulated depreciation 9,147 9,372 ------- ------- Net book value $12,189 $28,002 ======= =======
F-13 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 7. LONG-TERM DEBT Long-term debt consists of the following obligations at September 30 (in thousands):
1998 1997 ---- ---- Bank line of credit (a) $ 2,496 $ 4,939 Real estate mortgage notes (b) 3,267 3,446 Michigan Strategic Fund Limited Obligation Revenue Bonds (c) 4,352 5,891 Equipment term notes (d) 2,805 6,077 Other notes payable (e) 778 794 -------- -------- Total long-term debt 13,698 21,147 Less current maturities (4,725) (3,436) Less long-term obligations classified as current (6,623) -- Less debt secured by assets of discontinued subsidiary (2,350) -- -------- -------- Long-term debt reported $ -- $ 17,711 ======== ======== -------------- (a) In July 1996, the Company entered into an amended and restated revolving credit and loan agreement with a bank, which is for a three year period and permits borrowings of up to $4 million under a revolving credit note and up to $2 million under a line of credit note. During 1998, the Company violated certain debt covenants. As a result, in November 1998 the Company's primary lender required the Company to replace its current credit facilities with an amendment and extension agreement, which extends continuing credit, up to $3 million at prime plus 1%, through February 1, 1999. Prior to entering into the amendment and extension agreement the interest rate was at prime or the 30 day LIBOR rate plus 215 basis points. Borrowings on the bank line of credit are collateralized by accounts receivable and inventory, limited to stated advance rate percentages. Interest is payable monthly. The agreement prohibits the payment of cash dividends and requires the Company to maintain specific financial covenants including minimum total equity, current ratio and EBITDA. The Company is working with its secured lenders closely and has continued to make all scheduled debt payments through December 1998. Management believes it can extend current debt facilities with existing lenders or refinance with other lenders on a continuing basis. (b) During 1996, the Company refinanced its existing mortgage loans to obtain new mortgage loans requiring monthly installments of principal and interest. Interest on a $2.88 million mortgage note is 8.25% per annum and is collateralized by land and buildings with a net book value of $3,350,000, while interest on a $775,000 mortgage note is currently charged at prime plus 1% and is collateralized by land and building with a net book value of $1,400,000. These agreements mature in fiscal 1999 and 2011. F-14 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 7. LONG-TERM DEBT (Continued) (c) In June and September 1996, the Michigan Strategic Fund sold $3,000,000 and $4,000,000, respectively, of its Limited Obligation Revenue Bonds and the bondholders then loaned the proceeds to the Company for the purchase of equipment. The bonds require monthly interest and principal payments through September 1, 2002. The bonds bear interest at the rates of 6.15% and 5.99%, respectively, and are collateralized by equipment with a net book value of $6.9 million. In October 1998, the balance of $2,349,800 outstanding on the $4 million bond was paid with proceeds received from the sale of the remaining Milford assets. (d) During 1996, the Company entered into an equipment term note with a financial institution with interest payable at the 30 day LIBOR plus 215 basis points (approximately 7.53% at September 30, 1998). During 1997, the Company entered into an equipment term note agreement which provided for advances up to $1,500,000 through December 31, 1997. At September 30, 1998, $644,700 was outstanding and interest is currently payable at prime plus 1%. Both of these equipment term notes are collateralized by the related equipment which amounted to a net book value of $4.8 million at September 30, 1998. (e) Interest rates on other notes payable range from 4.9% to 12%. At September 30, 1998, the balance includes $627,000 in trade installment notes collateralized by certain property. Maturity dates range from 1999 to 2001. The prime rate at September 30, 1998 and 1997 was 8.25% and 8.5%, respectively.
Scheduled principal payments on long-term debt for the next five years are summarized as follows (in thousands):
Year Ended September 30, Amount ------------- ------ 1999 $ 7,075 2000 1,628 2001 1,883 2002 1,035 2003 171 Thereafter 1,906 ------- Total $13,698 =======
F-15 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 8. COMMON STOCK OPTIONS In 1991, the Board of Directors (the "Board") adopted a nonqualified common stock option plan (the "1991 Plan"). The 1991 Plan authorizes the Board to grant options to purchase a maximum of 400,000 shares of common stock to employees, at not less than the fair market value at the date of grant. The options vest at various dates as described in the related option agreement and expire up to 10 years from the date of grant. The Company accounts for stock option grants and awards under its stock-based compensation plan in accordance with APB Opinion No. 25. Accordingly, no compensation cost has been recognized for stock option grants since the options have exercise prices of not less than the market value of the Company's common stock at the date of grant. There were 25,000 stock options granted during 1998, 272,000 options granted during 1996, and none granted in 1997. For stock options granted during the years ended September 30, 1998 and 1996, if compensation cost had been determined based on the fair value at the date of grant consistent with the method prescribed by SFAS No. 123, the Company's net operating results and related per share amounts would have been adjusted to the pro forma amounts indicated below:
1998 1996 ----------------------- ----------------------- Net Net Income Net Net Income Income (Loss) Per Income (Loss) Per (Loss) Common Share (Loss) Common Share ------ ------------ ------ ------------ As reported $(5,945,400) $ (1.11) $ 40,600 $ 0.01 ----------- -------- --------- ------ Compensation costs for stock option grants, net of tax benefit (23,700) -- (300,300) (0.06) ----------- -------- --------- ------ Pro forma $(5,969,100) $ (1.11) $(259,700) $(0.05) =========== ======== ========= ======
Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants during those years:
Year Ended September 30, ------------------------ 1998 1996 ---- ---- Expected volatility 50.0% 38.0% Risk-free interest rate 5.5% 5.5% Expected lives (in years) 5 5
F-16 SECOM GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 8. COMMON STOCK OPTIONS (Continued) A summary of the status of stock option grants under the Company's 1991 Plan as of September 30, 1998, 1997 and 1996 and changes during the years ending on those dates is presented below:
1 9 9 8 1 9 9 7 1 9 9 6 ----------------------------- ------------------------------ ----------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- ------------ ------------ ------------ ------------ ----------- Outstanding at the beginning of the year 313,000 $ 2.19 376,000 $ 2.15 162,500 $ 2.68 Granted 25,000 1.75 -- -- 272,000 1.94 Exercised -- -- (2,600) 1.94 -- -- Terminated (99,000) 2.27 (60,400) 1.94 (58,500) 2.65 ------- ----------- ------- ----------- ------- ---------- Outstanding at the end of the year 239,000 2.12 313,000 2.19 376,000 $ 2.15 ======= =========== ======= =========== ======= ========== Options exercisable at end of the year 128,900 $ 2.30 112,200 $ 2.44 80,800 $ 2.49 ======= =========== ======= =========== ======= ========== Weighted average fair value of options granted during the year $ 0.95 $ 1.10 =========== ==========
The following table summarizes information about stock options outstanding under the Company's 1991 Plan at September 30, 1998:
Remaining Contractual Exercise Options Options Life Price Outstanding Exercisable (Years) -------- ----------- ----------- ----------- $ 1.75 25,000 2,500 4.7 1.94 146,000 58,400 2.5 2.63 68,000 68,000 0.3 ------- ------- 239,000 128,900 ======= =======
During the year ended September 30, 1996, 175,000 options exercisable at $1.94 were issued to an officer of the Company outside of the 1991 Plan. At September 30, 1998, 70,000 of these options were exercisable and the remaining options vest ratably over a five year period. These options expire 10 years from the date of grant. Additionally, 200,000 options excersizable at $2.63 issued to certain related parties outside of the 1991 Plan, expired unexcersized in November 1998. F-17 9. INCOME TAXES The provision for income taxes attributable to continuing operations consists of the following components for the years ended September 30:
1 9 9 8 1 9 9 7 1 9 9 6 -------------- ------------- -------------- Current benefit (expense) $ 140,100 $ (30,200) $ (232,600) Deferred benefit (expense) 1,451,200 (74,900) 214,700 Change in valuation allowance (1,047,400) 76,400 -- -------------- ------------- -------------- Income tax benefit (expense) $ 543,900 $ (28,700) $ (17,900) ============== ============= ==============
Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:
1 9 9 8 1 9 9 7 -------------- --------------- Deferred tax assets: Alternative minimum tax carryforwards $ 349,900 $ 325,900 Net operating loss carryforwards 628,800 -- Net operating loss carryforwards of acquired companies - subject to limitations 446,000 438,800 Allowances and accruals 618,900 278,600 Post-retirement and pension benefits -- 1,224,000 -------------- --------------- Total deferred tax assets 2,043,600 2,267,300 Less valuation allowance (1,439,700) (392,300) -------------- --------------- Net deferred tax assets 603,900 1,875,000 Current portion 603,900 651,000 -------------- --------------- Long-term portion $ -- $ 1,224,000 ============== =============== Deferred tax liabilities: Depreciation $ 372,500 $ 650,200 Book and tax basis differences from business combinations 574,800 1,926,500 Other amounts 12,800 58,300 -------------- --------------- Total deferred tax liabilities (all long-term) $ 960,100 $ 2,635,000 ============== ===============
During 1998 and 1997, certain tax benefits from net operating losses and temporary differences creating deferred tax assets have been reserved with a valuation allowance due to their uncertainty of realization. Remaining net operating loss carryforwards of approximately $3,161,000 as of September 30, 1998 are available for offset against future taxable earnings through the year 2013, subject to annual limitations as set forth in the Internal Revenue Code. F-18 9. INCOME TAXES (Continued) A reconciliation of the Company's statutory income tax provision computed on pre-tax results from continuing operations to the recorded income tax provision for the years ended September 30 are as follows:
1 9 9 8 1 9 9 7 1 9 9 6 ------------- ----------- ---------- Statutory income tax (provision) benefit $ 2,247,400 $ 6,300 $ (20,200) Change in valuation allowance (1,047,400) 76,400 -- Nondeductible goodwill amortization (582,000) (46,400) (26,300) Other (74,100) (65,000) 28,600 ------------- ----------- ---------- Income tax (expense) benefit $ 543,900 $ (28,700) $ (17,900) ============= =========== ==========
10. COMMITMENTS AND CONTINGENCIES Leases and Litigation The Company's annual expense and future obligations related to operating leases is not significant. Additionally, the Company is involved in certain legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of counsel, the outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. Trading of Common Stock In November 1998, the Company's common stock was scheduled to be delisted from trading on the National Association of Securities Dealers Automated Quotation System (NASDAQ) National Market System as a result of the Company failing to meet certain minimum listing requirements. The Company has requested a hearing to appeal the proposed delisting action and the delisting action has been stayed pending the outcome of the Company's appeal. The appeal is expected to occur sometime in 1999. 11. CASH RESTRICTED FOR EQUIPMENT The cash restricted for equipment was received from the Michigan Strategic Fund bondholders (see Note 7) to purchase equipment for future production requirements. Proceeds not yet utilized at September 30, 1997 totaled $526,500 and were classified as restricted cash. At September 30, 1997, the Company had contractual obligations to purchase equipment sufficient to utilize the restricted cash. F-19 12. RELATED PARTY TRANSACTIONS Since January 1997, the Company's Chairman, Robert Clemente, served in an "Of Counsel" capacity to the law firm of Munro & Munro, PC. During fiscal 1998, Munro & Munro was retained by the Company for professional legal services required in the normal course of business. During fiscal 1998, the Company paid to this law firm $84,000 in legal fees and expenses. Mr. Clemente does not receive any portion of the fees paid by the Company to this law firm. During the year ended September 30, 1998 the Company incurred $24,600 in consulting expenses for certain special projects completed by a director. 13. SEGMENT INFORMATION The following is summarized business segment information applicable to continuing operations (in thousands):
Metal Eliminations Parts and Year Ended September 30: Forming Tooling Corporate Consolidated - ------------------------------- ---------- --------- ------------- ------------ 1998 Net sales $ 17,186 $ 17,303 $ (2,763) $ 31,726 (Loss) income from operations (6,378) 1,423 (831) (5,786) Identifiable assets 10,676 6,819 5,473 22,968 Depreciation and amortization 1,501 616 576 2,693 Capital expenditures 506 504 239 1,249 1997 Net sales 18,930 18,474 (2,367) 35,037 (Loss) income from operations (1,395) 2,587 (300) 892 Identifiable assets 13,753 7,433 11,754 32,940 Depreciation and amortization 1,200 701 334 2,235 Capital expenditures 1,457 662 971 3,090 1996 Net sales 14,748 18,136 (2,007) 30,877 (Loss) income from operations (701) 2,093 (501) 891 Identifiable assets 12,920 7,211 10,734 30,865 Depreciation and amortization 1,098 671 215 1,984 Capital expenditures 1,803 163 3,513 5,479
F-20 14. SUPPLEMENTAL CASH FLOWS INFORMATION Cash payments for interest and income taxes during the year ended September 30 amounted to the following (in thousands):
1 9 9 8 1 9 9 7 1 9 9 6 -------- -------- ------- Interest: Continuing operations $ 985 $ 1,058 $ 903 Discontinued operations 370 191 -- Income taxes: Continuing operations 25 205 154 Discontinued operations -- -- --
The Company entered into the following noncash investing and financing transactions for the year ended September 30 (in thousands):
1998 1996 -------- -------- Note receivable received from sale of machine $ 575 $ -- Cancellation of accrued interest/note payable in exchange for exercise of stock warrant -- 132 Common stock issued for services or for reduction of other obligations -- 32 Stock issued for note receivable -- 37
* * * * * F-21
SECOM GENERAL CORPORATION AND SUBSIDIARIES SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - ------------------------------------------------------------------------------ Quarter Ended ----------------------------------------------------------------------------- 1998 1997(1) -------------------------------------- ------------------------------------- September June March December September June March December 1998 1998 1998 1997 1997 1997 1997 1996 --------- ---- ----- -------- --------- ---- ----- -------- (In thousands, except per share amounts) Net sales $ 6,947 $ 7,879 $ 8,545 $ 8,354 $ 8,657 $ 9,145 $ 9,191 $ 8,044 Gross profit 165 813 8 893 1,586 1,526 1,534 1,156 (Loss) income from continuing operations (1,356) (949) (3,299) (462) 126 (69) 85 (189) (Loss) income from discontinued operations 1,193 -- (621) (451) (68) 226 142 56 ------- ------- ------- ------- ------- ------- ------- ------- Net (loss) income $ (163) $ (949) $(3,920) $ (913) $ 58 $ 157 $ 227 $ (133) ======= ======= ======= ======= ======= ======= ======= ======= (Loss) income per common share: Continuing operations $ (0.24) $ (0.18) $ (0.62) $ (0.09) $ 0.02 $ (0.01) $ 0.01 $ (0.03) Discontinued operations 0.21 -- (0.11) (0.08) (0.01) 0.04 0.03 0.01 ------- ------- ------- ------- ------- ------- ------- ------- Net (loss) income per common share $ (0.03) $ (0.18) $ (0.73) $ (0.17) $ 0.01 $ 0.03 $ 0.04 $ (0.02) ======= ======= ======= ======= ======= ======= ======= ======= Price range of common stock: High bid $ 1.72 $ 2.50 $ 2.25 $ 2.50 $ 2.69 $ 2.94 $ 3.31 $ 3.06 Low bid 0.31 1.38 1.50 1.69 2.19 2.00 2.19 2.50 Weighted average shares outstanding 5,335 5,335 5,335 5,336 5,424 5,460 5,480 5,494 (1) Amounts restated to reflect discontinued operations.
F-22
SECOM GENERAL CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (UNAUDITED) - ------------------------------------------------------------------------------ Year Ended September 30, -------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except per share amounts) Statement of operations data Net sales $ 31,726 $ 35,037 $ 30,877 $ 36,276 $ 32,571 (Loss) income from continuing operations, before income taxes (6,610) (18) 58 831 1,154 Income tax benefit (expense) 544 (29) (17) 373 (61) -------- -------- -------- -------- -------- (Loss) income from continuing operations (6,066) (47) 41 1,204 1,093 Income from discontinued operations, net of income taxes 121 356 -- -- -- -------- -------- -------- -------- -------- Net (loss) income $ (5,945) $ 309 $ 41 $ 1,204 $ 1,093 ======== ======== ======== ======== ======== (Loss) income per common share: Continuing operations $ (1.13) $ (0.01) $ 0.01 $ 0.28 $ 0.29 Discontinued operations 0.02 0.07 -- -- -- -------- -------- -------- -------- -------- Net (loss) income per common share $ (1.11) $ 0.06 $ 0.01 $ 0.28 $ 0.29 ======== ======== ======== ======== ======== Balance sheet data Total assets $ 27,868 $ 46,208 $ 34,954 $ 26,947 $ 27,826 Long-term debt 8,973 17,711 13,724 4,622 7,089 Stockholders' equity 8,342 14,300 14,036 11,910 9,837 Common stock shares outstanding 5,335 5,340 5,342 4,276 3,701 Equity per common share 1.56 2.68 2.63 2.79 2.66 Current ratio 0.81 1.64 1.84 1.13 1.02 Long-term debt to stockholders' equity 1.08 1.24 0.98 0.39 0.72
F-23 EX-10.9 2 AMENDMENT AND EXTENSION AGREEMENT NBD Bank ("NBD" or "Lender"), Secom General Corporation ("Secom"), Form Flow, Inc. ("Form Flow"), L & H Die, Inc. ("L&H"), Micanol, Inc. ("Micanol"), Uniflow Corporation ("Uniflow"), and MMC Manufacturing Corp. f/k/a Milford Manufacturing, Corporation ("Milford") enter into this Amendment and Extension Agreement (this "Agreement") on November 25, 1998. For convenience (i) Secom, Form Flow, L&H, Micanol, Uniflow, and Milford are referred to herein, collectively, as "Borrowers" and, individually, as a "Borrower," (ii) Secom, Form Flow, L&H, Micanol, Uniflow, and Milford in their capacity as guarantor of another Borrower's debt to NBD, and any other person or entity who guaranteed the obligations of one or more of Borrowers to NBD are referred to herein, collectively, as "Guarantors", and, individually, as a "Guarantor," and (iii) Borrowers and Guarantors are referred to herein, collectively, as the "Parties" and, individually, as a "Party." RECITALS A. NBD, as lender and secured party, and Borrowers, as borrowers and debtors, are parties to a certain Amended and Restated Revolving Credit and Loan Agreement dated as of June 30, 1996, as amended by Acknowledgement to Amended and Restated Revolving Credit and Loan Agreement, dated April 4, 1997, First Amendment to Amended and Restated Revolving Credit and Loan Agreement dated August 22, 1997 and Second Amendment to Amended and Restated Revolving Credit and Loan Agreement, dated as of January 1, 1998 (collectively, as so amended and as may be further amended and with all supplements thereto, the "Credit Agreement"). Capitalized terms used herein but not defined shall have the meanings given to them in the Credit Agreement. B. In furtherance of, and in accordance with, the Credit Agreement, NBD agreed, among other things, to make available to Borrowers (i) a secured committed revolving credit facility in an aggregate principal amount not to exceed $4,000,000 (the "Revolving Credit Facility"), (ii) secured discretionary line of credit advances (the "Line of Credit"), in an aggregate principal amount not to exceed $2,000,000, against the security of accounts receivable and inventory described in the Credit Agreement, subject to certain limitations, and (iii) a term loan in the original principal amount of $800,000 (the "Term Loan"). C. In furtherance of, and in accordance with the Credit Agreement, NBD also agreed, among other things, to make discretionary advances to Borrowers in an aggregate principal amount not to exceed $1,500,000 ("Equipment Line") to be used for the acquisition of equipment by any Borrower, and NBD agreed to extend discretionary advances to Secom in an aggregate principal amount not to exceed $300,000 ("Improvement Line") to be used for the improvement of Secom's facility at 38200 Ecorse Road, Romulus, Michigan. D. The Revolving Credit Facility is evidenced by an Amended and Restated E-1 Revolving Credit Note dated as of June 30, 1996 in the original principal amount of $4,000,000 (the "Revolving Note"). The Line of Credit is evidenced by a Line of Credit Note, dated as of June 30, 1996, in the original principal amount of $2,000,000 (the "Line of Credit Note"). The Term Loan is evidenced by an Amended and Restated Term Note dated June 30, 1996 (the "Term Note") in the original principal amount of $800,000. The Equipment Line is evidenced by an Amended and Restated Equipment Line Note (the "Equipment Line Note") dated as of January 1, 1998, in the original principal amount of $1,500,000, and the Improvement Line was evidenced by a Promissory Note (the "Improvement Line Note") dated as of August 22, 1997, in the original principal amount of $300,000. The Improvement Line Note has been paid in full and no further advances will be made under the Improvement Line. For convenience, the Revolving Note, the Line of Credit Note, the Term Note, and the Equipment Line Note are referred to herein, collectively, as the "Notes." E. Among other mortgages and security agreements (i) Secom executed and delivered to NBD (A) an Amended and Restated Security Agreement dated June 30, 1996, as amended by an Amendment to Amended and Restated Security Agreement dated March 31, 1997 (as may be further amended and with all supplements thereto, the "Secom Security Agreement"), (ii) Micanol executed and delivered to NBD an Amended and Restated Security Agreement dated as of June 30, 1996, as amended by Amendment to Amended and Restated Security Agreement dated March 31, 1997 (as amended and as may be further amended and with all supplements thereto, the "Micanol Security Agreement"), (iii) Form Flow executed and delivered to NBD an Amended and Restated Security Agreement dated June 30, 1996, as amended by Amendment to Amended and Restated Security Agreement dated March 31, 1997, a Continuing Security Agreement dated August 22, 1997 and a Continuing Security Agreement dated November 5, 1997, (collectively, as amended and as may be further amended and with all supplements thereto, the "Form Flow Security Agreements"), (iv) L&H executed and delivered to NBD an Amended and Restated Security Agreement dated as of June 30, 1996, as amended by Amendment to Amended and Restated Security Agreement dated March 31, 1997, a Continuing Security Agreement dated August 22, 1997, and a Continuing Security Agreement dated November 5, 1997 (as so amended and as may be further amended and with all supplements thereto, the "L&H Security Agreements"), (v) Uniflow executed and delivered to NBD an Amended and Restated Security Agreement dated June 30, 1996, as amended by Amendment to Amended and Restated Security Agreement dated March 31, 1997, and a Continuing Security Agreement dated August 22, 1997 (as so amended and as may be further amended from time to time and with all supplements thereto, the "Uniflow Security Agreements"), and (vi) Milford executed and delivered to NBD a Security Agreement dated April 4, 1997 (as so amended and as may be further amended from time to time and with all supplements thereto the "Milford Security Agreement"). For convenience, the Secom Security Agreement, the Form Flow Security Agreements, the L&H Security Agreements, the Micanol Security Agreement, the Uniflow Security Agreements, and the Milford Security Agreement are referred to herein, collectively, as the "Security Agreements." F. In addition to the Secom Security Agreement, Secom also executed and delivered to NBD an Amended and Restated Future Advance Mortgage, dated December 6, 1995, and E-2 recorded on March 6, 1996 in Liber 28654, Pages 367-381 of the Wayne County Records (as may be amended and with all supplements thereto, the "Secom Mortgage"), which Secom Mortgage relates to property located at 6901 Cogswell Avenue,. 6999 Cogswell Avenue and 38200 Ecorse Road (collectively, "the Mortgaged Premises"). G. All of the obligations of Secom to NBD, whether then existing or thereafter created or arising, are guaranteed by L&H, Uniflow, Form Flow and Micanol, jointly and severally, pursuant to that certain Amended and Restated Continuing Guaranty, dated as of June 30, 1996 (as may be amended and with all supplements thereto, the "Secom Guaranty"). H. All of the obligations of L&H to NBD, whether then existing or thereafter created or arising, are guaranteed, jointly and severally, by Secom, Uniflow, Form Flow and Micanol, pursuant to that certain Amended and Restated Continuing Guaranty, dated as of June 30, 1996, (as may be amended and with all supplements thereto, the "L&H Guaranty"). I. All of the obligations of Uniflow to NBD, whether then existing or thereafter created or arising, are guaranteed, jointly and severally, by Secom, L&H, Form Flow and Micanol, pursuant to that certain Amended and Restated Continuing Guaranty, dated as of June 30, 1996, (as may be amended and with all supplements thereto, the "Uniflow Guaranty"). J. All of the obligations of Form Flow to NBD, whether then existing or thereafter created or arising, are guaranteed, jointly and severally, by Secom, L&H, Uniflow and Micanol, pursuant to that certain Amended and Restated Continuing Guaranty, dated as of June 30, 1996, (as may be amended and with all supplements thereto, the "Form Flow Guaranty"). K. All of the obligations of Micanol to NBD, whether then existing or thereafter created or arising, are guaranteed, jointly and severally, by Secom, L&H, Uniflow, and Form Flow, pursuant to that certain Amended and Restated Continuing Guaranty, dated as of June 30, 1996, (as may be amended and with all supplements thereto, the "Micanol Guaranty"). L. All of the obligations of L&H, Uniflow, Form Flow, Secom and Micanol to NBD, whether then existing or thereafter created or arising, are guaranteed by Milford pursuant to separate guaranties, each dated April 4, 1997, executed by Milford in favor of NBD (as may be amended, and with all supplements thereto, the "Milford Loan Party Guaranties"). M. For convenience, the Secom Guaranty, the L&H Guaranty, the Uniflow Guaranty, the Form Flow Guaranty, the Micanol Guaranty, and the Milford Loan Party Guaranties are referred to herein, collectively, as the "Guaranties," and such Guaranties and all other documents and instruments executed by any Guarantor in connection therewith are referred to herein, collectively, as the "Guarantor Loan Documents." N. For convenience, all of the foregoing documents, mortgages, agreements, assignments and promissory notes set forth in Recitals A through M above, together with any other documents, instruments, agreements or promissory notes executed in connection with, or E-3 in furtherance of, any of the foregoing, as amended from time to time, including as amended by this Agreement, but exclusive of all present or future oral agreements between NBD and any one or more of the Parties, are referred to herein, collectively, as the "Loan Documents." O. On November 6, 1998 (i) there was $2,207,793.17 in principal owing by Borrowers to NBD under the Revolving Credit Facility, (ii) there was $0 in principal owing by Borrowers to NBD under the Line of Credit, (iii) there was $625,592.35 in principal owing by Borrowers to NBD under the Term Loan, and (iv) there was $644,680.00 in principal owing by Borrowers to NBD under the Equipment Line, in each case, plus accrued but unpaid interest, costs and expenses (including attorneys' fees) called for by the Credit Agreement. In early 1998, substantially all of Milford's tangible assets were sold to a third party unaffiliated with any Borrower and a portion of the proceeds of such sale were applied to repay certain of Milford's obligations to NBD. Milford remains a loan party Borrower and Guarantor under the Loan Documents, however, and in that regard, Milford still has obligations to NBD. For convenience, all of the obligations referred to in the immediately preceding sentence, together with all other principal and interest due or becoming due to NBD, together with the payment of all other sums, indebtedness and liabilities of any and every kind now or hereafter owing and to become due from Borrowers to NBD however created, incurred, evidenced, acquired or arising, and whether direct or indirect, primary, secondary, fixed or contingent, matured or unmatured, joint, several, or joint and several, and whether for principal, interest, reimbursement obligations, indemnity obligations, obligations under guaranty agreements, fees, costs, expenses, or otherwise, all of Borrowers' obligations under this Agreement, together with all other present and future obligations of Borrowers to NBD, are referred to herein, collectively, as the "Obligations." P. Each Party, jointly and severally, acknowledges and agrees that (i) the Obligations, Guarantors' obligations under the Guarantor Loan Documents, and all other obligations of any one or more of the Parties to NBD are owing to NBD without setoff, recoupment, defense or counterclaim, in law or in equity, of any nature or kind; (ii) the Obligations are secured by valid, perfected, indefeasible, enforceable, first priority liens and security interests in favor of NBD in, among other things (A) all of each Borrower's present and future accounts, chattel paper, instruments, documents and inventory, contracts and business records (but excluding computer hardware and software), and all proceeds and products of all of the foregoing, as more fully described in the Security Agreements; (B) specific equipment of Form Flow located at 6901 Cogswell, Romulus, Michigan 48174, as more fully described on Exhibit A to the Continuing Security Agreement dated August 22, 1997, executed by Form Flow in favor of NBD; (C) a Mazak ZTC-16B vertical machining center, SN130013 and accessories owned by Form Flow as more fully described in the Continuing Security Agreement dated November 5, 1997 executed by Form Flow in favor of NBD; (D) specific equipment of L&H located at 38200 Ecorse Road, Romulus, Michigan 48174, as more fully described on Exhibit A to the Continuing Security Agreement dated August 22, 1997, executed by L&H in favor of NBD; (E) specific equipment of L&H located at 38200 Ecorse Road, Romulus, MI 48174-1350, as more fully described in the Continuing Security Agreement dated November 5, 1997 executed by L&H in favor of NBD; and (F) specific equipment of Uniflow located at E-4 26600 Heyn Drive, Novi, Michigan 48374, as more fully described on Exhibit A to the Continuing Security Agreement dated August 22, 1997, executed by Uniflow in favor of NBD. The Obligations are also secured by a first priority lien, security interest and mortgage in favor of NBD with respect to the Mortgaged Premises, as more fully described in the Secom Mortgage. For convenience all collateral referred to above, together with all other collateral described in the Loan Documents and all collateral heretofore, simultaneously herewith or hereafter granted to NBD by any one or more of the Parties to secure any of the Obligations or any one or more of the Parties' other obligations to NBD, including, without limitation, the obligations of any one or more of the Guarantors under the Guarantor Loan Documents, is referred to, collectively, as the "Collateral." Q. Each Party reaffirms, ratifies, confirms and approves its obligations and duties under the Loan Documents, as modified by this Agreement. Without limiting the generality of the immediately preceding sentence, Guarantors hereby reaffirm, ratify, confirm and approve their obligations and duties under the Guarantor Loan Documents, and the provisions herein, and acknowledge and agree that the Guarantor Loan Documents extend to, and cover, all of the Obligations, including the sums described in Paragraph N above. Each Party, jointly and severally, reaffirms, ratifies and confirms the liens, mortgages, assignments and security interests granted to NBD in the Collateral under the Loan Documents or otherwise. R. Borrowers are in default under Loan Documents for the following reasons: (i) Based on Borrowers' financial statements dated August 30, 1998 (the "August 1998 Financials"), Borrowers' Cash Flow Coverage Ratio is less than 1.20 to 1.00; (ii) Borrowers' Tangible Capital Funds are less than $10,000,000 (On August 31, 1998, Borrowers' Tangible Capital Funds were $8,090,364.00); (iii) Borrowers' Current Ratio is less than 1.25 to 1.00 (on August 31, 1998, Borrowers' Current Ratio was 1.22 to 1.00); (iv) Based on the Borrowers' financial statements for the quarter ended June 30, 1998, Borrowers' total Funded Debt to EBITDA is greater than 4.75 to 1.00, in violation of Borrowers' loan documents with G.E. Capital Public Finance, Inc and Key Corp. (Under Section 7.1(f) of the Loan Documents, a default by Borrowers with respect to a debt to other lenders is a default under the Loan Documents); and (v) Borrowers have failed to pay real and personal property taxes on Borrowers' assets in an amount totaling approximately $250,000 in the aggregate (the "Unpaid Taxes"). For convenience, the above-described defaults are referred to collectively as the "Existing Defaults." Each Party represents and warrants, after due inquiry and investigation, E-5 that none of them is aware of any other Events of Default or defaults, or of any event which, with the passage of time, notice, or both, would become an Event of Default or a default under the Loan Documents or this Agreement. S. Each Party also acknowledges that based on the Existing Defaults, NBD has the right, without further notice, to enforce its rights under the Loan Documents (including the Guarantor Loan Documents) and applicable law. Further, if NBD took such action, each Party acknowledges that NBD's actions would be within NBD's rights under the Loan Documents (including the Guarantor Loan Documents) and applicable law, and would be reasonable and appropriate under the circumstances. T. Each Party acknowledges and agrees that (i)NBD has fully performed all of its obligations under the Loan Documents; (ii)NBD has no obligation to continue to lend to Borrowers, or to forbear from enforcing its rights and remedies beyond the Forbearance Period (as hereinafter defined); (iii) any loans made after the date of this Agreement will be made in NBD's sole discretion; and (iv) NBD has made no representations of any nature or kind that funding in any amount will continue, or that the Forbearance Period (as hereinafter defined) will be extended beyond the expiration thereof. U. Each Party further acknowledges and agrees that the actions taken by NBD to date in furtherance of the Loan Documents are reasonable and appropriate under the circumstances and are within NBD's fights under the Loan Documents and applicable law. V. Each Party represents and warrants to NBD that it has received direct and substantial economic benefit from all of the Obligations and that it will continue to receive direct and substantial economic benefit from such Obligations, and from any other loans made or which may be made in the future to Borrowers. W. NBD informed Borrowers on several occasions that NBD is concerned about the Existing Defaults and that Borrowers must take steps to address such Existing Defaults. The Parties have informed NBD that they have engaged the services of an investment banking firm (the "Investment Banker") to explore, among other things, potential acquisition candidates for the business as a whole or for the various business segments of Borrowers. The Parties have requested that NBD agree to waive the Existing Defaults to allow the Parties, with the assistance of the Investment Banker, time to develop and begin to implement a plan with respect to sale of the business as a whole or Borrowers' various business segments. X. Subject to the terms and conditions of this Agreement, and in reliance on the Parties' agreements, acknowledgments, representations, and warranties in this Agreement, NBD has agreed to amend the Loan Documents and waive the Existing Defaults under the Loan Documents (including the Guarantor Loan Documents), as set forth below. E-6 AGREEMENT Based on the foregoing Recitals (which are incorporated herein as agreements, representations, warranties, and covenants of the respective Parties, as the case may be), and for other good and valuable consideration, the adequacy and receipt of which are acknowledged by each Party hereto, NBD and each Party agree as follows: 1. Waiver. (a) Subject to the following conditions and those set forth below, NBD agrees to waive the Existing Defaults through February 1, 1999 (the "Extension Period"), at which time, unless earlier demand is made, all Obligations shall be due and payable in full without further notice or demand by NBD. (b) NBD's agreement to waive the Existing Defaults through the Extension Period is conditioned upon NBD receiving, on or before November 18, 1998 (the "Effective Date"), a fully-executed copy of this Agreement, together with fully-executed copies of all of the exhibits that require signature. (c) Anything here to the contrary notwithstanding, NBD's waiver shall be deemed null and void and of no further force and effect if during the Extension Period there are further Events of Default or defaults under the Loan Documents, including this Agreement, or if any Party fails to fully comply with all the terms and conditions of this Agreement or any of the other Loan Documents. 2. Financial Covenants During Extension Period. Attached hereto as Exhibit A is a copy of projections prepared by Borrowers (the "Projections") of operating results and cash flows through March 31, 1999. In accordance with the Projections, and as an accommodation to Borrowers, anything to the contrary in the Loan Documents notwithstanding, through the Extension Period, the following financial covenants shall be applicable, rather than the Cash Flow Coverage Ratio, Tangible Capital Funds and Current Ratio covenants set forth in the Credit Agreement: (a) Borrowers' Total Equity shall not be less than $7,000,000. For the purposes of this covenant, "Total Equity" means book net worth determined in accordance with generally acceptable accounting principles; (b) Borrowers' Total Liabilities to Total Equity shall not exceed 2.5 to 1.0. Notwithstanding anything in the Loan Documents to the contrary, for the purposes of this covenant, "Total Liabilities" means all liabilities of Borrowers of any nature whatsoever; (c) Borrowers' Current Ratio shall not be less than 0.6 to 1.0; and E-7 (d) Borrowers' EBITD shall not be less than $125,000 for the month of October, 1998, not less than $65,000 for the month of November, 1998 and not less than negative $45,000 for the month of December, 1998. 3. Interest. Notwithstanding anything to the contrary in the Loan Documents, prior to the occurrence of a default or Event of Default under this Agreement or any of the other Loan Documents (excluding the Existing Defaults during the Forbearance Period, but including a worsening of such Existing Defaults) (a) all Obligations shall bear interest computed on the basis of the actual number of days elapsed in a year of 360 days at the rate of 1% per annum ab.ove the rate announced from time to time by NBD as its prime rate, which may not be the lowest rate charged by NBD to any of its customers (the "Applicable Rate"). After the occurrence of an Event of Default or default under this Agreement or the Loan Documents (excluding the Existing Defaults during the Forbearance Period, but including a worsening of such Existing Defaults), all of such Obligations at NBD's sole discretion shall bear interest at the rate of 3% per annum above the Applicable Rate (the "Default Rate"). Notwithstanding the foregoing, in no event whatsoever shall the rate of interest charged under this Agreement or any agreement or note executed in connection herewith or referred to or incorporated herein exceed the highest rate permitted by applicable law. The fact that NBD is entitled to receive a higher rate of interest upon default is to compensate NBD for increased administrative and monitoring costs and shall not in any manner be deemed to have waived or modified any of NBD's rights in connection with the occurrence of a default or any Event of Default under this Agreement or any other Loan Document. 4. Increase in Line of Credit and Termination of Improvement Line, Equipment Line Credit, and Revolving Credit Facility. (a) The $4,000,000 Revolving Credit Facility described in Recital B(i), the Improvement Line described in Recital C, and the Equipment Line of Credit described in Recital C are hereby terminated. No further advances under the Revolving Credit Facility, the Improvement Line, or the Equipment Line of Credit will be made. (b) Anything to the contrary in the Loan Documents notwithstanding, and as reflected by the amendments to the Credit Agreement described in paragraphs 4, 5 and 6 below, NBD's commitment and obligation to make Loans is terminated. NBD's uncommitted credit authorization to Borrowers referred to in Section 2.1(b) of the Credit Agreement shall remain in place but in the principal sum not to exceed $3,000,000 in the aggregate at any one time outstanding, which uncommitted credit authorization shall be evidenced by a Second Amended and Restated Master Demand Business Loan Note as more fully described in Section 12 below. Under this uncommitted credit authorization, NBD, in its sole and absolute discretion, may decide whether or not to make any future Loans to Borrowers. NBD may refuse to advance for any reason or for no reason at any time, even if Borrowers have collateral availability to borrow under the Loan Documents and no Event of Default or default has occurred under such Loan Documents. The fact that NBD in its sole and absolute discretion makes one or more Loans after the date of this Agreement does not in any way obligate NBD to make any other Loans E-8 under the Revolving Loan Authorization or otherwise. 5. Revised Definitions. (a) The following definitions in Section 1.1 of the Credit Agreement are hereby amended in their entirety to read as follows: "Authorization Amount" means an uncommitted credit authorization to Borrowers under Section 2.1(b) in the principal sum not to exceed $3,000,000, in the aggregate at any time outstanding. "Current Ratio" means the relationship, expressed as a numerical ratio, which (i) the amount of current assets of the Loan Parties, determined on a Combined basis, which would be properly classified as a current asset under GAAP, bears to (ii) the amount of current liabilities of the Loan Parties determined on a Combined basis, which would be properly classified as current liabilities under GAAP. For the purposes of this definition, current assets shall not include assets that represent capital equipment being held for sale over the next six month, and current liabilities shall not include debt associated with such assets. "Tangible Capital Funds" means Tangible Net Worth plus Subordinated Debt. "Termination Date" means the earlier to occur of (a) the date on which a demand for payment of the obligations is made by NBD, (b) February 1, 1999, and (c) the date on which NBD's obligations shall be terminated pursuant to Section 7.2. (b) The definition of "Borrowing Base" contained in Section 1.1 of the Credit Agreement is hereby amended by changing the last sentence at the end of that definition to read as follows: "In no event will the amount included in the Borrowing Base under clause (b) above (for Eligible Inventory) exceed $500,000." (c) The definition of "Commitment" contained in Section 1.1 of the Credit Agreement is hereby deleted in its entirety. 6. Changes With Respect to Revolving Loans. Section 2.1 of the Credit Agreement is hereby amended as follows: (a) Section 2.1(a) of the Credit Agreement is deleted in its entirety; (b) Section 2. l(b) of the Credit Agreement is hereby amended to read in its entirety as follows: E-9 (b) Revolving Loan Authorization. Subject to the terms and conditions of this Agreement, NBD may, in its sole and absolute discretion, make Revolving Loans to the Borrowers, jointly and severally, from the Effective Date and before the Termination Date as Borrowers may from time to time request from NBD; provided, however, that the aggregate principal amount of all Revolving Loans which are outstanding hereunder shall not at any time exceed the Authorization Amount; provided, further, that the aggregate principal amount of all Revolving Loans which NBD shall make pursuant to this Section 2. l(b) at any time shall not, when added to the principal balance of the Revolving Loans outstanding at such time plus the aggregate face amount of all outstanding L/Cs, exceed (i) the borrowing base at such time; or (ii) the Authorization Amount at such time. The Revolving Loans advanced under this Section 2.1(b) shall be evidenced by a Second Amended and Restated Master Demand Business Loan Note of Borrower in substantially the form of Exhibit B to the Amendment and Forbearance Agreement by and among Borrowers and NBD. Such Note shall be dated the Effective Date and stated to mature on demand. Interest shall accrue on the unpaid principal balance of the Revolving Loans from time to time outstanding under this Section 2.1(b) at the applicable rate(s) and shall be payable in accordance with Section 4.2. Subject to the other terms and conditions of this Agreement, and subject to NBD's sole and absolute discretion, the Revolving Loans may be borrowed, repaid and re-borrowed prior to the Termination Date. Although such Note shall be expressed to be payable in the maximum amount of $3,000,000, the Borrowers shall be obligated to pay only the unpaid principal balance of the Revolving Loans, together with interest thereon and other amounts due in connection therewith as provided herein and in the Note. The proceeds of the Revolving Loans shall be used by the Borrowers for working capital or other general corporate purposes of the Loan Parties. 7. Issuance of Letters of Credit. The introductory paragraph of Section 2.3(a) of the Credit Agreement is hereby amended to read in its entirety as follows: (a) Issuance of L/Cs. Upon the request by the Borrowers (with no less than three Business Days prior written application in such form as requested by NBD), and provided there is sufficient availability under the Borrowing Base and Authorization, NBD may, in its sole and absolute discretion, issue for the account of any Borrower standby or commercial letters of credit, upon the following conditions: E-10 8. Sale of the Press. The Parties have informed NBD that they are attempting to sell a 900 ton press (the "Press"), which has been partially paid for but has never been delivered to Borrowers. The Parties have informed NBD that they have been told that the Press is expected to sell for between $600,000-$700,000. The Parties acknowledge that NBD advanced to Borrowers $246,403, which funds were utilized as a down payment on the Press. The Parties have informed NBD that the sale proceeds on the Press will be delivered to NBD immediately upon receipt to be applied by NBD to the Obligations in any order NBD determines in its sole discretion. It is NBD's current intention to apply the proceeds it receives from the sale of the Press to the balance outstanding on the Amended Equipment Term Note (as defined in Section 11), but NBD reserves the right to apply such sale proceeds in its sole discretion to the Obligations in any manner it deems appropriate. 9. Reporting Requirements. (a) Sections 6.1(d)(iv) and (v) of the Credit Agreement are hereby amended in their entirety to read as follows: (iv) daily, a Borrowing Base Certificate in a form and detail reasonably acceptable to Bank, executed by the chief financial officers of the Loan Parties and completed as of the end of the preceding day sent by facsimile with the originals to follow by U.S. Mail; (v) as soon as available and in any event within 15 days after the end of each calendar month, a report listing the accounts receivable aging, accounts payable aging and inventory of all of the Loan Parties, in a form and detail reasonably acceptable to Bank, executed by the chief financial officers if, the Loan Parties and completed as of the end of the most recently ended month; (b) Sections 6.1(d)(ix) and(x) are added to the Credit Agreement as follows: (ix) Within 15 days after the end of each month, a balance sheet as of the end of such month and statements of income, retained earnings and cash flows from the beginning of the fiscal year to the end of such month, certified as correct by one of Borrowers' authorized agents; and (x) Such other documents, certificates, financial reports or statements as Bank may reasonably request. (c) Simultaneously with the execution of this Agreement, the Parties shall provide to NBD all documents in their possession or control with respect to the Investment Banker, including, without limitation, engagement letters, preliminary analyses, time tables, correspondence, expressions of interest from any third parties, and cost analyses, and other documents and materials. Thereafter, immediately upon receipt, the Parties shall provide to E-11 NBD copies of all Investment Banker information. In addition, the Parties hereby authorize NBD to speak directly to such Investment Banker regarding the Investment Banker's progress with respect to marketing the business, so long as a representative of Borrowers is present during such discussions. 10. Year 2000 Issues. Borrowers will take all actions reasonably necessary to assure that Year 2000 Issues will not have a material adverse effect on the business, operations or financial condition of Borrowers. Upon NBD's request, Borrowers will provide NBD with a description of their plan to address Year 2000 Issues, including updates and progress reports. Borrowers will advise NBD of any reasonably anticipated material adverse effect on the business, operations or financial condition of Borrowers as a result of Year 2000 Issues. 11. Amended and Restated Notes. The Revolving Note and the Line of Credit Note are consolidated, amended, restated and replaced in their entirety by a Second Amended and Restated Master Demand Business Loan Note, in the form of Exhibit B attached hereto (the "Amended Revolving Note"). The Term Note is amended and restated and replaced in its entirety by a Second Amended and Restated Term Note in the form of Exhibit C attached hereto (the "Amended Term Note"). The Equipment Line Note is amended, restated and replaced in its entirety by a Second Amended and Restated Equipment Term Note in the form of Exhibit D attached hereto (the "Amended Equipment Term Note"). The Improvement Loan Note was paid in full in early 1998 and, therefore, is hereby canceled. For convenience, the Amended Revolving Note, the Amended Term Note, and the Amended Equipment Line Note are referred to herein, collectively, as the "Amended Notes." Any reference in any other document or instrument (including, but not limited to, the Credit Agreement) to the Revolving Note, the Line of Credit Note or the Equipment Term Note shall constitute a reference to the Amended Notes. The Amended Notes are in substitution and exchange for the Notes and shall not in any circumstances be deemed a novation or to have paid, terminated, extinguished or discharged Borrowers' indebtedness evidenced by such Notes, all of which indebtedness shall continue under, and be evidenced and governed by, the Amended Notes. 12. Dominion of Funds and Lockbox Arrangements. Borrowers have recently executed and delivered to NBD a Dominion of Funds Agreement, attached hereto as Exhibit E. Borrowers agree to continue to operate within the terms and conditions of the Dominion of Funds Agreement and also within the terms and conditions of the Lockbox Agreement which they have previously executed. 13. Amended and Restated Security Agreements, Second Amended and Restated Mortgage. Simultaneously with the execution and of this Agreement, Borrowers will execute and deliver to NBD (a) Amended and Restated Security Agreements in the form of Exhibit G attached hereto (the "Amended Security Agreements"), and (b) UCC-I Financing Statements in the form of Exhibit H attached hereto (the "New UCC's"), pursuant to which Borrowers will grant to NBD a blanket lien on all of Borrowers' assets, including machinery, equipment, and general intangibles, other than the Other Lenders' M&E, as defined below. Simultaneously with the execution of this Agreement, Secom will execute and deliver to NBD a E-12 Second Amended and Restated Future Advance Mortgage on the Mortgaged Premises in the form of Exhibit I attached hereto (the "Amended Mortgage"). Key Corp. Leasing, Ltd., GE Capital Public Finance, Inc., and Amplicon (collectively, the "Other Lenders") have liens and security interests in certain of Borrowers' machinery, equipment (and with respect to Amplicon only, software) and products and proceeds of the foregoing (the "Other Lenders' M&E"). Borrowers have informed NBD that it is an Event of Default under Borrowers' loan documents with the Other Lenders for Borrowers to grant a lien to NBD on the Other Lenders' M&E without such Other Lenders' consent and that they do not believe such Other Lenders will consent. Thus, as noted above, the Other Lenders' M&E will be excluded from the all asset lien provided for in the Amended Security Agreements and the New UCC's. 14. Compensation. So long as any of the Obligations remain outstanding, no loans, distributions, advances or other payments of any kind or nature shall be made by any Borrower to any shareholder or any member of their immediate families, other than the following: (i) Reasonable cash compensation in an amount no greater than the amount currently being paid to each such individual as of the date hereof, provided that such cash compensation is paid for services actually rendered by the applicable individual to Borrower; (ii) Reasonable reimbursement for business expenses incurred in the ordinary course of business; and (iii) Employee benefits provided in the ordinary course of business to other employees of Borrower consistent with past practices. 15. Transactions with Affiliates. Without NBD's prior written consent, which consent may be withheld at NBD's sole discretion, until all of the Obligations are paid in full, no advances will be made by any Borrower to any entity or individual affiliated with any Borrower, whether now existing or formed in the future, except with respect to inter-company transactions consistent with practice, and except for amounts to shareholders and members of their immediate families specifically permitted by Paragraph 14 above. 16. NBD's Consultant. The Parties acknowledge that counsel to NBD may hire a financial consultant (the "Consultant") to assist such counsel in its evaluation of Borrowers' financial condition and Borrowers' relationship with NBD. The Parties shall provide the Consultant access to Borrowers' facilities, books and records and shall cooperate in good faith with the Consultant and shall cause Borrowers' outside accountant (the "CPA") to cooperate in good faith in connection with the provision of all information requested by the Consultant (including copies of all information in the CPA's possession relating to the Parties). All information provided to the Consultant shall be held in confidence and used only by NBD and its agents in connection with transactions with the Parties. E-13 17. Additional Covenants. In addition to the covenants already contained in the Loan Documents or elsewhere in this Agreement, Borrowers agree that the Loan Documents are hereby amended to include the following covenants: (a) Except as specifically provided herein, Borrowers shall not make any loan or advance to any of their respective shareholders or affiliates without the prior written consent of NBD, except in connection with Borrowers' 401K Plan; (b) Borrowers shall not incur any obligations for loans or leases without the prior written consent of NBD; (c) Borrowers shall permit NBD or its agents to perform audits of the Collateral whenever deemed necessary by NBD. Borrowers shall compensate NBD for those audits in accordance with NBD's schedule of fees, as may be amended from time to time; (d) Borrowers shall not permit any tax or other liens to be placed on any of their property; provided, however, that it shall not be an Event of Default hereunder if the manufacturer of the Press asserts a mechanic's lien against such Press for nonpayment of the Purchase Price; and (e) The Parties shall immediately notify NBD in writing of any legal proceeding brought by or against any Borrower or any Guarantor. 18. Additional Reporting. In addition to any reports or information required by the Loan Documents or this Agreement (which must be provided timely), or that NBD may hereafter request, each Party must provide NBD with: (a) Within one day of receipt, copies of written notices of default received from other creditors, and (b) Within one day of gaining knowledge thereof, any adverse information regarding any Party. 19. Defaults. In addition to any other Events of Default or defaults provided for in the Loan Documents, and without waiver of the demand and discretionary provisions of the Loan Documents, the occurrence of any of the following constitutes an Event of Default and a. default under this Agreement (and each Loan Document): (a) If any Party fails to comply with any term or condition in this Agreement (or any agreement referred to or incorporated herein) or the Loan Documents (other than the Existing Defaults); (b) If any material adverse change occurs in any Borrower's financial condition or business prospects; E-14 (c) If any lender, supplier, creditor, lessor, bond holder or representative thereof (collectively, "Creditor") of any Party shall (i)obtain a judgment against any Party or (ii) receives from -------- any Borrower any prepayments of obligations; (d) If any representation or warranty made by any Party in this Agreement or in connection with the negotiation hereof is untrue as of the date made; (e) If attachment by way of seizure, levy, lien or otherwise of any assets of any one or more of the Parties; (f) If the filing of any notice of lien, levy or assessment by any government, department or agency or the fact that any taxes or debts owing (including the Unpaid Taxes) become a lien or encumbrance upon any assets of any of the Parties; and (g) If any Borrower fails to pay or cause to be paid when due any and all taxes with respect to such Borrower's business, including, without limitation, payroll taxes and real property taxes, other than the Unpaid Taxes. (h) If any Borrower defaults under any agreement, document or instrument by and among such Borrower and NBD or any of its affiliates, or by and among such Borrower and any other bank, financial institution, lending agency, or leasing agency who has provided financing of any nature to such Borrower, including without limitation, the Other Lenders, except for those defaults under the Borrowers' loan documents with the Other Lenders listed on Exhibit J attached hereto (the "Other Lenders' Existing Defaults"). (i) If any of the Other Lenders accelerate the obligations owing to them by any of the Borrowers, or otherwise attempt to enforce their rights under any of their loan documents with any of the Borrowers, on account of the Other Lenders Existing Defaults. 20. Written Documents Control. The Parties acknowledge and agree that in the past, certain terms and provisions of the Loan Documents may not have been complied with and may have been temporarily waived or modified through certain temporary oral agreements or waivers among the Parties and NBD. Each Party acknowledges and agrees that any and all of such oral agreements or waivers are hereby terminated and each Party's duties, obligations, fights and responsibilities with respect to the Loan Documents and this Agreement shall be governed solely in accordance with the terms and conditions of the written Loan Documents between the Parties and NBD, and this Agreement, together with all written supplements or amendments, thereto or hereto, but exclusive of all present or future oral agreements between NBD and any one or more of the Parties. 21. Bank Accounts. The Parties represent and warrant to NBD that all of the financial and bank accounts of Borrowers of any nature, including, without limitation, checking and savings accounts, time deposit accounts and operating and other deposit accounts and money market and other investment accounts (collectively, the "Bank Accounts"), are E-15 maintained with NBD, and Borrowers maintain no such accounts with any other bank, financial institution or other third party. The Parties acknowledge and agree that Borrowers shall continue to maintain all of such Bank Accounts with NBD, and all revenues of Borrowers will be deposited in an NBD Bank Account immediately upon receipt. 22. No Overdrafts. The Parties acknowledge that, notwithstanding that NBD may have honored overdrafts in the past, hereafter, neither NBD nor any oF its affiliates will, under any circumstances, honor any checks or other items presented to NBD or such affiliates for payment for which there are insufficient available funds in any Borrower's accounts and NBD or. such affiliates, as the case may be, may return any such items so presented. 23. Authority 10 Debit Accounts. If any payment called for by the Loan Documents, this Agreement Or any other agreement referred to or incorporated herein, or any other present or future agreements between NBD or any of its affiliates on the one hand, or any party on the other hand, is not paid when and as called for under the terms of such agreement, then NBD or any of its affiliates may debit any one or more of any Party's accounts at NBD or any of its affiliates for such amount. The fact that NBD or any of its affiliates has debited any such account will in no way waive or diminish any default for the failure to make such payment when and as due. 24. No Further Forbearance Implied. Each Party acknowledges that NBD has no obligation to continue making Loans or extend the term of the Forbearance Period or forbear from enforcing its fights and remedies after the Forbearance Period, and nothing contained herein or otherwise is intended to be or is a promise or agreement to continue making Loans, or to extend the term of the Forbearance Period beyond the expiration thereof. Furthermore, no future agreement by NBD to continue making Loans, or to extend the term of the Forbearance Period beyond the expiration thereof, or any other agreement, is valid or enforceable unless it is contained in a written agreement signed by NBD. 25. Forbearance Fee. In consideration for NBD agreeing to forbear from exercising its rights and remedies under the Loan Documents with respect to the Existing Defaults as provided herein, Borrowers shall pay to NBD a forbearance fee in the amount of $35,000 (the "Forbearance Fee") simultaneously with the execution of this Agreement. 26. Expenses, Fees and Costs; Indemnification (a) Each Party, jointly and severally, shall be responsible for the payment of all fees and out-of-pocket disbursements incurred by NBD, including fees of counsel and court costs, in any way arising from or in connection with this Agreement, any Collateral, any Loan Document, any Obligations, or the business relationship between NBD on the one hand and any one or more of the Parties on the other hand, including, without limitation: (1) Audit Fees (as defined in Paragraph 27 below); (2) all fees and expenses (including recording fees and insurance policy fees) of NBD and counsel for NBD for the preparation, examination, approval, negotiation, execution and delivery of, or the closing of any of the transactions contemplated by, E-16 this Agreement or any of the Loan Documents; (3) all fees and out-of-pocket disbursements incurred by NBD, including attorneys' fees, in any way arising from or in connection with any action taken by NBD to monitor, advise, administer, enforce or collect any of the Obligations (including under this Agreement, the Guarantor Loan Documents, and any other Loan Document, or otherwise), or any other obligations of any one or more of the Parties, whether joint, joint and several, or several, under this Agreement, any Loan Document, any other existing or future document or agreement, or arising from or relating to the business relationship between NBD, on the one hand, and any one or more of the Parties, on the other hand, or otherwise securing any of the Obligations, including any actions to lift the automatic stay or to otherwise in any way monitor or participate in any bankruptcy, reorganization or insolvency proceeding of any one or more of the Parties; (4) all expenses and fees (including attorneys' fees) incurred in relation to, in connection with, in defense of or in prosecution of any litigation instituted by any one or more of the Parties, NBD, or any third party, against or involving NBD arising from, relating to, or in connection with any of the Obligations, or any one or more of the Parties' other obligations, this Agreement, any Collateral, any Loan Document, or the business relationship between NBD, on the one hand, and any one or more of the Parties, on the other hand, including any so-called "lender liability" action, any claim and delivery or other action for possession of, or foreclosure on, any of the Collateral, post-judgment enforcement of any rights or remedies including enforcement of any judgments, and prosecution of any appeals (whether discretionary or as of right and whether in connection with pre-judgment or post-judgment matters); (5) all costs, expenses, and fees incurred by NBD or its agents in connection with appraisals and reappraisals of all or any of the Collateral (and each Party must fully cooperate with such appraisers and make its property available for appraisal in connection with as many appraisals as NBD may request); (6) all costs, expenses, and fees incurred by NBD or its counsel in connection with consultants, including, without limitation, the Consultant, expert witnesses, or other professionals retained by NBD or its counsel, to assist, advise, or give testimony with respect to any matter relating to the Collateral, the Obligations, the Loan Documents, the Guaranty, or the business relationship between NBD, on the one hand, and any one or more of the Parties, on the other hand (and each Party must fully cooperate with such Consultant, expert witness or other professional and shall make its premises, books and records, accounting systems, computer systems and other media for the recordation of information available to such persons); and (7) all costs, expenses and fees incurred by NBD in connection with any environmental investigations including, but not limited to, Phase I, Phase II and Phase III environmental audits (and each Party agrees that NBD or its agents may enter on its premises at any time to conduct such environmental investigations). Each Party's agreement, jointly and severally, to be responsible for NBD's attorneys' fees and costs applies regardless of whether or not NBD prevails in whole or in part in any action, proceeding, litigation, or otherwise, and regardless of the nature of any action or litigation or the theories or bases of recovery or defense. Each Party, jointly and severally, agrees to indemnify NBD for all Claims (as hereinafter defined) which may be imposed on, incurred by, or asserted against NBD in connection with this Agreement, any Loan Document, or the transactions contemplated hereby or thereby, or the business relationship between NBD, on the one hand, and any one or more of the Parties, on the other hand. E-17 (b) All of the foregoing costs, expenses, reimbursement obligations, and indemnification obligations are part of the Obligations and are secured by all of the Collateral. (c) "Claims" means any demand, claim, action or cause of action, damage, liability, loss, cost, debt, expense, obligation, tax, assessment, charge, lawsuit, contract, agreement, undertaking or deficiency, of any kind or nature, whether known or unknown, fixed, actual, accrued or contingent, liquidated or unliquidated (including interest, penalties, attorneys' fees and other costs and expenses incident to proceedings or investigations relating to any of the foregoing or the defense of any of the foregoing), whether or not litigation has commenced. 27. Verification of Accounts/Audits. Attached hereto as Exhibit F is a true and complete list, including accurate addresses and contact persons of all of each Borrower's customers and account debtors. The Parties agree that, NBD, through its employees or authorized agents, is permitted to send a letter to and otherwise contact each Borrower's customers and account debtors to Verify account receivable balances. In addition, NBD shall be permitted full and complete access to each Borrower's facilities, and books and records to conduct audits as often as NBD reasonably desires. The cost of such audits is part of the Obligations, is secured by all Collateral, and must be paid by Borrowers within ten (10) days of receipt of an invoice therefor (the "Audit Fees"). The Audit Fees are in addition to all other interest, fees, costs, and expenses provided for in the Loan Documents or this Agreement. 28. Other Documents. Each Party must execute, or cause to be executed, any documents requested by NBD to carry out the intent of or to implement this Agreement, the Guarantor Loan Documents, or any other Loan Document. 29. Cross Default/Cross Collateralization/Remedies. An Event of Default or a default under this Agreement (or any agreement referred to or incorporated herein)as an Event of Default or a default under each document and agreement comprising the Loan Documents (including the Guarantor Loan Documents), and an Event of Default or a default under any document or agreement comprising the Loan Documents (including the Guarantor Loan Documents) is an Event of Default or a default under the terms of this Agreement (and all agreements referred to or incorporated herein). Immediately upon the occurrence of an Event of Default or a default under this Agreement, any Loan Document or any document executed in connection herewith or referenced herein, and without notice or an opportunity to cure such Event of Default or default, NBD has the right to exercise any remedies provided in this Agreement, the Loan Documents, and under applicable law, and the Forbearance Period will automatically expire at NBD's election, without further notice and, at NBD's election but without notice, all of each Party's obligations to NBD (including the Obligations and the Guarantors' obligations under the Guarantor Loan Documents) will be immediately due and payable. In any event, from and after the earlier of expiration of the Forbearance Period or the occurrence of an Event of Default or a default under this Agreement or any Loan Document, NBD may immediately take action to enforce its rights and remedies under the Loan Documents (including enforcement action on account of the Existing Defaults), this Agreement, and applicable law, including collecting the Obligations and foreclosing on the Collateral. Each of E-18 the Parties acknowledges and agrees that it was and remains each Party's intent that a default by any Party under any of its Obligations to NBD shall be deemed to be a default under each document or agreement evidencing all of the other Parties' Obligations to NBD, and all Collateral pledged by a Party to secure that Party's Obligations to NBD also secures all of the other Parties' Obligations to NBD. Each Party agrees to execute and deliver to NBD any security agreements, financing statements or other documents NBD may deem necessary or desirable to effectuate the above-referenced provisions. ABSENT THE PRIOR OCCURRENCE OF AN EVENT OF DEFAULT, DEFAULT OR PRIOR DEMAND FOR PAYMENT, ALL OBLIGATIONS, AND GUARANTORS' OBLIGATIONS UNDER THE GUARANTOR LOAN DOCUMENTS ARE DUE AND PAYABLE IN FULL AT THE EXPIRATION OF THE FORBEARANCE PERIOD. 30. Loan Documents, Guaranties and Secom Mortgage Continue. Except as expressly modified and amended by the terms of this Agreement, all other terms and conditions of the Loan Documents (including the Guarantor Loan Documents and the Secom Mortgage) remain in full force and effect and are hereby ratified, confirmed, and approved. If there is an express conflict between the terms of this Agreement and the terms of the Loan Documents, the terms of this Agreement govern and control. Without limiting the generality of the foregoing, (a) each Guarantor acknowledges and agrees that the Guaranties extend to cover all of the Obligations of Borrowers to NBD, including without limitation, all of such Obligations under this Agreement and under the Loan Documents, and (b) each Party acknowledges and agrees that the Secom Mortgage extends to cover all of Borrowers' Obligations to NBD, including without limitation, all of such Obligations under this Agreement and under the Loan Documents. 31. Reservation of Rights/No Waivers. This Agreement grants a limited forbearance until the expiration of the Forbearance Period on the terms and conditions set forth in this Agreement. Except for such forbearance through the expiration of the Forbearance Period, all of NBD's rights and remedies against each Party and the Collateral are expressly reserved, including all fights and remedies resulting from, or arising in connection with, the Existing Defaults. Likewise, nothing herein is a waiver of any Existing Defaults, or other defaults existing as of the date hereof, or an agreement to consent to further worsening of such Existing Defaults, or new Events of Default or defaults, or in any way prejudices NBD's rights and remedies under the Loan Documents (including the Guarantor Loan Documents), or applicable law. Further, NBD has the right to waive any terms, provisions, or conditions in this Agreement or the Loan Documents in its sole discretion, and any such waiver does not prejudice, waive, or reduce any other fight or remedy which NBD may have against any one or more of the Parties. No waiver of fights or any condition of this Agreement, the Loan Documents, or any other agreement by NBD is effective unless the same is contained in a writing signed by an authorized agent of NBD. E-19 32. Credit Inquiries. In the event customers, buyers, investors, potential alternative financing sources, or other parties ask NBD about the current lending relationship among NBD and any one or more of the Parties, each Party agrees that NBD may refer such inquiries to the appropriate Party. 33. Entire Agreement, Etc. (a) This Agreement and the Exhibits hereto constitute the Parties' and NBD's entire understanding with respect to the subject matter hereof. Modifications or amendments to this Agreement must be in writing and signed by the party to be charged in order to be effective. This Agreement is governed by the internal laws of the State of Michigan (without regard to conflicts of law principles). This Agreement is binding on each Party and its respective successors, assigns, heirs, and personal representatives and shall inure to NBD's benefit and its successors and assigns. If any provision of this Agreement conflicts with any applicable statute or law, or is otherwise unenforceable, such offending provision is null and void only to the extent of such conflict or unenforceability, and is deemed separate from and does not invalidate any other provision of this Agreement. (b) This Agreement is being entered into among competent persons who are experienced in business and represented by counsel (or who have had the opportunity to be represented by counsel), and has been reviewed by the Parties and their counsel, if any. Therefore, any ambiguous language in this Agreement will not necessariiy be construed against any particular party as the drafter of such language. (c) This Agreement may be executed in any number of counterparts with the same effect as if all signatories had signed the same document. All counterparts must be construed together to constitute one instrument. Facsimile copies of signatures are to be treated as original signatures for all purposes. (d) References in the Loan Documents and all other documents executed in connection with the Loan Documents (as each of the foregoing is amended hereby) to the Loan Documents mean the Loan Documents as amended by this Agreement. (e) The term "including" means including, without limitation, and the term "includes" means includes, without limitation. (f) All headings are inserted for convenience only and do not affect the construction or interpretation of this Agreement. E-20 34. Additional Representations. Each Party represents and warrants to NBD that: (a) Each Borrower's execution, delivery, and performance of this Agreement and all agreements and documents delivered in connection herewith by such Borrower, have been duly authorized by all necessary corporate action and do not and will not require any consent or approval of such Borrower's stockholders, violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to such Borrower or it articles of incorporation or bylaws, or result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which such Borrower is a party or by which it or its properties may be bound or affected. (b) No authorization, consent, approval, license, exemption of or filing a registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary to the valid execution, delivery or performance by any Borrower of this Agreement and all agreements and documents delivered in connection with this Agreement. (c) This Agreement and all agreements and documents delivered pursuant hereto by any one or more of the Parties are the legal, valid and binding obligations of each such Party enforceable against each such Party in accordance with the terms thereof. (d) After giving effect to the amendments contained herein and effected pursuant hereto, all representations and warranties contained in the Loan Documents are true and correct on and as of the date hereof with the same force and effect as if made on and as of the date hereof. (e) Except for the Existing Defaults, each Party has duly and properly performed, complied with and observed each of its covenants, agreements, and obligations contained in the Loan Documents. (f) Borrowers' audited financial statement for the fiscal year ended September 30, 1997, and Borrowers' interim financial statements for the nine-month period ended June 30, 1998, copies of which have been furnished to NBD, fairly present Borrowers' financial condition at such dates and the results of Borrowers' operations for the periods indicated, all substantially in accordance with generally accepted accounting principles applied on a consistent basis. (g) No Party has assigned any claim, set off or defense to any individual or entity. (h) This Agreement and all of the Exhibits and other written material delivered by any one or more of the Parties to NBD in connection with the transactions contemplated hereby do not contain any statement that is false or misleading with respect to any E-21 material fact and do not omit to state a material fact necessary in order to make the statements therein not false or misleading. There is no additional fact of which any Party is aware that has not been disclosed in writing to NBD that materially affects adversely or, so far as each Party can reasonably foresee, will materially affect adversely, any Party's financial condition or business prospects. (i) All Parties executing this Agreement in a representative capacity warrant that they have authority to execute this Agreement and legally bind the entity they represent. 35. Survival; Reliance. All agreements, representations and warranties made in this Agreement (and all agreements referred to or incorporated herein) survive the execution of this Agreement (and all documents and agreements referred to or incorporated herein). Notwithstanding anything in this Agreement (or any documents or agreements referred to or incorporated herein) to the Contrary, no investigation or inquiry by NBD (including by its agents) with respect to any matter which is the subject of any representation, warranty, covenant or other agreement set forth herein or therein is intended, nor shall it be interpreted, to limit, diminish or otherwise affect the full scope and effect of any such representation, warranty, covenant or other agreement. All terms, covenants, agreements, representations and warranties of each Party made herein (or in any documents or agreements referred to or incorporated herein), or in any certificate or other document delivered or to be delivered pursuant hereto, are deemed to be material and to have been relied upon by NBD, notwithstanding any investigation heretofore or hereafter made by NBD or its agents. 36. Notices. Any notice or other communication required or permitted to be given under this Agreement or any of the Loan Documents must be in writing and delivered personally, telegraphed, telecopied or telexed, or mailed (by certified or registered mail or by recognized overnight courier), postage prepaid, and is deemed given when so delivered personally, telegraphed or telexed, or if mailed, one day after the date of mailing, addressed as follows (or to any another address as to which any party so advises the other parties in writing): (a) If to Borrowers or Guarantors: Secom General Corporation 46035 Grand River Avenue Novi, Michigan 48374 Telecopy (248) 347-2829 Attn: Paul Clemente (b) If to NBD: NBD Bank 701 First National Building Detroit, Michigan 48226 Telecopy: (313) 225-4355 Attn: Oliver J. Glenn, III E-22 With a copy to: Honigman Miller Schwartz and Cohn 2290 First National Building Detroit, Michigan 48226-3583 Telecopy: (313) 465-8026 Attn: Carol A. Clark 37. Discretionary Loans; Demand Obligations. Notwithstanding any provisions of this Agreement, it is understood and agreed that NBD is at no time obligated to make any Loan, despite compliance with any express conditions precedent thereto, and NBD may at any time make demand for payment of the Obligations, notwithstanding that there may then exist no Event of Default or default. ABSENT PRIOR DEMAND BY NBD, OR A WRITTEN AGREEMENT SIGNED BY NBD TO THE CONTRARY, ALL OF THE OBLIGATIONS SHALL BE DUE AND PAYABLE IN FULL ON THE EARLIER OF (A) A DEFAULT UNDER THE LOAN DOCUMENTS, INCLUDING THIS AGREEMENT, OR (B) THE EXPIRATION OF THE FORBEARANCE PERIOD. 38. Impairment of Collateral. The execution and delivery of this Agreement (and all agreements and documents referred to herein) does not impair or affect any other security (by endorsement or otherwise) for the Obligations, or any one or more of the Parties' other obligations to NBD. No security taken before or after as security for the Obligations impairs or affects this Agreement (or any agreement or document referred to herein). All present and future additional security is to be considered as cumulative security. 39. Time Is of the Essence. Each Party acknowledges and agrees that time is of the essence as to each and every term and provision of this Agreement and each Loan Document. 40. Adverse Events. Promptly upon gaining knowledge thereof or at such time as any Party should have known thereof, each Party must inform NBD of the occurrence of any Event of Default, or default, or any event which with the lapse of time or service of notice or both would constitute an Event of Default or default under this Agreement or any of the Loan Documents, or of any other occurrence which has or could reasonably be expected to have a materially adverse effect on any Party's business, properties, or financial condition or upon any Party's ability to comply with its obligations under this Agreement or the Loan Documents (including the Guarantor Loan Documents). 41. Non-Waiver. No failure or delay on the part of NBD in the exercise of any power or fight, and no course of dealing between any one or more of the Parties or any Personal Guarantor and NBD, operates as a waiver of such power or right, nor shall any single or partial exercise of any power or right preclude other or further exercise thereof or the exercise of any other power or right. The remedies provided for herein are cumulative and not exclusive of any remedies which may be available to NBD at law or in equity. No notice to or demand on any Party not required hereunder or under the Loan Documents entitles any such Party to any other or further notice or demand in similar or other circumstances, or waives NBD's right to any other or further action in any circumstances without notice or demand. Any waiver of an E-23 provision of this Agreement or the Loan Documents and any consent to any departure by any one or more of the Parties from the terms of any provision of this Agreement or the Loan Documents, is effective only if in writing signed by an authorized officer of NBD, and only in the specific instance and for the specific purpose for which given. 42. No Other Promises or Inducements. There are no promises or inducements which have been made to any signatory hereto to cause such signatory to enter into this Agreement other than those which are set forth in this Agreement. 43. Additional Agreements. Prior to or simultaneously with the execution and delivery of this Agreement (or such other date as is indicated below), the Parties shall cause to be executed and delivered to NBD the following documents: (a) The Amended Notes executed by Borrowers; (b) The Amended and Restated Security Agreements and the New UCC's executed by Borrowers; (c) The list of customers and account debtors; (d) The Second Amended and Restated Future Advance Mortgage executed by Secom; (e) Certificate of Resolutions in the form attached as Exhibit K hereto, executed by Borrower; (f) A Security Agreement and UCC-I Financing Statement in the form of Exhibit L attached hereto, executed by Milford; (g) A UCC-I Financing Statement covering equipment owned by Uniflow and financed by NBD as described on such UCC-1 Financing Statement in the form of Exhibit M attached hereto; (h) Executed demand deposit account signature cards and resolutions for all of Borrowers' operating accounts in the form of Exhibit N attached hereto; and (i) Such other financing statements, resolutions, searches and other documents and agreements reasonably required by NBD, to effectuate the transactions contemplated by this Agreement. E-24 44. Subordination Agreements. ANYTHING CONTAINED IN THIS AGREEMENT OR IN ANY OTHER AGREEMENT TO THE CONTRARY NOTWITHSTANDING, NOTHING CONTAINED IN THIS AGREEMENT OR IN ANY OTHER AGREEMENT RESTRICTS OR PROHIBITS NBD'S RIGHT TO BLOCK, STOP OR PROHIBIT PAYMENTS TO ANY SUBORDINATED CREDITOR(S) ON ACCOUNT OF THE EXISTING DEFAULTS OR OTHERWISE. Without limiting the generality of the previous sentence and notwithstanding any provision of any Subordination Agreement to the contrary, Guarantors agree jointly and severally that all amounts owing by any Borrower to any of them, however evidenced, present or future (the "Subordinated Indebtedness") are subordinated to all of the Obligations, AND HEREBY WAIVE ALL RIGHTS TO RECEIVE PAYMENTS ON OR RELATED TO THE SUBORDINATED INDEBTEDNESS UNTIL SUCH TIME AS NBD HAS RECEIVED PAYMENT IN FULL WITH RESPECT TO THE OBLIGATIONS. 45. Payments to Shareholders. Effective immediately, all dividends, distributions and other payments to shareholders, present or future, whether by way of stock redemption, payments on preferred stock, or deferred compensation, principal or interest, shall cease in their entirety, except for those payments specifically permitted by this Agreement, or those in connection with a 401K Plan. 46. STATUTE OF FRAUDS. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. ALL PRIOR AND CONTEMPORANEOUS ORAL AGREEMENTS, IF ANY, BETWEEN NBD, ON THE ONE HAND, AND ANY ONE OR MORE OF THE PARTIES, ON THE OTHER HAND, ARE MERGED INTO THIS AGREEMENT AND DO NOT SURVIVE THE EXECUTION OF THIS AGREEMENT. 47. RELEASE. AS OF THE DATE HEREOF EACH PARTY REPRESENTS AND WARRANTS THAT HE, SHE OR IT IS AWARE OF, AND POSSESSES, NO CLAIMS OR CAUSES OF ACTION AGAINST NBD. NOTWITHSTANDING THIS REPRESENTATION AND AS FURTHER CONSIDERATION FOR THE AGREEMENTS AND UNDERSTANDINGS HEREIN, EACH PARTY INDIVIDUALLY, JOINTLY, SEVERALLY, AND JOINTLY AND SEVERALLY, IN EVERY CAPACITY, INCLUDING BUT NOT LIMITED TO, AS SHAREHOLDERS, OFFICERS, PARTNERS, DIRECTORS, INVESTORS, OR CREDITORS OF ANY ONE OR MORE OF THE PARTIES, EACH OF THEIR EMPLOYEES, AGENTS, EXECUTORS, SUCCESSORS AND ASSIGNS, HEREBY RELEASES NBD, ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS, AFFILIATES, SUBSIDIARIES, SUCCESSORS AND ASSIGNS FROM ANY LIABILITY, CLAIM, RIGHT OR CAUSE OF ACTION WHICH NOW EXISTS, OR HEREAFTER ARISES, WHETHER KNOWN OR UNKNOWN, ARISING FROM OR IN ANY WAY RELATED TO FACTS IN EXISTENCE AS OF THE DATE HEREOF. BY WAY OF EXAMPLE AND NOT E-25 LIMITATION, THE FOREGOING INCLUDES ANY CLAIMS IN ANY WAY RELATED TO ACTIONS TAKEN OR OMITTED TO BE TAKEN BY NBD UNDER THE LOAN DOCUMENTS, THE BUSINESS RELATIONSHIP WITH NBD AND ALL OTHER OBLIGATIONS OF ANY NATURE OR KIND OF ANY ONE OR MORE OF THE PARTIES, ANY ORAL AGREEMENTS OR UNDERSTANDINGS (ACTUAL OR ALLEGED), ANY BANKING RELATIONSHIPS THAT ANY ONE OR MORE OF THE PARTIES HAS OR MAY HAVE HAD WITH NBD AT ANY TIME AND FOR ANY REASON INCLUDING, BUT NOT LIMITED TO, DEMAND DEPOSIT ACCOUNTS, OR OTHERWISE. 48. WAIVER OF JURY TRIAL AND BOND; SUBMISSION TO JURISDICTION; AND ACKNOWLEDGMENT. (a) ANY JUDICIAL PROCEEDING AGAINST ANY ONE OR MORE OF THE PARTIES BROUGHT BY NBD WITH RESPECT TO ANY TERM OR CONDITION OF THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER PRESENT OR FUTURE AGREEMENT BETWEEN ANY ONE OR MORE OF THE PARTIES AND NBD MAY BE BROUGHT BY NBD IN A COURT OF COMPETENT JURISDICTION IN THE STATE OF MICHIGAN, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY AND NBD ACCEPT FOR THEMSELVES AND IN CONNECTION WITH THEIR RESPECTIVE PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER PRESENT AND FUTURE AGREEMENT BETWEEN ANY ONE OR MORE OF THE PARTIES AND NBD. EACH PARTY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON THEM, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY MAIL OR MESSENGER DIRECTED TO THEM AT THEIR ADDRESSES SET FORTH IN THIS AGREEMENT. EACH OF THE PARTIES WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND OR SURETY WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF NBD. NOTHING CONTAINED IN THIS SECTION AFFECTS NBD'S RIGHT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECTS NBD'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST ANY ONE OR MORE OF THE PARTIES OR ANY ONE OR MORE OF THEIR PROPERTIES IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY ANY PARTY AGAINST NBD INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY PRESENT OR FUTURE AGREEMENT BETWEEN ANY ONE OR MORE OF THE PARTIES AND NBD, MUST BE BROUGHT ONLY IN A COURT LOCATED IN THE STATE OF MICHIGAN. EACH PARTY WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED E-26 HEREUNDER OR IN CONNECTION HEREWITH AND MAY NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NONCONVENIENS. (b) EACH PARTY ACKNOWLEDGES THAT (1) HE, SHE OR IT HAS FULLY READ ALL OF THIS AGREEMENT AND HAS BEEN GIVEN THE OPPORTUNITY TO CONSULT WITH COUNSEL AND OTHER ADVISORS OF HIS, HER OR ITS CHOICE, AND AFTER CONSULTING WITH SUCH COUNSEL OR ADVISORS, KNOWLINGLY, VOLUNTARILY AND WITHOUT DURESS, COERCION, UNLAWFUL RESTRAINT, INTIMIDATION OR COMPULSION, ENTERS INTO THIS AGREEMENT, BASED UPON SUCH ADVICE AND COUNSEL AND IN THE EXERCISE OF HIS, HER OR ITS BUSINESS JUDGMENT, (2) THIS AGREEMENT HAS BEEN ENTERED INTO IN EXCHANGE FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH THE PARTIES HERETO ACKNOWLEDGE, (3) HE, SHE OR IT HAS CAREFULLY AND COMPLETELY READ ALL OF THE TERMS AND PROVISIONS OF THIS AGREEMENT AND IS NOT RELYING ON THE OPINIONS OR ADVICE OF NBD OR HIS, HER OR ITS AGENTS OR REPRESENTATIVES IN ENTERING INTO THIS AGREEMENT. (c) THE PARTIES HERETO ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL RIGHT, BUT THAT THIS RIGHT MAY BE WAIVED. NBD AND EACH PARTY EACH HEREBY KNOWINGLY, VOLUNTARILY AND WITHOUT COERCION, WAIVE ALL RIGHTS TO A TRIAL BY JURY OF ALL DISPUTES ARISING OUT OF OR IN RELATION TO THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER AGREEMENTS BETWEEN ANY OF THE PARTIES. NO PARTY WILL BE DEEMED TO HAVE RELINQUISHED THE BENEFIT OF THIS WAIVER OF JURY TRIAL UNLESS SUCH RELINQUISHMENT IS IN A WRITTEN INSTRUMENT SIGNED BY THE PARTY TO WHICH SUCH RELINQUISHMENT WILL BE CHARGED. EACH PARTY AND NBD AGREE THAT ANY OF THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THEIR CONSENT TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY AND THE OTHER AGREEMENTS SET FORTH IN THIS AGREEMENT. WITNESS NBD BANK /s/ Scott J. Konieczny By: /s/ Oliver J. Glenn, III Name: Oliver J. Glenn, III Title: Vice President [Signatures continued on Page 28] E-27 [Signatures continued from Page 27] WITNESS SECOM GENERAL CORPORATION /s/ Scott J. Konieczny By: /s/ Paul D. Clemente Name: Vice President Title: Subscribed and sworn to before me this 25th day of Nov., 1998. /s/ Marlene Baynes Notary Public, Oakland County, MI My Commission Expires: 5-28-2002 WITNESS FORM FLOW, INC. /s/ Scott J. Konieczny By: /s/ Paul D. Clemente Name: Title: Director Subscribed and sworn to before me this 25th day of Nov., 1998. /s/ Marlene Baynes Notary Public, Oakland County, MI My Commission Expires: 5-28-2002 WITNESS L & H DIE, INC. /s/ Scott J. Konieczny By: /s/ Paul D. Clemente Name: Title: Director Subscribed and sworn to before me this 25th day of Nov., 1998. /s/ Marlene Baynes Notary Public, Oakland County, MI My Commission Expires: 5-28-2002 [Signatures continued on Page 29] MARLENE BAYNES Notary Public, Oakland County, MI My Commission Expires 5-28-2002 E-28 WITNESS MICANOL, INC. /s/ Scott J. Konieczny By: /s/ Paul D. Clemente Name: Title: Director Subscribed and sworn to before me this 25th day of Nov., 1998. /s/ Marlene Baynes Notary Public, Oakland County, MI My Commission Expires: 5-28-2002 WITNESS UNIFLOW CORPORATION /s/ Scott J. Konieczny By: /s/ Paul D. Clemente Name: Title: Director Subscribed and sworn to before me this 25th day of Nov., 1998. /s/ Marlene Baynes Notary Public, Oakland County, MI My Commission Expires: 5-28-2002 MMC MANUFACTURING CORP. F/K/A WITNESS MILFORD MANUFACTURING, CORPORATION /s/ Scott J. Konieczny By: /s/ Paul D. Clemente Name: Vice President Title: Subscribed and sworn to before me this 25th day of Nov., 1998. /s/ Marlene Baynes Notary Public, Oakland County, MI My Commission Expires: 5-28-2002 MARLENE BAYNES Notary Public, Oakland County, MI My Commission Expires 5-28-2002 E-29 EXHIBITS Exhibit A: Projections Exhibit B: Second Amended and Restated Master Demand Business Loan Note (attached) Exhibit C: Second Amended and Restated Term Note (attached) Exhibit D: Second Amended and Restated Equipment Term Note (attached) Exhibit E: Dominion of Funds Agreement Exhibit F: List of Borrowers' Customers Exhibit G: Amended Security Agreements Exhibit H: New UCC's Exhibit I: Second Amended and Restated Mortgage Exhibit J: Other Lenders' Existing Defaults Exhibit K: Certificate of Resolutions Exhibit L: Milford Security Agreement and UCC-1 Financing Statement Exhibit M: Uniflow UCC-1 Financing Statement Exhibit N: Demand Deposit Account Signature Cards and Resolutions E-30 Exhibit "B" SECOND AMENDED AND RESTATED MASTER DEMAND BUSINESS LOAN NOTE Amount: (DELTA) $3,000,000 Dated: as of November 25, 1998 Made at Detroit, Michigan. FOR VALUE RECEIVED, the undersigned, jointly and severally, promise to pay to the order of NBD BANK ("Bank"), at its offices in Detroit, Michigan or at such other place as the holder of this note may from time to time designate in writing on demand, the principal sum of (DELTA) Three Million (DELTA) and 00/100 Dollars (DELTA)($3,000,000.00), together with interest on the outstanding balance thereof as provided below. THIS NOTE IS PAYABLE ON DEMAND. Until demand, the undersigned shall make monthly payments of accrued interest commencing on December 1, 1998, and continuing on the 1st day of each consecutive month thereafter. Unpaid interest under the Prior Notes (defined below) is due on December 1, 1998. The indebtedness under this Note outstanding from time to time prior to maturity (whether by demand, acceleration or otherwise) or the occurrence of an Event of Default shall bear interest on the basis of a year of 360 days for the actual number of days elapsed in each month, at the rate of 1% per annum above the Bank's Prime Rate (the "Applicable Rate"), as more fully provided in the Amended and Restated Revolving Credit and Loan Agreement dated as of June 30, 1996, as amended by First Amendment to Revolving Credit and Loan Agreement dated as of August 22, 1997, Second Amendment to Revolving Credit and Loan Agreement dated as of January 1, 1998, and an Amendment and Forbearance Agreement (the "Forbearance Agreement") dated the date hereof (as so amended and as may be further amended from time to time, the "Credit Agreement"). Capitalized terms not otherwise defined herein shall have the meanings given them in the Credit Agreement. As used herein, the "Prime Rate" shall be the per annum rate of interest from time to time announced by the Bank (or any successor thereto) as its prime rate, which prime rate may not be the lowest `rate of interest charged by the Bank to any of its customers. Any change in the Prime Rate shall immediately effect a change in the rate of interest payable hereunder. After maturity, or from and after an Event of Default, the outstanding principal balance under this Note shall bear additional interest from and after such maturity date or the occurrence of the Event of Default, at a rate of three (3%) percentage points per annum above the Applicable Rate until the Note is fully paid or the Event of Default is fully cured (the "Default Rate"). If any payment is not received by Bank within fifteen days after its due date, the Bank may assess and the undersigned agree to pay a late fee equal to the lesser of 5% of the past due amount or the Late Fee Cap. The Late Fee Cap is $350 and is based on the original principal amount of this Note. Principal of and interest on this Note shall be payable in lawful money of the United States of America. The undersigned agrees to pay all costs of collection and enforcement of this Note, including reasonable attorneys' fees and court costs E-31 The indebtedness under this Note may be prepaid in whole or in part at any time. In addition to the payments described above, additional payments on this Note may be due and payable pursuant to the terms of the Credit Agreement. Bank is hereby authorized by Borrowers to record on its books and records, the date and amount of each Revolving Loan, the Loan Period, the applicable interest rate (including any changes therein), the amount of each payment of principal thereon and such other information as appropriate, which books and records shall constitute rebuttable presumptive evidence of the information so recorded, provided, however, that any failure by Bank to record any such information shall not relieve Borrowers of their obligation to repay the outstanding principal amount of all Revolving Loans made by Bank, all accrued interest thereon and any amount payable with respect thereto in accordance with the terms of this Note and the Credit Agreement. This Note is given pursuant to the terms and conditions of the Credit Agreement, including the Forbearance Agreement. This Note is secured by, among other collateral, the collateral granted to Lender under the terms of the Credit Agreement, including the Forbearance Agreement, and the Loan Documents. The occurrence of any default under the Credit Agreement, including the Forbearance Agreement, or any of the Loan Documents (as such documents may have been amended by the Credit Agreement), or any document or instrument referred to or incorporated into any of the foregoing shall be deemed a default under this Note and shall entitle the holder of this Note to accelerate the maturity of the debt evidenced by this Note and to have all rights and remedies afforded by law or available under the Credit Agreement, including the Forbearance Agreement, the Loan Documents and under all other agreements referred to or executed in connection with any of the foregoing. This Note consolidates, amends and restates (but does not discharge) certain existing obligations evidenced by a Line of Credit Note, dated as of June 30, 1996 in the original principal amount of $2,000,000, and an Amended and Restated Revolving Credit Note, dated June 30, 1996, in the original principal amount of $4,000,000, all from the undersigned,to Bank ("Prior Notes"). Any references in the Credit Agreement or any other agreement to the Prior Notes shall hereafter constitute a reference to this Note. The undersigned, and all endorsers and guarantors, hereby severally waive valuation and appraisement, presentment, protest and demand, notice of protest, demand and dishonor and nonpayment of this Note, and expressly agree that the maturity of this Note, or any payment due under this Note, may be extended from time to time without in any way affecting the liability of the undersigned or such endorsers or guarantors. E-32 This Note, made and executed in the State of Michigan, shall be governed and construed according to the internal laws of the State of Michigan. SECOM GENERAL CORPORATION, a Delaware corporation By: ______________________ Name: Paul Clemente Its: Vice President 46035 Grand River Ave. Novi, Michigan 48374 UNIFLOW CORPORATION By: ______________________ Paul Clemente Its: Vice President 26600 Heyn Drive Novi, Michigan 48450 MICANOL, INC. By: ______________________ Paul Clemente Its: Vice President P.O. Box 881 46001 Grand River Novi, Michigan 48376 L&H DIE, INC. By: ______________________ Paul Clemente Its: Vice President 38200 Ecorse Road Romulus, Michigan 48174 FORM FLOW, INC. By: ______________________ Paul Clemente Its: Vice President 6901 Cogswell Romulus, Michigan 48174 [Signature of Milford Manufacturing continued on Page 4] E-33 [Signature of Milford Manufacturing continued from Page 3] MMC MANUFACTURING CORP., f/k/a MILFORD MANUFACTURING, CORPORATION By: _____________________________ Name:________________________ Its:_________________________ 101 Oak Street Milford, Michigan 48381 E-34 Exhibit "C" SECOND AMENDED AND RESTATED TERM NOTE Amount: $625,592.35 Dated: as of November 25, 1998 Due Date: (DELTA) Demand or February 1, 1999 Made at Detroit, Michigan FOR VALUE RECEIVED, the undersigned promise to pay to the order of NBD BANK ("Bank"), at its offices in Detroit, Michigan or at such other place as the holder of this Note may from time to time designate in writing, the principal sum of SIX HUNDRED TWENTY-FIVE THOUSAND, FIVE HUNDRED NINETY-TWO AND 35/100 Dollars ($625,592.35), together with interest on the outstanding balance thereof at 1% above the Bank's Prime Rate (the "Note Rate"), as more fully provided in the Credit Agreement referred to below, payable as follows: Unless earlier demand for payment is made, principal is payable in 2 monthly installments (DELTA) in the amount of $5,000 plus accrued interest on December 6, 1998 and January 6, 1999, followed by a balloon payment of all remaining principal and interest on (DELTA) February 1, 1999. As used herein, the "Prime Rate" shall be the per annum rate of interest from time to time announced by the Bank (or any successor thereto) as its prime rate, which prime rate may not be the lowest rate of interest charged by the Bank to any of its customers. Any change in the Prime Rate shall immediately effect a change in the rate of interest payable hereunder. After maturity, or from and after an Event of Default, described below, the outstanding principal balance under this Note shall bear additional interest from and after such maturity date or the occurrence of the Event of Default, at a rate of three (3%) percentage points per annum above the Note Rate until the Note is fully paid or the Event of Default is fully cured (the "Default Rate"). The indebtedness under this Note outstanding from time to time shall bear interest on the basis of a year of 360 days for the actual number of days elapsed in each month. Principal of and interest on this Note shall be payable in lawful money of the United States of America. The undersigned agrees to pay all costs of collection and enforcement of this Note, including reasonable attorneys' fees and court costs. If any payment is not received by Bank within fifteen days after its due date, the Bank may assess and the undersigned agree to pay a late fee equal to the lesser of 5% of the past due amount or the Late Fee Cap. The Late Fee Cap is $200 and is based on the original principal amount of this Note. The indebtedness under this Note may be prepaid in whole or in part at any time. This Note is given pursuant to the terms and conditions of the Amended and Restated Revolving Credit and Loan Agreement dated as of June 30, 1996, as amended by First Amendment to Amended and Restated Revolving Credit and Loan Agreement dated as of August 22, 1997, Second Amendment to Revolving Credit and Loan Agreement dated as of January 1, 1998, and an Amendment and Forbearance Agreement (the "Forbearance Agreement") dated the date hereof (as so amended and as may be further amended from time to E-35 time, the "Credit Agreement"). Capitalized terms not otherwise defined herein shall have the meanings given them in the Credit Agreement. This Note is secured by, among other collateral, the collateral granted to Lender under the terms of the Credit Agreement, including the Forbearance Agreement, and the Loan Documents. The occurrence of any Event of Default under the Credit Agreement, including the Forbearance Agreement, or any default under any of the Loan Documents or any document or instrument referred to or incorporated into any of the foregoing shall be deemed an Event of Default under this Note and shall entitle the holder of this Note to accelerate the maturity of the debt evidenced by this Note and to have all rights and remedies afforded by law or available under the Credit Agreement, including the Forbearance Agreement, the Loan Documents and under all other agreements referred to or executed in connection with any of the foregoing. This Second Amended and Restated Term Note, among other things, amends and restates (but does not discharge) the indebtedness outstanding under that certain Amended and Restated Term Note dated as of June 30, 1996, in the original principal amount of $775,000. Any reference in any other document or instrument to the foregoing notes shall constitute a reference to this Second Amended and Restated Term Note. The undersigned, and all endorsers and guarantors, hereby severally waive valuation and appraisement, presentment, protest and demand, notice of protest, demand and dishonor and nonpayment of this Note, and expressly agree that the maturity of this Note, or any payment due under this Note, may be extended from time to time without in any way affecting the liability of the undersigned or such endorsers or guarantors. This Note, made and executed in the State of Michigan, shall be governed and construed according to the internal laws of the State of Michigan. SECOM GENERAL CORPORATION, a Delaware corporation By: ______________________ Name: Paul Clemente Title: Vice President 46035 Grand River Ave. Novi, Michigan 48374 E-36 Exhibit "D" SECOND AMENDED AND RESTATED EQUIPMENT TERM NOTE Amount: $644,680 Dated: as of November 25, 1998 Due Date: (DELTA) Demand or February 1, 1999 Made at Detroit, Michigan. FOR VALUE RECEIVED, the undersigned, jointly and severally, promise to pay to the order of NBD BANK ("Bank"), at its offices in Detroit, Michigan or at such other place as the holder of this note may from time to time designate in writing, the principal sum of SIX HUNDRED FORTY-FOUR THOUSAND, SIX HUNDRED EIGHTY AND 00/100 Dollars ($644,680), together with interest on the outstanding balance thereof as provided below, payable as follows: (DELTA) Unless earlier demand for payment is made, principal is payable in 2 equal monthly installments equal to $10,750 of the principal, beginning on December 1, 1998 and January 1, 1999, followed by a balloon payment of all remaining principal and interest on (DELTA) February 1, 1999. Interest is payable in monthly payments of accrued interest commencing on December 1, 1998, and continuing on the first day of each consecutive month thereafter until maturity. Accrued interest since the last payment on the Prior Note (defined below) shall be due on December 1, 1998. The indebtedness under this Note outstanding from time to time prior to maturity (whether by acceleration or otherwise) or the occurrence of an Event of Default shall bear interest on the basis of a year of 360 days for the actual number of days elapsed in each month, at the rate of 1% per annum over the rate announced from time to time as Bank's Prime Rate (the "Applicable Rate"), as more fully described in the Amended and Restated Revolving Credit and Loan Agreement dated as of June 30, 1996, as amended by First Amendment to Amended and Restated Revolving Credit and Loan Agreement, dated as of August 22, 1997, Second Amendment to Amended and Restated Revolving Credit and Loan Agreement dated as of January 1, 1998, and an Amendment and Forbearance Agreement (the "Forbearance Agreement") dated as of the date hereof (as so amended and as may be further amended from time to time, the "Credit Agreement"). Capitalized terms not otherwise defined herein shall have the meanings given them in the Credit Agreement. After maturity, or from and after an Event of Default, the outstanding principal balance under this Note shall bear additional interest from and after such maturity date or the occurrence of the Event of Default, at a rate of three (3%) percentage points per annum above the Applicable Rate until the Note is fully paid or the Event of Default is fully cured (the "Default Rate"). If any payment is not received by Bank within fifteen days after its due date, the Bank may assess and the undersigned agree to pay a late fee equal to the lesser of 5% of the past due amount or the Late Fee Cap. The Late Fee Cap is $200 and is based on the original principal amount of this Note. Principal of and interest on this Note shall be payable in lawful money of the United States of America. The undersigned agrees to pay all costs of collection and enforcement of this Note, including reasonable attorneys' fees and court costs. The indebtedness under this Note may be prepaid in whole or in part at any time subject to any applicable indemnity payment under the Credit Agreement. E-37 This Note is given pursuant to the terms and conditions of the Credit Agreement, including the Forbearance Agreement. This Note is secured by, among other collateral, the collateral granted to Bank under the terms of the Credit Agreement, including the Forbearance Agreement, and the Loan Documents. The occurrence of any default under the Credit Agreement, including the Forbearance Agreement, or any of the Loan Documents (as such documents may have been amended by the Credit Agreement), or any document or instrument referred to or incorporated into any of the foregoing shall be deemed a default under this Note and shall entitle the holder of this Note to accelerate the maturity of the debt evidenced by this Note and to have all rights and remedies afforded by law or available under the Credit Agreement, including the Forbearance Agreement, the Loan Documents and under all other agreements referred to or executed in connection with any of the foregoing. Bank is hereby authorized by Borrowers to record on its books and records, the Loan Period, the applicable interest rate (including any changes therein), the amount of each payment of principal thereon and such other information as appropriate, which books and records shall constitute rebuttable presumptive evidence of the information so recorded, provided, however, that any failure by Bank to record any such information shall not relieve Borrowers of their obligation to repay the outstanding principal amount of all Equipment Advances made by Bank, all accrued interest thereon and any amount payable with respect thereto in accordance with the terms of this Note and the Credit Agreement. This Note amends and restates (but does not discharge) the Amended and Restated Equipment Line Note dated as of January 1, 1998, in the original principal amount of $1,500,000, from the undersigned to Bank (the "Prior Note"). Any reference in the Credit Agreement or any other agreement to the Prior Note shall hereafter constitute a reference to this Note. The undersigned, and all endorsers and guarantors, hereby severally waive valuation and appraisement, presentment, protest and demand, notice of protest, demand and dishonor and nonpayment of this Note, and expressly agree that the maturity of this Note, or any payment due under this Note, may be extended from time to time without in any way affecting the liability of the undersigned or such endorsers or guarantors. E-38 This Note, made and executed in the State of Michigan, shall be governed and construed according to the internal laws of the State of Michigan. SECOM GENERAL CORPORATION, a Delaware corporation By: _____________________________ Name:________________________ Its:_________________________ 46035 Grand River Ave. Novi, Michigan 48374 UNIFLOW CORPORATION By: _____________________________ Name:________________________ Its:_________________________ 26600 Heyn Drive Novi, Michigan 48450 MICANOL, INC. By: _____________________________ Name:________________________ Its:_________________________ P.O. Box 881 46001 Grand River Novi, Michigan 48376 L & H DIE, INC. By: _____________________________ Name:________________________ Its:_________________________ 38200 Ecorse Roa Romulus, Michigan 48174 [Signatures continued on Page 4] E-39 [Signatures continued from Page 3] FORM FLOW, INC. By: _____________________________ Name:________________________ Its:_________________________ 6901 Cogswell Romulus, Michigan 48174 MMC MANUFACTURING CORP., f/k/a MILFORD MANUFACTURING, CORPORATION By: _____________________________ Name:________________________ Its:_________________________ 101 Oak Street Milford, MI 48381 E-40 EX-22 3 EXHIBIT NO. 22 SUBSIDIARIES Form Flow, Inc. 6901 Cogswell Romulus, Michigan 48174 L & H Die, Inc. 38200 Ecorse Road Romulus, Michigan 48174 Micanol, Inc. 38200 Ecorse Road Romulus, Michigan 48174 Uniflow Corporation 46001 Grand River Avenue Novi, Michigan 48374 E-41 EX-23.1 4 [Letterhead of Deloitte & Touche LLP] Deloitte & Touche LLP ____________ _________________________________________ Suite 900 Telephone (313) 396-3000 600 Renaissance Center Detroit, Michigan 48243-1704 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-45177 and 33-43557 of Secom General Corporation on Form S-8 of our report dated December 5, 1997 (January 11, 1999 as to Note 2), appearing in this Annual Report on Form 10-K of Secom General Corporation for the year ended September 30, 1998. Detroit, Michigan January 11, 1999 E-42 EX-23.2 5 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-45177 and 33-43557 of Secom General Corporation on Form S-8 of our report dated January 11, 1999, appearing in this Annual Report on Form 10-K of Secom General Corporation for the year ended September 30, 1998. REHMANN ROBSON, P.C. Farmington Hills, Michigan January 11, 1999 E-43 EX-27 6
5 1,000 YEAR SEP-30-1998 JUN-30-1998 $ 104,600 0 4,273,500 (134,500) 4,044,800 14,982,300 21,336,300 9,147,100 27,867,700 18,565,500 0 533,500 0 0 0 27,876,700 31,725,500 31,725,500 29,846,700 37,511,400 (129,600) 0 953,700 (543,900) 0 (6,066,100) (120,700) 0 0 (5,945,400) (1.11) (1.11)
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