Altra Industrial Motion
Altra Holdings, Inc. (Form: 10-Q, Received: 08/04/2009 17:03:58)
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2009
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-33209
ALTRA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of incorporation or organization)
  61-1478870
(I.R.S. Employer Identification No.)
     
300 Granite Street, Suite 201, Braintree, MA
(Address of principal executive offices)
  02184
(Zip code)
(781) 917-0600
(Registrant’s telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large Accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of August 1, 2009, 26,651,572 shares of Common Stock, $.001 par value per share, were outstanding.
 
 

 

 


 

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PART I—FINANCIAL INFORMATION
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Item 1. Unaudited Condensed Consolidated Financial Statements
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  Exhibit 10.1
  Exhibit 10.35
  Exhibit 10.8
  EX-31.1 Section 302 Certification of Chief Executive Officer
  EX-31.2 Section 302 Certification of Chief Financial Officer
  EX-32.1 Section 906 Certification of Chief Executive Officer
  EX-32.2 Section 906 Certification of Chief Financial Officer

 

 


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ALTRA HOLDINGS, INC.
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
(unaudited)
                 
    June 27, 2009     December 31, 2008  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 63,644     $ 52,073  
Trade receivable, less allowance for doubtful accounts of $1,486 and $1,277 at June 27, 2009 and December 31, 2008, respectively
    62,267       68,803  
Inventories
    79,387       98,410  
Deferred income taxes
    7,704       8,032  
Assets held for sale (See Note 8)
          4,676  
Prepaid expenses and other current assets
    8,212       6,514  
 
           
Total current assets
    221,214       238,508  
 
               
Property, plant and equipment, net
    109,897       110,220  
Intangible assets, net
    77,905       79,339  
Goodwill
    78,518       77,497  
Deferred income taxes
    463       495  
Other non-current assets, net
    6,771       7,525  
 
           
 
               
Total assets
  $ 494,768     $ 513,584  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 24,466     $ 33,890  
Accrued payroll
    12,842       16,775  
Accruals and other current liabilities
    19,369       18,755  
Deferred income taxes
    6,906       6,906  
Current portion of long-term debt
    1,053       3,391  
 
           
Total current liabilities
    64,636       79,717  
 
               
Long-term debt — less current portion and net of unaccreted discount, net
    246,308       258,132  
Deferred income taxes
    22,945       23,336  
Pension liablities
    11,546       11,854  
Other post retirement benefits
    322       2,270  
Long-term taxes payable
    8,283       7,976  
Other long-term liabilities
    2,369       1,434  
Commitments and contingencies (See Note 16)
           
Stockholders’ equity:
               
Common stock ($0.001 par value, 90,000,000 shares authorized, 25,932,321 and 25,582,543 issued and outstanding at June 27, 2009 and December 31, 2008, respectively)
    26       26  
Additional paid-in capital
    131,191       129,604  
Retained earnings
    22,977       23,325  
Accumulated other comprehensive income
    (15,835 )     (24,090 )
 
           
Total stockholders’ equity
    138,359       128,865  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 494,768     $ 513,584  
 
           
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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ALTRA HOLDINGS, INC.
Condensed Consolidated Statements of Income (Loss)
Amounts in thousands, except per share data
(Unaudited)
                                 
    Quarter Ended     Year to Date Ended  
    June 27,     June 28,     June 27,     June 28,  
    2009     2008     2009     2008  
Net sales
  $ 111,877     $ 167,893     $ 236,417     $ 331,075  
Cost of sales
    82,419       117,506       174,756       232,890  
 
                       
Gross profit
    29,458       50,387       61,661       98,185  
 
                               
Operating expenses:
                               
Selling, general and administrative expenses
    19,938       26,448       41,681       51,161  
Research and development expenses
    1,494       1,766       3,061       3,497  
Other post employment benefit plan settlement gain
          (169 )     (1,467 )     (169 )
Restructuring costs
    2,482       335       4,354       1,068  
 
                       
 
    23,914       28,380       47,629       55,557  
 
                               
Income from operations
    5,544       22,007       14,032       42,628  
 
                               
Other non-operarting income and expense:
                               
Interest expense, net
    6,240       7,713       12,589       15,154  
Other non-operating (income) expense, net
    1,781       (853 )     1,619       (1,479 )
 
                       
 
    8,021       6,860       14,208       13,675  
 
                               
Income (loss) from continuing operations before income taxes
    (2,477 )     15,147       (176 )     28,953  
Provision (benefit) for income taxes
    (711 )     5,278       172       10,127  
 
                       
 
                               
Net income (loss) from continuing operations
    (1,766 )     9,869       (348 )     18,826  
Net loss from discontinued operations, net of income taxes of $124
                      (397 )
 
                       
Net income (loss)
  $ (1,766 )   $ 9,869     $ (348 )   $ 18,429  
 
                       
 
                               
Consolidated Statement of Comprehensive Income
                               
Foreign currency translation adjustment
    10,798       (674 )     8,255       2,302  
 
                       
Comprehensive income
  $ 9,032     $ 9,195     $ 7,907     $ 20,731  
 
                       
 
                               
Weighted average shares, basic
    25,931       25,476       25,911       25,474  
Weighted average shares, diluted
    25,931       26,121       25,911       26,120  
 
                               
Basic earnings per share:
                               
Net income (loss) from continuing operations
  $ (0.07 )   $ 0.39     $ (0.01 )   $ 0.74  
Net loss from discontinued operations
                      (0.02 )
 
                       
Net income (loss)
  $ (0.07 )   $ 0.39     $ (0.01 )   $ 0.72  
 
                       
 
                               
Diluted earnings per share:
                               
Net income (loss) from continuing operations
  $ (0.07 )   $ 0.38     $ (0.01 )   $ 0.72  
Net loss from discontinued operations
                      (0.01 )
 
                       
Net income (loss) from continuing operations
  $ (0.07 )   $ 0.38     $ (0.01 )   $ 0.71  
 
                       
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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ALTRA HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
(Unaudited)
                 
    Year to date ended  
    June 27, 2009     June 28, 2008  
Cash flows from operating activities
               
Net income (loss)
  $ (348 )   $ 18,429  
Adjustments to reconcile net income (loss) to net cash flows:
               
Depreciation
    8,190       8,051  
Amortization of intangible assets
    2,732       2,884  
Amortization and write-offs of deferred financing costs
    957       1,344  
Loss (gain) on foreign currency, net
    1,379       (671 )
Accretion of debt discount, net
    372       359  
Loss on sale of Electronics Division
          397  
Fixed asset impairment
    1,395        
Loss on sale of fixed assets
          137  
Other post employment benefit plan settlement gain
    (1,467 )     (169 )
Stock based compensation
    1,587       1,022  
Changes in assets and liabilities:
               
Trade receivables
    8,634       (18,077 )
Inventories
    20,446       (2,522 )
Accounts payable and accrued liabilities
    (15,384 )     (2,547 )
Other current assets and liabilities
    (769 )     (2,077 )
Other operating assets and liabilities
    83       57  
 
           
Net cash provided by operating activities
    27,807       6,617  
 
           
Cash flows from investing activities
               
Purchase of property, plant and equipment
    (3,783 )     (7,641 )
Proceeds from sale of Electronics Division
          17,210  
 
           
Net cash provided by (used in) investing activities
    (3,783 )     9,569  
 
           
Cash flows from financing activities
               
Payments on Senior Notes
    (4,950 )     (1,346 )
Payments on Senior Secured Notes
    (8,250 )     (15,000 )
Payments on Revolving Credit Agreement
    (1,000 )     (1,723 )
Payment on mortgages
    (171 )     (188 )
Payment on capital leases
    (381 )     (574 )
 
           
Net cash used in financing activities
    (14,752 )     (18,831 )
 
           
Effect of exchange rate changes on cash and cash equivalents
    2,299       70  
 
           
Net change in cash and cash equivalents
    11,571       (2,575 )
Cash and cash equivalents at beginning of year
    52,073       45,807  
 
           
Cash and cash equivalents at end of period
  $ 63,644     $ 43,232  
 
           
 
               
Cash paid during the period for:
               
Interest
  $ 12,047     $ 14,210  
Income taxes
  $ 1,014     $ 10,300  
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
1. Organization and Nature of Operations
Headquartered in Braintree, Massachusetts, Altra Holdings, Inc. (“the Company”), through its wholly-owned subsidiary Altra Industrial Motion, Inc. (“Altra Industrial”), is a leading multi-national designer, producer and marketer of a wide range of mechanical power transmission products. The Company brings together strong brands covering over 40 product lines with production facilities in eight countries and sales coverage in over 70 countries. The Company’s leading brands include Boston Gear, Warner Electric, TB Wood’s, Formsprag Clutch, Ameridrives Couplings, Industrial Clutch, Kilian Manufacturing, Marland Clutch, Nuttall Gear, Stieber Clutch, Wichita Clutch, Twiflex Limited, Bibby Transmissions, Matrix International, Inertia Dynamics, Huco Dynatork, and Warner Linear.
2. Basis of Presentation
The Company was formed on November 30, 2004 following acquisitions of certain subsidiaries of Colfax Corporation (“Colfax”) and The Kilian Company (“Kilian”). During 2006, the Company acquired Hay Hall Holdings Limited (“Hay Hall”) and Bear Linear (“Warner Linear”). On April 5, 2007, the Company acquired TB Wood’s Corporation (“TB Wood’s”), and on October 5, 2007, the Company acquired substantially all of the assets of All Power Transmission Manufacturing, Inc. (“All Power”). These acquisitions are discussed in detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, which is incorporated herein by reference.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the unaudited condensed consolidated financial statements as of June 27, 2009 and December 31, 2008 and for the quarter and year to date periods ended June 27, 2009 and June 28, 2008.
The Company follows a four, four, five week calendar per quarter with all quarters consisting of thirteen weeks of operations with the fiscal year end always on December 31.
The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008 contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
The carrying values of financial instruments, including accounts receivable, accounts payable and other accrued liabilities, approximate their fair values due to their short-term maturities. The carrying amount of the 9% Senior Secured Notes was $234.3 million and $242.5 million at June 27, 2009 and December 31, 2008, respectively. The estimated fair value of the 9% Senior Secured Notes at June 27, 2009 and December 31, 2008 was $224.9 million and $232.8 million, respectively based on quoted market prices for such Notes.
3. Net Income (loss) per Share
Basic earnings per share is based on the weighted average number of shares of common stock outstanding, and diluted earnings per share is based on the weighted average number of shares of common stock outstanding and all potentially dilutive common stock equivalents outstanding. Common stock equivalents are included in the per share calculations when the effect of their inclusion would be dilutive.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
The following is a reconciliation of basic to diluted net income per share:
                                 
    Quarter Ended     Year to Date Ended  
    June 27,     June 28,     June 27,     June 28,  
    2009     2008     2009     2008  
 
                               
Income (loss) from continuing operations
  $ (1,766 )   $ 9,869     $ (348 )   $ 18,826  
Net loss from discontinued operations
                      (397 )
 
                       
Net income (loss)
  $ (1,766 )   $ 9,869     $ (348 )   $ 18,429  
 
                               
Shares used in net income (loss) per common share — basic
    25,931       25,476       25,911       25,474  
 
                               
Incremental shares of unvested restricted common stock
          645             646  
 
                       
 
Shares used in net income (loss) per common share — diluted
    25,931       26,121       25,911       26,120  
 
                               
Earnings per share — Basic:
                               
Income (loss) from continuing operations
  $ (0.07 )   $ 0.39     $ (0.01 )   $ 0.74  
Net loss from discontinued operations
                    $ (0.02 )
 
                       
Net income (loss)
  $ (0.07 )   $ 0.39     $ (0.01 )   $ 0.72  
 
                       
 
                               
Earnings per share — Diluted:
                               
Income (loss) from continuing operations
  $ (0.07 )   $ 0.38     $ (0.01 )   $ 0.72  
Net loss from discontinued operations
                    $ (0.01 )
 
                       
Net income (loss)
  $ (0.07 )   $ 0.38     $ (0.01 )   $ 0.71  
 
                       
4. Recent Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about fair value of financial instruments in interim reporting periods as well as in annual financial statements. The effective date for FSP No. FAS 107-1 and APB 28-1 is June 15, 2009 and accordingly the Company has adopted the provisions of this FSP as of June 30, 2009. Although the adoption of FSP FAS 107-1 and APB 28-1 did not materially impact its financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures, which are included in Note 1.
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165 (“SFAS No. 165”), Subsequent Events. SFAS No. 165 defines the subsequent events or transactions period, circumstances under which such events or transactions should be recognized, and disclosures regarding subsequent events or transactions. SFAS No. 165 is effective for interim or annual periods ending after June 15, 2009. The Company has adopted the provisions of SFAS No. 165 as of June 30, 2009. Although the adoption of SFAS No. 165 did not materially impact its financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures, which are included in Note 16.
5. Discontinued Operations
On December 31, 2007, the Company completed the divestiture of the TB Wood’s adjustable speed drives business (“Electronics Division”) to Vacon PLC (“Vacon”) for $29.0 million. The decision to sell the Electronics Division was made to allow the Company to continue its strategic focus on its core electro-mechanical power transmission business.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
In connection with the sale of the Electronics Division, the Company entered into a transition services agreement. Pursuant to the transition services agreement, the Company provided services such as sales support, warehousing, accounting and IT services to Vacon. The Company recorded the income received as an offset to the related expense of providing the service. During the quarter and year to date periods ended June 28, 2008, the Company recorded a reduction of $0.1 million and $0.3 million against cost of sales, respectively, and $0.3 million and $0.7 million as an offset to selling, general and administrative expenses, respectively. No transition services have been provided in 2009. The Company leases building space to Vacon. The Company recorded $0.1 million and $0.3 million of lease income in other income in the condensed consolidated statement of income (loss) during the quarter and year to date periods ended June 27, 2009 and June 28, 2008.
Loss from discontinued operations in the year to date period ended June 28, 2008 was comprised of a working capital adjustment, net of taxes.
6. Inventories
Inventories located at certain subsidiaries acquired in connection with the TB Wood’s acquisition are stated at the lower of cost or market, principally using the last-in, first-out (“LIFO”) method. The remaining subsidiaries are stated at the lower of cost or market, using the first-in, first-out (“FIFO”) method. Market is defined as net realizable value. Inventories at June 27, 2009 and December 31, 2008 consisted of the following:
                 
    June 27,     December 31,  
    2009     2008  
Raw materials
    28,331     $ 31,925  
Work in process
    16,174       21,310  
Finished goods
    34,882       45,175  
 
           
Inventories
  $ 79,387     $ 98,410  
 
           
Approximately 12% of total inventories at June 27, 2009 were valued using the LIFO method. The Company recorded a $0.1 million adjustment and $0.8 million adjustment as a component of cost of sales to value the inventory on a LIFO basis for the year to date periods ended June 27, 2009 and June 28, 2008, respectively. The Company recorded a less than $0.1 million adjustment as a component of cost of sales to value the inventory on a LIFO basis in the quarter ended June 27, 2009 and a $0.6 million adjustment in the quarter ended June 28, 2008.
If the LIFO inventory was accounted for using the FIFO method, the inventory balance at June 27, 2009 would be $1.5 million higher.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
7. Goodwill and Intangible Assets
Changes to goodwill from December 31, 2008 through June 27, 2009 were as follows:
         
Balance December 31, 2008
    77,497  
Impact of changes in foreign currency
    1,021  
 
     
Balance June 27, 2009
  $ 78,518  
 
     
Other intangible assets as of June 27, 2009 and December 31, 2008 consisted of the following:
                                 
    June 27, 2009     December 31, 2008  
            Accumulated             Accumulated  
Other intangible assets   Cost     Amortization     Cost     Amortization  
Intangible assets not subject to amortization:
                               
Tradenames and trademarks
  $ 30,730     $     $ 30,730     $  
Intangible assets subject to amortization:
                               
Customer relationships
    62,038       17,329       62,038       15,065  
Product technology and patents
    5,435       3,579       5,435       3,111  
Impact of changes in foreign currency
    610             (688 )      
 
                       
Total intangible assets
  $ 98,813     $ 20,908     $ 97,515     $ 18,176  
 
                       
The Company recorded $1.4 million and $1.5 million of amortization expense in the quarters ended June 27, 2009 and June 28, 2008, respectively, and $2.7 million and $2.9 million for the year to date periods ended June 27, 2009 and June 28, 2008, respectively.
The estimated amortization expense for intangible assets is approximately $2.7 million for the remainder of 2009 and $5.5 million in each of the next four years and then $21.9 million thereafter.
8. Assets Held for Sale
During the fourth quarter of 2007, management entered into a plan to exit the building located in Stratford, Canada. The operations of the facility, which was acquired as part of the TB Wood’s acquisition, were integrated into certain of the Company’s other existing facilities in 2008.
In the second quarter of 2009, due to real estate market conditions in Stratford, Canada, the Company has reevaluated the classification of these buildings as assets held for sale and reclassified the buildings, with a net book value of $1.2 million to held and used. As a result of the change in classification, the Company recorded a catch-up depreciation adjustment of $0.1 million in the year to date period ended June 27, 2009.
As of December 31, 2008, management planned to exit two buildings, one in Scotland, Pennsylvania and one in Chattanooga, Tennessee. The two buildings were previously the operating facilities for the Electronics Division which was divested on December 31, 2007. The Company leases the space to Vacon.
In the first quarter of 2009, due to real estate market conditions in Scotland, Pennsylvania and Chattanooga, Tennessee, the Company reevaluated the classification of these buildings as assets held for sale and reclassified the buildings, with a net book value of $3.5 million to held and used. As a result of the change in classification, the Company recorded a catch-up depreciation adjustment of $0.2 million in the year to date period ended June 27, 2009.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
9. Income Taxes
The estimated effective income tax rates recorded for the quarters ended June 27, 2009 and June 28, 2008 were based upon management’s best estimate of the effective tax rate for the entire year. The effective tax rate for continuing operations changed from 35.0% for the year to date period ended June 28, 2008 to 97.7% for the year to date period ended June 27, 2009. The increase in the effective tax rate was the result of significantly lower earnings before taxes coupled with the higher relative impact of the current interest expense on reserves previously established under FASB interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB 109 (“FIN 48”). The FIN 48 interest expense, which is included as part of the income tax (benefit) provision, as a percentage of income from continuing operations increased from 0.48% for the year to date period ended June 28, 2008 to 109.5% for the year to date period ended June 27, 2009.
At June 27, 2009, the Company had $8.3 million of unrecognized tax benefits, which, if recognized, would reduce the Company’s effective tax rate. We do not expect the amount of unrecognized tax benefit disclosed above to change significantly over the next 12 months.
The Company and its subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction as well as in various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in all of these jurisdictions. With the exception of certain foreign jurisdictions, the Company is no longer subject to income tax examinations for the tax years prior to 2005 in these major jurisdictions. Additionally, the Company has indemnification agreements with the sellers of the Colfax, Kilian and Hay Hall entities, which provides for reimbursement to the Company for payments made in satisfaction of tax liabilities relating to pre-acquisition periods.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense in the condensed consolidated statements of income (loss). At December 31, 2008 and June 27, 2009, the Company had $3.1 million and $3.3 million of accrued interest and penalties, respectively. The Company accrued $0.2 million of interest and no penalties during the year to date period ended June 27, 2009.
10. Pension and Other Employee Benefits
Defined Benefit (Pension) and Post-retirement Benefit Plans
The Company sponsors various defined benefit (pension) and post-retirement (medical, dental and life insurance coverage) plans for certain, primarily unionized, active employees. In March 2009, the Company reached a new collective bargaining agreement with the union at its Erie, Pennsylvania facility. One of the provisions of the new agreement eliminates benefits that employees were entitled to receive through the applicable other post employment benefit plan (“OPEB”). OPEB benefits will no longer be available to retired or active employees. This resulted in an OPEB settlement gain of $1.5 million in the year to date period ended June 27, 2009. In addition, no additional years of credited service will be accrued on the defined benefit pension plan effective February 28, 2009. There was no curtailment gain or loss as a result of the change in the pension plan, the plan had no unrecognized prior service cost and there was no change in the projected benefit obligation.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
The following table represents the components of the net periodic benefit cost associated with the respective plans for the quarters and year to date periods ended June 27, 2009 and June 28, 2008:
                                 
    Quarter Ended  
    Pension Benefits     Other Benefits  
    June 27, 2009     June 28, 2008     June 27, 2009     June 28, 2008  
Service cost
  $ 16     $ 16     $ 3     $ 15  
Interest cost
    365       378       19       52  
Expected return on plan assets
    (327 )     (326 )            
Amortization of prior service income
                (244 )     (243 )
Other post employment benefit plan settlement gain
                      (169 )
Amortization of net gain
                (7 )     (6 )
 
                       
Net periodic benefit cost (income)
  $ 54     $ 68     $ (229 )   $ (351 )
 
                       
                                 
    Year to Date Ended  
    Pension Benefits     Other Benefits  
    June 27, 2009     June 28, 2008     June 27, 2009     June 28, 2008  
Service cost
  $ 32     $ 32     $ 6     $ 31  
Interest cost
    730       757       38       104  
Expected return on plan assets
    (654 )     (652 )            
Amortization of prior service income
                (488 )     (487 )
Other post employment benefit plan settlement gain
                (1,467 )     (169 )
Amortization of net gain
                (14 )     (12 )
 
                       
Net periodic benefit cost (income)
  $ 108     $ 137     $ (1,925 )   $ (533 )
 
                       
11. Debt
Outstanding debt obligations at June 27, 2009 and December 31, 2008 were as follows:
                 
    June 27, 2009     December 31, 2008  
 
               
Senior Revolving Credit Agreement
  $     $  
TB Wood’s Credit Agreement
    5,000       6,000  
Overdraft agreements
           
9% Senior Secured Notes
    234,250       242,500  
11.25% Senior Notes
          4,706  
Variable Rate Demand Revenue Bonds
    5,300       5,300  
Mortgages
    2,078       2,257  
Capital leases
    2,273       2,672  
Less: debt discount, net
    (1,540 )     (1,912 )
 
           
Total long-term debt
  $ 247,361     $ 261,523  
 
           

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Senior Revolving Credit Agreement
The Company maintains a $30 million revolving borrowings facility with a commercial bank (the “Senior Revolving Credit Agreement”) through its wholly owned subsidiary Altra Industrial. The Senior Revolving Credit Agreement is subject to certain limitations resulting from the requirement of Altra Industrial to maintain certain levels of collateralized assets, as defined in the Senior Revolving Credit Agreement. Altra Industrial may use up to $10.0 million of its availability under the Senior Revolving Credit Agreement for standby letters of credit issued on its behalf, the issuance of which will reduce the amount of borrowings that would otherwise be available to Altra Industrial. Altra Industrial may re-borrow any amounts paid to reduce the amount of outstanding borrowings; however, all borrowings under the Senior Revolving Credit Agreement must be repaid in full as of November 30, 2010.
Substantially all of Altra Industrial’s assets have been pledged as collateral against outstanding borrowings under the Senior Revolving Credit Agreement. The Senior Revolving Credit Agreement requires Altra Industrial to maintain a minimum fixed charge coverage ratio of 1.20 for all four quarter periods when availability under the line falls below $12.5 million. Altra Industrial’s availability under the Senior Revolving Credit Agreement has never dropped below $12.5 million and we do not believe that it will in the foreseeable future. The Senior Revolving Credit Agreement imposes customary affirmative covenants and restrictions on Altra Industrial.
There were no borrowings under the Senior Revolving Credit Agreement at June 27, 2009 and December 31, 2008. However, the lender had issued $7.6 million of outstanding letters of credit as of June 27, 2009 and December 31, 2008, respectively, under the Senior Revolving Credit Agreement.
The interest rate on any outstanding borrowings on the line of credit are the lender’s Prime Rate plus 25 basis points or LIBOR plus 175 basis points. The rate on all outstanding letters of credit are 1.5% and .25% on any unused availability under the Senior Revolving Credit Agreement.
TB Wood’s Revolving Credit Agreement
As of June 27, 2009 and December 31, 2008, there were $6.1 million and $6.0 million of outstanding letters of credit under the TB Wood’s Credit Agreement, respectively. All borrowing under the TB Wood’s Revolving Credit Agreement are due on November 30, 2010. The interest rate on any outstanding borrowings on the line of credit are the lender’s Prime Rate plus 25 basis points or LIBOR plus 175 basis points.
Overdraft Agreements
Certain foreign subsidiaries maintain overdraft agreements with financial institutions. There were no borrowings as of June 27, 2009 or December 31, 2008 under any of the overdraft agreements.
9% Senior Secured Notes
Altra Industrial issued 9% Senior Secured Notes (“Senior Secured Notes”), with a face value of $270.0 million. Interest on the Senior Secured Notes is payable semi-annually, in arrears, on June 1 and December 1 of each year, at an annual rate of 9%. The Senior Secured Notes mature on December 1, 2011 unless previously redeemed by Altra Industrial.
The effective interest rate on the Senior Secured Notes is approximately 9.6% after consideration of the amortization of the original net issue discount of $5.6 million (included in long-term debt) and the original $6.5 million of deferred financing costs (included in other assets).
The Senior Secured Notes are guaranteed by Altra Industrial’s U.S. domestic subsidiaries and are secured by a second priority lien, subject to first priority liens securing the Senior Revolving Credit Agreement, on substantially all of Altra Industrial’s assets. The Senior Secured Notes contain many terms, covenants and conditions, which impose substantial limitations on Altra Industrial.
During the second quarter of 2009, Altra Industrial retired $8.3 million aggregate principal amount of the outstanding Senior Secured Notes at a redemption price of between 94.75% and 97.125% of the principal amount, plus accrued and unpaid interest. In connection with the redemption, Altra Industrial recorded a gain on the extinguishment of debt of $0.4 million, which is recorded as a reduction in interest expense in the condensed consolidated statement of income (loss). In addition, Altra Industrial wrote-off $0.1 million of deferred financing costs and original issue discount/premium which is included in interest expense.
11.25% Senior Notes
Altra Industrial issued 11.25% Senior Notes (“Senior Notes”), with a face value of £33 million. Interest on the Senior Notes was payable semi-annually, in arrears, on August 15 and February 15 of each year, at an annual rate of 11.25%. The effective interest rate on the Senior Notes was approximately 12.4%, after consideration of the $2.6 million of deferred financing costs (included in other assets). The Senior Notes were scheduled to mature on February 13, 2013.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
During the second quarter of 2009, Altra Industrial retired the remaining principal balance of the Senior Notes of £3.3 million or $5.0 million of the principal amount, plus accrued and unpaid interest. In connection with the redemption, Altra Industrial incurred $0.2 million of pre-payment premium and wrote-off the entire remaining balance of $0.1 million of deferred financing fees, which is recorded as interest expense in the condensed consolidated statement of income (loss).
Variable Rate Demand Revenue Bonds
In connection with the acquisition of TB Wood’s, the Company assumed the obligation to make payments due under certain Variable Rate Demand Revenue Bonds outstanding as of the acquisition date. TB Wood’s had borrowed approximately $3.0 million and $2.3 million through the issuance of Variable Rate Demand Revenue Bonds under the authority of the industrial development corporations of the City of San Marcos, Texas and City of the Chattanooga, Tennessee, respectively. These bonds bear variable interest rates (less than 1% interest on June 27, 2009), and mature in April 2024 and April 2022, respectively. The bonds were issued to finance production facilities for TB Wood’s manufacturing operations in those cities, and are secured by letters of credit issued under the terms of the TB Wood’s Credit Agreement.
As of December 31, 2008, the Company planned to sell the building in Chattanooga, Tennessee. According to the terms of the indenture and lease, before the Company can acquire the building, free of all encumbrances, the outstanding debt under the Variable Rate Demand Revenue Bonds would have to be paid in full. As a result, the debt was classified as a current liability on the condensed consolidated balance sheet as of December 31, 2008.
In the first quarter of 2009, due to real estate market conditions in Chattanooga, Tennessee, the Company reevaluated the classification of these buildings as an asset held for sale and reclassified this building to held and used. As a result of the change in classification, the Company reclassified $2.3 million of debt associated with the Chattanooga property to long-term debt on the condensed consolidated balance sheet.
Mortgage
In June 2006, the Company entered into a mortgage on its building in Heidelberg, Germany with a local bank. As of June 27, 2009 and December 31, 2008, the mortgage had a remaining principal balance outstanding of 1.5 million, or $2.1 million, and 1.6 million, or $2.3 million, respectively, and an interest rate of 5.75%. The mortgage is payable in monthly installments over 15 years.
Capital Leases
The Company leases certain equipment under capital lease arrangements, whose obligations are included in both short-term and long-term debt.
12. Stockholders’ Equity
Stock-Based Compensation
The Company’s Board of Directors established the 2004 Equity Incentive Plan (the “Plan”) that provides for various forms of stock based compensation to independent directors, officers and senior-level employees of the Company. The restricted shares of common stock issued pursuant to the Plan generally vest ratably between 3.5 to 5 years, provided that the vesting of the restricted shares may accelerate upon the occurrence of certain liquidity events, if approved by the Board of Directors in connection with the transactions. Shares granted to non-management members of the Board of Directors generally vest immediately.
The Plan permits the Company to grant restricted stock to key employees and other persons who make significant contributions to the success of the Company. The restrictions and vesting schedule for restricted stock granted under the Plan are determined by the Compensation Committee of the Board of Directors. Compensation expense recorded during the quarters ended June 27, 2009 and June 28, 2008 was $0.6 million . Compensation expense for the year to date periods ended June 27, 2009 and June 28, 2008 was $1.6 million and $1.0 million, respectively. Stock based compensation expense is recognized on a straight-line basis over the vesting period.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
The following table sets forth the activity of the Company’s unvested restricted stock grants in the year to date period ended June 27, 2009:
                 
            Weighted-average  
    Shares     grant date fair value  
 
Restricted shares unvested December 31, 2008
    797,714     $ 5.53  
Shares granted
    283,141     $ 6.95  
Forfeitures
    (11,830 )   $ 7.15  
Shares for which restrictions lapsed
    (349,774 )   $ 4.21  
 
           
Restricted shares unvested June 27, 2009
    719,251     $ 6.70  
 
           
Total remaining unrecognized compensation cost was approximately $4.1 million as of June 27, 2009, which will be recognized over a weighted average remaining period of three years. The fair market value of the shares in which the restrictions have lapsed during the year to date period ended June 27, 2009 was $3.0 million. Restricted shares granted are valued based on the fair market value of the stock on the date of grant.
13. Concentrations of Credit, Segment Data and Workforce
Financial instruments, which are potentially subject to counter party performance and concentrations of credit risk, consist primarily of trade accounts receivable. The Company manages these risks by conducting credit evaluations of customers prior to delivery or commencement of services. When the Company enters into a sales contract, collateral is normally not required from the customer. Payments are typically due within thirty days of billing. No customer represented greater than 10% of total sales for the quarters ended June 27, 2009 and June 28, 2008.
The Company is also subject to counter party performance risk of loss in the event of non-performance by counterparties to financial instruments, such as cash and investments. Cash and investments are held by international or well established financial institutions.
In accordance with SFAS 131, the Company has five operating segments that are regularly reviewed by our Chief Operating Decision Maker. Each of these operating segments represents an Operating Platform that produces mechanical power transmission products. The Company aggregates all of the operating segments into one reportable segment in a manner that is consistent with the objective and a basic principles of SFAS 131. The five operating segments have similar long-term average gross profit margins. All of our products are sold by one global sales force and we have one global marketing function. Strategic markets and industries are determined for the entire company and then targeted by the brands. All of our operating segments have common manufacturing and production processes. Each segment includes a machine shop which uses similar equipment and manufacturing techniques. Each of our segments uses common raw materials, such as aluminum, steel and copper. The materials are purchased and procurement contracts are negotiated by one global purchasing function manager.
We serve the general industrial market by selling to original equipment manufacturers (“OEM”) and distributors. Our OEM and distributor customers serve the general industrial market. Resource allocation decisions such as capital expenditure requirements and headcount requirements are made at a consolidated level and allocated to the individual operating segments.
Discrete financial information is not available by product line at the level necessary for management to assess performance or make resource allocation decisions.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Net sales to third parties by geographic region are as follows:
                                 
    Net Sales  
    Quarter Ended     Year to Date Ended  
    June 27,     June 28,     June 27,     June 28,  
    2009     2008     2009     2008  
 
North America (primarily U.S.)
  $ 81,726     $ 117,694     $ 173,329     $ 236,397  
Europe
    23,831       43,022       51,510       81,262  
Asia and other
    6,320       7,177       11,578       13,416  
 
                       
Total
  $ 111,877     $ 167,893     $ 236,417     $ 331,075  
 
                       
Net sales to third parties are attributed to the geographic regions based on the country in which the shipment originates.
The net assets of foreign subsidiaries at June 27, 2009 and December 31, 2008 were $73.1 million and $73.5 million, respectively.
14. Commitments and Contingencies
General Litigation
The Company is involved in various pending legal proceedings arising out of the ordinary course of business. None of these legal proceedings are expected to have a material adverse effect on the results of operations, cash flows, or financial condition of the Company. With respect to these proceedings, management believes that it will prevail, has adequate insurance coverage or has established appropriate reserves to cover potential liabilities. Any costs that management estimates may be paid related to these proceedings or claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these legal proceedings were to be determined adversely to the Company, there could be a material adverse effect on the results of operations, cash flows, or financial condition of the Company. As of June 27, 2009 and December 31, 2008, there were no such claims for which management believed a loss was probable. As a result, no amounts were accrued in the accompanying consolidated balance sheets for losses related to such claims at those dates.
The Company is indemnified under the terms of certain acquisition agreements for certain pre-existing matters up to agreed upon limits.
15. Restructuring, Asset Impairment and Transition Expenses
During 2007, the Company adopted two restructuring programs. The first was intended to improve operational efficiency by reducing headcount, consolidating operating facilities and relocating manufacturing to lower cost areas (the “Altra Plan”). The second was related to the acquisition of TB Wood’s and was intended to reduce duplicate staffing and consolidate facilities (the “TB Wood’s Plan”). The TB Wood’s Plan was initially formulated at the time of the TB Wood’s acquisition and therefore the accrual was recorded as part of purchase accounting.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
The Company has not incurred any additional expenses related to either the Altra Plan or the TB Wood’s Plan in 2009. The Company’s restructuring expense, by major component for the year to date period ended June 28, 2008 was as follows:
                         
            TB Wood’s        
    Altra Plan     Plan     Total  
 
Expenses
                       
Other cash expenses
  $     $     $  
Moving and relocation
    228       68       296  
Severance
    631             631  
 
                 
 
                       
Total cash expenses
    859       68       927  
 
                 
 
                       
Non-cash asset impairment and loss on sale of fixed asset
    141             141  
 
                 
 
                       
Total restructuring expenses
  $ 1,000     $ 68     $ 1,068  
 
                 
In March 2009, the Company adopted a new restructuring plan (“2009 Altra Plan”) to improve the utilization of the manufacturing infrastructure and to realign the business with the current economic conditions. The 2009 Altra Plan will improve operational efficiency by reducing headcount and consolidating facilities. The Company’s total restructuring expense related to headcount reductions for the quarter ended June 27, 2009 was $1.6 million. We expect to incur cash charges of between $3.5 million and $4.5 million related to this plan for the remainder of 2009 and between $0.5 million and $1.0 million of additional restructuring charges related to this plan in 2010. We expect costs savings from this plan to be approximately $28.8 million on a annualized basis, and we believe we will see the full savings beginning in 2010. We expect savings in 2009 to be approximately $20.0 million.
On April 7, 2009, the Company announced that it would be closing its facility in Mt. Pleasant, Michigan and relocating the manufacturing to certain of the Company’s other facilities. In connection with this decision, the Company completed an impairment analysis. The facility which had a carrying value of $1.4 million was written down to the fair value of $0.7 million, resulting in an impairment charge of $0.7 million. The Company estimated the fair value using observable inputs (level 2). The Company reviewed sale prices of comparable buildings in the Mt. Pleasant, Michigan area. The relocation is expected to be completed by the end of 2009.
On July 7, 2009, the Company announced that it would be closing its manufacturing facility in South Beloit, Illinois and relocating the manufacturing operations to certain of the Company’s other facilities. In connection with this decision, the Company completed an impairment analysis. The facility which had a carrying value of $2.1 million was written down to the fair value of $1.5 million, resulting in an impairment charge of $0.6 million. The Company estimated the fair value using observable inputs (level 2). The Company reviewed sale prices of comparable buildings in the South Beloit, Illinois area. The relocation is expected to be completed by the end of 2009.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
The expense for the year to date period ended June 27, 2009 is classified by major component as follows:
         
    2009 Altra Plan  
 
Expenses:
       
Other cash expenses
  $ 47  
Severance
    2,682  
 
     
 
       
Total cash expenses
    2,729  
 
     
 
       
Non-cash asset impairment and other non-cash charges
    1,625  
 
     
 
       
Total restructuring expenses
  $ 4,354  
 
     
The following is a reconciliation of the accrued restructuring costs between December 31, 2008 and June 27, 2009:
         
    All Plans  
 
       
Balance at December 31, 2008
  $ 1,297  
Cash restructuring expense incurred
    2,729  
Cash payments
    (2,597 )
 
     
Balance at June 27, 2009
  $ 1,429  
 
     
16. Subsequent Event
The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company evaluated subsequent events through August 4, 2009, the date the financial statements were issued.
On July 7, 2009, the Company announced that it would be closing its manufacturing facility in South Beloit, Illinois and relocating the manufacturing operations to certain of the Company’s other facilities. See Footnote 15 for further discussion on the impact of this decision.

 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of Altra Holdings, Inc. should be read together with the audited financial statements of Altra Holdings, Inc. and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Forward-Looking Statements.” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
General
Altra Holdings, Inc. is the parent company of Altra Industrial Motion, Inc. (“Altra Industrial”) and owns 100% of Altra Industrial’s outstanding capital stock. Altra Industrial, directly or indirectly, owns 100% of the capital stock of its 48 subsidiaries. The following chart illustrates a summary of our corporate structure:
(FLOW CHART)
The subsidiaries of Altra Industrial design, produce and market a wide range of mechanical power transmission (“MPT”) and motion control products. The business conducted at our subsidiaries is organized into five operating segments; Electro Magnetic Clutches & Brakes, Heavy Duty Clutches & Brakes, Overrunning Clutches & Engineered Bearing Assemblies, Engineered Couplings and Gearing and Belted Drives. We have a presence in over 70 countries. Our global sales and marketing network includes over 1,000 direct original equipment manufacturers (“OEM”) and over 3,000 distributor outlets. We are headquartered in Braintree, Massachusetts.
Our products, principal brands and markets and sample applications are set forth below:
         
Operating Segment   Principal Brands   Principal Markets
Heavy Duty Clutches & Brakes
  Wichita Clutch,   Energy
 
  Twiflex   Metals
 
  Industrial Clutch   Marine
Electro-Magnetic Clutches & Brakes
  Warner Electric,   Turf and Garden
 
  Matrix Engineering,   Forklift
 
  Inertia Dynamics   Elevator
 
  Warner Linear   Material Handling
Overrunning Clutches & Bearings
  Formsprag   Aerospace
 
  Stieber   Mining
 
  Kilian   Material Handling
 
  Marland Clutch   Transportation
Engineered Couplings
  TB Wood’s   Energy
 
  Ameridrives   Metals
 
  Bibby Transmission   Petro/Chem
 
  Huco Dynatork    
Gearing and Belted Drives
  Boston Gear,   Food Processing
 
  TB Wood’s   Material Handling
 
  Nuttall/Delroyd,   Energy
 
  Centric Clutch    

 

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Our Internet address is www.altramotion.com. By following the link “Investor Relations” and then “SEC filings” on our Internet website, we make available, free of charge, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such forms are filed with or furnished to the SEC. We are not including the information contained on or available through our website as a part of, or incorporating such information by reference into this Form 10-Q.
Business Outlook
Our future financial performance depends, in large part, on conditions in the markets that we serve and on the U.S. and global economies in general. During November and December 2008, we saw a significant change in economic conditions both in North America and internationally as most of our end markets experienced dramatic downturns. During the fourth quarter of 2008, we began to see several of our distributors and OEM customers implement inventory reduction programs which have continued throughout the first two quarters of 2009. Due to the inability to predict the duration and severity of the current global economic downturn, our visibility regarding the outlook for our markets and business during 2009 is limited. Assuming that the downturn continues, we expect continued weakness in our order rates for the remainder of 2009 in almost all of our end markets.
In response to the continued challenging economic conditions of 2009, we have taken and continue to take swift and aggressive actions to reduce our expenses and maximize near-term profitability. Our cost-reduction initiatives are centered on three areas: workforce cutbacks, plant consolidations and procurement and other cost reductions. Effective in February 2009, the Company’s discretionary 401(k) match was suspended and a temporary reduction in executive compensation was initiated. Effective June 1, 2009, the Company announced the temporary suspension of all company contributions to the 401(k) plan. We also have announced a general hiring freeze, that all non-union employee salaries will be frozen for at least twelve months and reduced work schedules. During the year to date period ended June 27, 2009, we incurred $4.4 million of restructuring expense and $1.6 million of non-cash charges mainly related to an impairment charge at the Mount Pleasant and South Beloit facility that are both expected to close in December 2009. The remaining expense relates mainly to severance. We expect to incur an additional $3.5 and $4.5 million of expenses associated with the workforce reduction and consolidation of facilities in 2009 and between $0.5 million and $1.0 million in 2010. We expect to see annualized savings of approximately $28.8 million beginning in 2010. We expect savings in 2009 to be $20.0 million.
We will continue our strong focus on working capital management and cash flow generation with the intent of improving our liquidity by reducing inventory and A/R levels. As of June 27, 2009, we have a cash balance of $63.6 million.
This outlook presents management’s expectations, however, although we believe they are reasonable, our expectations may not be correct and our plans may change. As with any forward-looking statements, there are inherent risks and uncertainties that could cause actual results to differ from present plans or expectations and such differences could be material.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect our reported amounts of assets, revenues and expenses, as well as related disclosure of contingent assets and liabilities. We base our estimates on past experiences and other assumptions we believe to be appropriate, and we evaluate these estimates on an on-going basis. Management believes there have been no significant changes in our critical accounting policies since December 31, 2008, except as listed below. See the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

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Goodwill, Intangibles and other long-lived assets . In connection with our acquisitions, goodwill and intangible assets were identified and recorded at their fair value. We recorded intangible assets for customer relationships, trade names and trademarks, product technology, patents and goodwill. In valuing the customer relationships, trade names and trademarks, we utilized variations of the income approach. The income approach was considered the most appropriate valuation technique because the inherent value of these assets is their ability to generate current and future income. The income approach relies on historical financial and qualitative information, as well as assumptions and estimates for projected financial information. Projected financial information is subject to risk if our estimates are incorrect. The most significant estimate relates to our projected revenues and profitability. If we do not meet the projected revenues and profitability used in the valuation calculations then the intangible assets could be impaired. In determining the value of customer relationships, we reviewed historical customer attrition rates which were determined to be approximately 5% per year. Most of our customers tend to be long-term customers with very little turnover. While we do not typically have long-term contracts with customers, we have established long-term relationships with customers which make it difficult for competitors to displace us. Additionally, we assessed historical revenue growth within our industry and customers’ industries in determining the value of customer relationships. The value of our customer relationships intangible asset could become impaired if future results differ significantly from any of the underlying assumptions. This could include a higher customer attrition rate or a change in industry trends such as the use of long-term contracts which we may not be able to obtain successfully. Customer relationships and product technology and patents are considered finite-lived assets, with estimated lives ranging from 8 years to 16 years. The estimated lives were determined by calculating the number of years necessary to obtain 95% of the value of the discounted cash flows of the respective intangible asset. Goodwill and trade names and trademarks are considered indefinite lived assets. Trade names and trademarks were determined to be indefinite lived assets based on the criteria stated in paragraph 11 in SFAS 142 Goodwill and Other Intangible Assets . Other intangible assets include trade names and trademarks that identify us and differentiate us from competitors, and therefore competition does not limit the useful life of these assets. Additionally, we believe that our trade names and trademarks will continue to generate product sales for an indefinite period.
As of December 31, 2008, goodwill was allocated to each of our twenty identified reporting units. In accordance with SFAS 142, we conducted an annual impairment review of goodwill and indefinite lived intangible assets as of December 31, 2008 at each of these reporting units.
    The breakdown of reporting units by acquisition and acquisition date are as follows:
     
Colfax acquisition — November 30, 2004
  12 reporting units
Hay Hall acquisition — February 10, 2006
  5 reporting units
Warner Linear acquisition — May 18, 2006
  1 reporting unit
TB Wood’s acquisition — April 5, 2007
  1 reporting unit
All Power Transmission — October 5, 2007
  1 reporting unit
Beginning in the fourth quarter of 2008, almost all of our reporting units were impacted by the overall general economic decline. The decline in our weekly order rates was significant and almost immediate. Between the week of November 7, 2008 and November 14, 2008 order rates declined 21%. Prior to that week, order rates had been flat or increasing for over a year. On a consolidated basis weekly order rates from the week of November 14 through the final full week of the year, December 19, decreased an additional 33%.

 

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As part of the annual goodwill impairment assessment we estimated the fair value of each of our reporting units using an income approach. We forecasted the future cash flows by reporting unit for each of the next five years and applied a long term growth rate to the final year of forecasted cash flows. The cash flows were then discounted using our estimated discount rate. The forecasts of revenue and profitability growth for use in the long-range plan and the discount rate were the key assumptions in our intangible fair value analysis. The following table sets forth the assumptions used in 2008 and 2007 in the calculation of estimated fair value for each of the reporting units that recorded a goodwill impairment during 2008:
                 
    2007 goodwill impairment   2008 goodwill impairment
    assumptions   assumptions
Huco (Hay Hall acquisition)
               
Revenue growth (1st year)
  13.6% increase   (26.2%) decrease
Average revenue growth (2nd – 5th year)
  5.8% increase   5.8% increase
Profitability growth rate EBITDA as a percent of sales (1st year)
  3.6% increase   (4%) decrease
Average profitability growth rate per year (EBITDA as a percent of sales) (2nd – 5th year)
  0.8% increase   1% increase
Discount Rate
  12%   13%
 
               
TB Woods
               
Revenue growth (1st year)
  10.4% increase   (18%) decrease
Average revenue growth (2nd – 5th year)
  5.8% increase   5.8% increase
Profitability growth rate EBITDA as a percent of sales (1st year)
  (0.7%) decrease   (1%) decrease
Average profitability growth rate per year (EBITDA as a percent of sales) (2nd – 5th year)
  0.6% increase   1% increase
Discount Rate
  12%   13%
 
               
Warner Linear
               
Revenue growth (1st year)
  51%   (10.3%) decrease
Average revenue growth (2nd – 5th year)
  5.8% increase   5.8% increase
Profitability growth rate EBITDA as a percent of sales (1st year)
  8.9% increase   6% increase
Average profitability growth rate per year (EBITDA as a percent of sales) (2nd – 5th year)
  0.6% increase   0.5% increase
Discount Rate
  12%   13%
A continuation of the significant decrease in order rates in the final weeks of 2008 and into 2009 was a key assumption when developing our long-term revenue and profitability plan for our goodwill impairment analysis as of December 31, 2008. All of our reporting units assumed significantly lower sales and lower profitability for 2009 in their long-term growth plan when compared to the forecast used in the goodwill impairment analysis as of December 31, 2007. The discount rate was not changed significantly from the December 31, 2007 goodwill impairment analysis.
As a result of the goodwill impairment analysis, we recorded a goodwill impairment of $31.8 million at the TB Woods, Huco and Warner Linear reporting units as of December 31, 2008. The goodwill remaining at these reporting units, after the adjustment for goodwill impairments, was $23.5 million at TB Woods and there was no goodwill remaining at either Warner Linear or Huco. Due to prevailing market conditions at the time of the acquisitions of these three reporting units, the purchase price paid as consideration for these three acquisitions required a higher premium when compared to the prior 2004 Colfax acquisition and therefore created higher goodwill at these reporting units.
Prior to filing our Form 10-K on March 6, 2009, we reviewed the assumptions used in our goodwill impairment analysis and noted that they had not changed significantly from when we completed our goodwill impairment assessment.
We considered whether the sum of the fair value of all of our reporting units was reasonable when compared to our market capitalization on the date of the goodwill impairment analysis. As of December 31, 2008, our estimated enterprise fair value was $274.4 million. Our market capitalization was $208.7 million. The difference between the fair value of the enterprise and our market capitalization represented a control market premium of between 25% and 35%.

 

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Management believes the preparation of revenue and profitability growth rates for use in the long-range plan and the discount rate requires significant use of judgment. If any of our reporting units do not meet our current year forecasted revenue and/or profitability estimates we could be required to perform an interim goodwill impairment analysis. In addition, if our discount rate increases, we could be required to perform an interim goodwill impairment analysis. The following table shows the number of reporting units that could be required to perform an interim goodwill impairment analysis if forecasted profitability decreases or the estimated discount rate increases and the goodwill recorded at each of these reporting units. In management’s opinion, these are the reasonably likely scenarios to occur and would have a material effect on the outcome of the fair value assessment and could result in a material goodwill impairment.
                         
    Profitability decrease     Profitability decrease     Profitability decrease  
    5% (all other     10% (all other     15% (all other  
    assumptions remain     assumptions remain     assumptions remain  
    constant)     constant)     constant)  
Number of reporting units that could be required to perform an interim impairment analysis
  1     4     5  
Goodwill as of December 31, 2008 at reporting units that would be required to perform an interim impairment analysis
  $23.5 million   $28.3 million   $40.9 million
                 
    Discount rate increase 50 basis     Discount rate increase 100 basis  
    points (all other assumptions     points (all other assumptions  
    remain constant)     remain constant)  
Number of reporting units that could be required to perform an interim impairment analysis
  1     1  
Goodwill as of December 31, 2008 at reporting units that could be required to perform an interim impairment analysis
  $23.5 million   $23.5 million
In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets, long-lived assets, including definite-lived intangible assets, are reviewed for impairment when events or circumstances indicate that the carrying amount of a long-lived asset may not be recovered. Long-lived assets are considered to be impaired if the carrying amount of the asset exceeds the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment is measured by the amount by which the carrying amount of the asset exceeds its fair value, and is charged to results of operations at that time.
During the fourth quarter of 2008, a goodwill impairment was identified and recorded at three reporting units which, in turn, triggered an impairment analysis with respect to long-lived assets at those reporting units.
For our definite lived intangible assets, mainly customer relationships, we estimated the future cash flows using the excess earnings method, a derivation of the discounted cash flow method. We estimated total revenue attributable to existing customer relationships and projected customer revenue growth for the remainder of the projection period. Existing customer revenue was then multiplied by an attrition curve based on our historical attrition rates percent (approximately 4%) for each reporting unit. We estimated profitability for the customer relationship based on the overall reporting unit’s profitability. We compared the estimated future undiscounted cash flows to the carrying value of the customer relationship for each reporting unit and did not identify any impairment.

 

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For our indefinite lived intangible assets, mainly trademarks, we estimated the fair value first by estimating the total revenue attributable to the trademarks for each of the reporting units. Second we estimated an appropriate royalty rate using the return on assets method by estimating the required financial return on our assets, excluding trademarks, less the overall return generated by our total asset base. The return as a percentage of revenue provides an indication of our royalty rate (approximately 1.5%). We compared the estimated fair value of our trademarks with the carrying value of the trademarks and did not identify any impairment.
During the second quarter of 2009, we did not identify any events that required us to perform an interim impairment analysis.
Recent Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about fair value of financial instruments in interim reporting periods as well as in annual financial statements. The effective date for FSP No. FAS 107-1 and APB 28-1 is June 15, 2009 and accordingly the Company has adopted the provisions of this FSP as of June 30, 2009. Although the adoption of FSP FAS 107-1 and APB 28-1 did not materially impact its financial condition, results of operations, or cash flow, we are now required to provide additional disclosures, which are included in Note 1.
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165 (“SFAS No. 165”), Subsequent Events. SFAS No. 165 defines the subsequent events or transactions period, circumstances under which such events or transactions should be recognized, and disclosures regarding subsequent events or transactions. SFAS No. 165 is effective for interim or annual periods ending after June 15, 2009. We adopted the provisions of SFAS No. 165 as of June 30, 2009. Although the adoption of SFAS No. 165 did not materially impact its financial condition, results of operations, or cash flow, we are now required to provide additional disclosures, which are included in Note 16.
Results of Operations
                                 
    Quarter Ended     Year to date ended  
    June 27,     June 28,     June 27,     June 28,  
(In thousands, except per share data)   2009     2008     2009     2008  
Net sales
  $ 111,877     $ 167,893     $ 236,417     $ 331,075  
Cost of sales
    82,419       117,506       174,756       232,890  
 
                       
Gross profit
    29,458       50,387       61,661       98,185  
Gross profit percentage
    26.33 %     30.01 %     26.08 %     29.66 %
Selling, general and administrative expenses
    19,938       26,448       41,681       51,161  
Research and development expenses
    1,494       1,766       3,061       3,497  
Other post employment benefit plan settlement gain
          (169 )     (1,467 )     (169 )
Restructuring costs
    2,482       335       4,354       1,068  
 
                       
Income from operations
    5,544       22,007       14,032       42,628  
Interest expense, net
    6,240       7,713       12,589       15,154  
Other non-operating (income) expense, net
    1,781       (853 )     1,619       (1,479 )
 
                       
Income (loss) from continuing operations before income taxes
    (2,477 )     15,147       (176 )     28,953  
Provision (benefit) for income taxes
    (711 )     5,278       172       10,127  
 
                       
Income (loss) from continuing operations
    (1,766 )     9,869       (348 )     18,826  
 
Net loss from discontinued operations, net of income taxes of $124
                      (397 )
 
                       
Net income (loss)
  $ (1,766 )   $ 9,869     $ (348 )   $ 18,429  
 
                       

 

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Quarter Ended June 27, 2009 compared with Quarter Ended June 28, 2008
(Amounts in thousands unless otherwise noted)
                                 
    Quarter Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Net sales
  $ 111,877     $ 167,893     $ (56,016 )     -33.4 %
The decrease in sales is primarily due to the overall economic decline which has impacted almost all of our end markets and industries. On a constant currency basis, sales decreased $47.1 million or 28.1%. We saw a substantial decrease in sales at our Heavy Duty Clutches & Brakes and Engineered Couplings operating segments of 23.9% and 10.8% respectively in the second quarter of 2009 versus the first quarter of 2009. Both of these operating segments sell into late cycle markets and began to see volume decreases in the second quarter of 2009. Until worldwide economic conditions improve, we expect continued weakness in our order rates.
                                 
    Quarter Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
Gross Profit
  $ 29,458     $ 50,387     $ (20,929 )     -41.5 %
Gross Profit as a percent of sales
    26.3 %     30.0 %                
The decrease in gross profit is due to the significant decrease in sales. As a result of our decrease in sales, we have less leverage on our fixed costs. On a constant currency basis, gross profit decreased $17.6 million or 34.9%. We have taken actions to reduce our expenses and maximize near-term profitability; however, we expect our 2009 gross profit as a percentage of sales to decrease when compared to 2008.
                                 
    Quarter Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Selling, general and administrative expense (“SG&A”)
  $ 19,938     $ 26,448     $ (6,510 )     -24.6 %
SG&A as a percent of sales
    17.8 %     15.8 %                
The decrease in SG&A is due to our strong cost reduction actions which began in the fourth quarter of 2008. Our cost reduction efforts were focused on headcount reductions and the elimination of non-critical expenses which decreased our overall SG&A costs. As a result of the decreased sales volume we have seen a reduction in outside sales representative commission costs. In addition, during the quarter we suspended all company contributions to our 401(k) plan in the United States and required certain U.S. personnel to take furloughs. However, due to the significant decrease in sales, SG&A as a percent of sales increased despite our cost reductions. During the remainder of 2009, we expect to continue to reduce our SG&A costs through plant consolidations, additional headcount reductions and expense elimination.
                                 
    Quarter Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Research and development expenses (“R&D”)
  $ 1,494     $ 1,766     $ (272 )     -15.4 %
R&D represents approximately 1% of sales in both periods.

 

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    Quarter Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Restructuring expenses
  $ 2,482     $ 335     $ 2,147       640.9 %
During 2007, we adopted two restructuring programs. The first was intended to improve operational efficiency by reducing headcount, consolidating our operating facilities and relocating manufacturing to lower cost areas (“Altra Plan”). The second was related to the acquisition of TB Wood’s and was intended to reduce duplicative staffing and consolidate facilities (“TB Wood’s Plan”). We recorded approximately $0.3 million in the second quarter of 2008 of restructuring expenses for moving and relocation, severance and non-cash asset impairment. There were no costs related to the Altra Plan or the TB Wood’s Plan incurred in 2009.
In March 2009, we adopted a new restructuring plan (“2009 Altra Plan”) to improve the utilization of the manufacturing infrastructure and to realign the business with the current economic conditions. The 2009 Altra Plan will improve operational efficiency by reducing headcount and consolidating certain facilities. During the second quarter of 2009, we recorded $2.5 million of restructuring $1.6 million related to severance and $0.6 million related to a non-cash impairment charge for our South Beloit, Illinois facility due to the announcement that we expect to close the facility at the end of 2009 and $0.3 million of other non-cash charges. We expect to incur between $3.5 million and $4.5 million of additional restructuring charges related to this plan for the remainder of 2009 and between $0.5 million and $1.0 million of additional restructuring charges related to this plan in 2010. We expect costs savings from this plan to be approximately $28.8 million on a annualized basis, and we believe we will see the full savings beginning in 2010. In 2009, we expect to see savings of $20.0 million.
                                 
    Quarter Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Interest Expense, net
  $ 6,240     $ 7,713     $ (1,473 )     -19.1 %
Net interest expense decreased due to the lower average outstanding balance of the Senior Secured Notes and Senior Notes. In addition, in the second quarter of 2008 we paid a premium of $0.4 million associated with the repurchase of $15.0 million of Senior Secured Notes and wrote-off $0.3 million of deferred financing costs. In the second quarter of 2009, we paid a premium of $0.2 million associated with the pay-down of $5.0 million of Senior Notes, which was offset by the discount of $0.4 million we received with the pay-down of $8.3 million of Senior Secured Notes. We wrote-off $0.2 million of deferred financing costs associated with the pay-down of the debt.
                                 
    Quarter Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Other non-operating loss (income), net
  $ 1,781     $ (853 )   $ 2,634       -309 %
Other non-operating income for both quarters included rental income of $0.2 million for facility rentals under lease agreements which were part of the sale of TB Wood’s Electronics Division. During the second quarter of 2009, we sold Saftek Ltd., Inc. In connection with the sale we recorded a $0.2 million loss on the sale. The remaining balance in each period relates to changes in foreign currency, primarily the Great British Pound and Euro.

 

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    Quarter Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Provision (benefit) for income taxes
  $ (711 )   $ 5,278     $ (5,989 )     -113.5 %
Provision (benefit) for income taxes as a % of income (loss) from continuing operations before income taxes
    -28.7 %     34.8 %                
In the second quarter of 2009, there was a loss before income taxes and as a result, we recorded an income tax benefit. In the second quarter of 2008, we had income before income taxes and recorded a income tax expense. The company had some tax benefits that were disallowed due to the loss before income taxes in 2009.
Year to Date Period Ended June 27, 2009 compared with Year to Date Period Ended June 28, 2008
(Amounts in thousands unless otherwise noted)
                                 
    Year to Date Period Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Net sales
  $ 236,417     $ 331,075     $ (94,658 )     -28.6 %
The decrease in sales is primarily due to the overall economic decline which has impacted almost all of our end markets and industries. On a constant currency basis, sales decreased $76.9 million or 23.2%. We saw a substantial decrease in sales at our Heavy Duty Clutches & Brakes and Engineered Couplings operating segments of 23.9% and 10.8% respectively in the second quarter of 2009 versus the first quarter of 2009. Both of these operating segments sell into late cycle markets and began to see volume decreases in the second quarter of 2009. As a result, on a year to date basis Heavy Duty Clutches & Brakes sales decreased 7.1% and Global Couplings decreased 12.8%. Until worldwide economic conditions improve, we expect continued weakness in our order rates.
                                 
    Year to Date Period Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Gross Profit
  $ 61,661     $ 98,185     $ (36,524 )     -37.2 %
Gross Profit as a percent of sales
    26.1 %     29.7 %                
The decrease in gross profit is due to the significant decrease in sales. As a result of our decrease in sales, we have less leverage on our fixed costs. On a constant currency basis, gross profit decreased $29.7 million or 30.2%. We have taken actions to reduce our expenses and maximize near-term profitability, however we expect our 2009 gross profit as a percentage of sales to decrease when compared to 2008.
                                 
    Year to Date Period Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Selling, general and administrative expense (“SG&A”)
  $ 41,681     $ 51,161     $ (9,480 )     -18.5 %
SG&A as a percent of sales
    17.6 %     15.5 %                
The decrease in SG&A is due to our strong cost reduction actions which began in the fourth quarter of 2008. Our cost reduction efforts were focused on headcount reductions and the elimination of non-critical expenses which decreased our overall SG&A costs. As a result of the decreased sales volume we have seen a reduction in outside sales representative commission costs. In addition, we have suspended the 401(k) company and matching contributions and required furloughs. However, due to the significant decrease in sales, SG&A as a percent of sales increased despite our cost reductions. During the remainder of 2009, we expect to continue to reduce our SG&A costs through plant consolidations, additional headcount reductions and expense elimination.

 

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    Year to Date Period Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Research and development expenses (“R&D”)
  $ 3,061     $ 3,497     $ (436 )     -12.5 %
R&D represents approximately 1% of sales in both periods.
                                 
    Year to Date Period Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Restructuring expenses
  $ 4,354     $ 1,068     $ 3,286       307.7 %
During 2007, we adopted two restructuring programs. The first was intended to improve operational efficiency by reducing headcount, consolidating our operating facilities and relocating manufacturing to lower cost areas (“Altra Plan”). The second was related to the acquisition of TB Wood’s and was intended to reduce duplicative staffing and consolidate facilities (“TB Wood’s Plan”). We recorded approximately $1.1 million in the year to date period ended June 28, 2008 of restructuring expenses for moving and relocation, severance and non-cash asset impairment. There were no costs related to the Altra Plan or the TB Wood’s Plan incurred in 2009.
In March 2009, we adopted a new restructuring plan (“2009 Altra Plan”) to improve the utilization of the manufacturing infrastructure and to realign the business with the current economic conditions. The 2009 Altra Plan will improve operational efficiency by reducing headcount and consolidating certain facilities. During the year to date period ended June 27, 2009, we recorded $2.7 million of restructuring expense related to severance, $0.7 million related to a non-cash impairment charge on a facility in Mt. Pleasant, Michigan that we plan on exiting, $0.6 million related to a non-cash impairment charge on a facility in South Beloit, Illinois that we plan on exiting and $0.3 million of other non-cash charges. We expect to incur between $3.5 million and $4.5 million of additional restructuring charges related to this plan for the remainder of 2009 and between $0.5 million and $1.0 million of additional restructuring charges related to this plan in 2010. We expect costs savings from this plan to be approximately $28.8 million on a annualized basis, and we believe we will see the full savings beginning in 2010. In 2009, we expect to see savings of $20.0 million.
                                 
    Year to Date Period Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Interest Expense, net
  $ 12,589     $ 15,154     $ (2,565 )     -16.9 %
Net interest expense decreased due to the lower average outstanding balance of the Senior Secured Notes. In addition, in the second quarter of 2008 we paid a premium of $0.4 million associated with the repurchase of $15.0 million of Senior Secured Notes and wrote-off $0.3 million of deferred financing costs. In the second quarter of 2009, we paid a premium of $0.2 million associated with the pay-down of $5.0 million of Senior Notes, which was offset by the discount of $0.4 million we received with the pay-down of $8.3 million of Senior Secured Notes. We wrote-off $0.2 million of deferred financing costs associated with the pay-down of the debt.
Other post employment benefit plan settlement gain
In March 2009, we reached a new collective bargaining agreement with the union at our Erie, Pennsylvania facility. One of the provisions of the new agreement eliminates benefits that employees were entitled to receive through the existing other post employment benefit plan (“OPEB”). OPEB benefits will no longer be available for retired and active employees. This resulted in an OPEB settlement gain of $1.5 million in the year to date period ended June 27, 2009.

 

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    Year to Date Period Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Other non-operating income (loss), net
  $ 1,619     $ (1,479 )   $ 3,098       -209 %
Other non-operating income for both quarters included rental income of $0.3 million for facility rentals under lease agreements which were part of the sale of the Electronics Division. This amount is offset by an adjustment to the assets that had previously been held for sale. During the first quarter of 2009, we reclassified two buildings out of assets held for sale to assets held and used. We recorded a cumulative catch up of depreciation expense of $0.2 million. In addition, during the second quarter of 2009, we sold Saftek Ltd., Inc. In connection with the sale we recorded a $0.2 million loss on the sale. The remaining balance in each period relates to changes in foreign currency, primarily the Great British Pound and Euro.
                                 
    Year to Date Period Ended  
    June 27, 2009     June 28, 2008     Change     %  
 
                               
Provision for income taxes, continuing operations
  $ 172     $ 10,127     $ (9,955 )     -98.3 %
Provision for income taxes as a % of income (loss) before taxes
    97.7 %     35.0 %                
The 2009 provision for income taxes as a percentage of income before taxes was 97.2%. The year to date loss produced a tax benefit before discrete items. However, the impact of discrete items, including FIN48 interest and tax rate changes in certain jurisdictions, created an overall tax expense for the six months ended June 27, 2009. Additionally, the company had some tax benefits that were disallowed due to the loss before income taxes in 2009.
Discontinued Operations
On December 31, 2007, the Company completed the divestiture of the TB Wood’s adjustable speed drives business (“Electronics Division”) to Vacon PLC (“Vacon”) for $29.0 million. The decision to sell the Electronics Division was made to allow the Company to continue its strategic focus on its core electro-mechanical power transmission business.
The $0.4 million loss from discontinued operations in the first half of 2008 was comprised of a working capital adjustment, net of taxes.
Liquidity and Capital Resources
Overview
We finance our capital and working capital requirements through a combination of cash flows from operating activities and borrowings under our Senior Revolving Credit Agreement. We expect that our primary ongoing requirements for cash will be for working capital, debt service, capital expenditures, expenditures in connection with restructuring activities and pension plan funding. In the event additional funds are needed, we could borrow additional funds under our Senior Revolving Credit Agreement, attempt to refinance our 9% Senior Secured Notes, or raise capital in equity markets. Presently, we have capacity under our Senior Revolving Credit Agreement to borrow $22.4 million. Of this total capacity, we can borrow up to approximately $9.9 million without being required to comply with any financial covenants under the agreement. In order to refinance the existing 9% Senior Secured Notes, we would incur a pre-payment premium of 4.5% of the principal balance through December 1, 2009, 2.3% through December 1, 2010 and 0% after that date. There can be no assurance however that additional debt financing will be available on commercially acceptable terms, if at all. Similarly, there can be no assurance that equity financing will be available on commercially acceptable terms, if at all.

 

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Despite a net loss of $0.3 million in the first six months of 2009, we saw an increase in our cash balance of $11.6 million versus an increase in our cash balance of $2.6 million in the same period in 2008. Our continued focus on working capital management and a decrease in capital expenditures allowed us to continue to generate cash flows from operations. We expect to continue to be able to generate cash flows for the remainder of 2009, despite lower sales and earnings.
Net Cash
                 
    June 27,     December 31,  
    2009     2008  
    (in thousands)  
Cash and cash equivalents
  $ 63,644     $ 52,073  
Cash and cash equivalents increased $11.6 million in the year to date period ended June 27, 2009 due to the following:
Net cash provided by operating activities for the year to date period ended June 27, 2009 of $27.8 million resulted mainly from cash provided from the add-back of non-cash depreciation, amortization, stock based compensation, accretion of net debt discount, deferred financing costs, non-cash loss on foreign currency and a fixed asset impairment charge of $16.6 million. In addition, there was a net decrease in working capital of $13.0 million. The decrease in working capital is mainly due to a decrease in inventory of $20.4 million, as a result of our focus on reducing our inventory level throughout the organization. This was offset by a non-cash other post employment benefit plan settlement gain of $1.5 million and our net loss of $0.3 million.
Net cash used in investing activities of $3.8 million for the year to date period ended June 27, 2009 resulted from the purchase of manufacturing equipment.
Net cash used by financing activities of $14.8 million for the year to date period ended June 27, 2009 consisted repurchases of our Senior Notes of $5.0 million and our Senior Secured Notes of $8.3 million, payment on our Senior Revolving Credit Agreement of $1.0 million, payments of capital lease obligations of $0.4 million and $0.2 million of payments on mortgages.

 

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Table of Contents

Liquidity
                                 
    Amounts in millions  
    June 27,             December 31,          
    2009             2008          
 
Debt:
                               
Senior Revolving Credit Agreement
  $             $          
TB Wood’s Credit Agreement
    5.0               6.0          
Overdraft agreements
                           
9% Senior Secured Notes
    234.3               242.5          
11.25% Senior Notes
                  4.7          
Variable Rate Demand Revenue Bonds
    5.3               5.3          
Mortgages
    2.1               2.3          
Capital leases
    2.3               2.6          
 
                           
Total Debt
  $ 249.0             $ 263.4          
Cash
  $ 63.6             $ 52.1          
Net Debt
  $ 185.4       57.3 %   $ 211.3       62.1 %
 
                               
Shareholders’ Equity
  $ 138.4       42.7 %   $ 128.9       37.9 %
Total Capitalization
  $ 323.8       100 %   $ 340.2       100 %
As of June 27, 2009, we had approximately $249.0 million of total indebtedness outstanding including capital leases and mortgages. Approximately 98% of our borrowings are fixed rate loans and therefore we do not believe that our vulnerability to interest rate changes is significant.
Our Senior Revolving Credit Agreement provides for senior secured financing of up to $30.0 million, including $10.0 million available for letters of credit through November 30, 2010. As of June 27, 2009, there were no outstanding borrowings, but there were $7.6 million of outstanding letters of credit issued under our Senior Revolving Credit Agreement.
We had $5.0 million of principal borrowings outstanding and $6.1 million of outstanding letters of credit as of June 27, 2009 under the TB Wood’s Revolving Credit Agreement, which is due in 2010.
We made capital expenditures of approximately $3.8 million and $7.6 million in the year to date periods ended June 27, 2009 and June 28, 2008, respectively. These capital expenditures were used to support on-going manufacturing requirements. We expect to have additional capital expenditures of between $2.0 million and $4.0 million for the remainder of 2009.
We have cash funding requirements associated with our pension plan which are estimated to be $0.5 million for the remainder of 2009, $1.5 million for 2010, $1.5 million for 2011, $1.5 million for 2012 and $1.5 million for 2013.
Our ability to make scheduled payments of principal and interest, to fund planned capital expenditures and to meet our pension plan funding obligations will depend on our ability to generate cash in the future. Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our Senior Revolving Credit Agreement will be adequate to meet our future liquidity requirements for at least the next two years. However, our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
There can be no assurance that our business will generate sufficient cash flow from operations, that any revenue growth or operating improvements will be realized or that future borrowings will be available under our senior secured credit facility in an amount sufficient to enable us to service our indebtedness, including the notes, or to fund our other liquidity needs. In addition, we cannot assure you that we will be able to refinance any of our indebtedness, including our Senior Revolving Credit Agreement and the notes as they become due. Our ability to access capital in the long term will depend on the availability of capital markets and pricing on commercially reasonable terms, if at all, at the time we are seeking funds. See the Risk factor entitled “ Our leverage could adversely affect our financial health and make us vulnerable to adverse economic and industry conditions ” in our Annual Report on Form 10-K for the year ended December 31, 2008 for further discussion of the factors that may affect our liquidity. In addition, our ability to borrow funds under our Senior Revolving Credit Agreement will depend on our ability to satisfy the financial and non-financial covenants contained in that facility.

 

28


Table of Contents

Contractual Obligations
As of June 27, 2009, we have paid our Senior Notes in full and have no remaining obligation to pay.
As of June 27, 2009, the remaining principal balance on our Senior Secured Notes was $234.3 million. The balance is due December 1, 2011.
From time to time, we may repurchase our Senior Secured Notes in open market transactions or privately negotiated transactions, subject to certain restrictions in our Senior Revolving Credit Agreement.
In connection with the TB Wood’s acquisition, we assumed the obligation to make payments under $5.3 million of variable rate demand revenue bonds. $3.0 million of these bonds mature in 2024 and $2.3 million mature in 2022. In addition, we refinanced, concurrent with the acquisition, $13.0 million then outstanding under the TB Wood’s Revolving Credit Agreement. As of June 27, 2009, there was $5.0 million outstanding, which is due in 2010.
Altra Industrial’s Senior Revolving Credit Agreement provides for senior secured financing of up to $30.0 million, including $10.0 million available for letters of credit. The Senior Revolving Credit Agreement requires us to comply with a minimum fixed charge coverage ratio of 1.20 for all four quarter periods when availability falls below $12.5 million. Our availability under the Senior Revolving Credit Agreement has never dropped below $12.5 million and we do not believe that it will in the foreseeable future. Our Senior Secured Notes do not contain any financial covenants. As of June 27, 2009, we were in compliance with all financial and non-financial covenants under the Senior Secured Notes, the Senior Revolving Credit Agreement and the TB Wood’s Revolving Credit Agreement.
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
We have exposure to changes in commodity prices principally related to metals including steel, copper and aluminum. We primarily manage the risk associated with such increases through the use of surcharges or general pricing increases for the related products. We do not engage in the use of financial instruments to hedge our commodities price exposure.
Additional information concerning market risk is contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2008. There were no additional material changes in our exposure to market risk from December 31, 2008.
Item 4.   Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 27, 2009.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives.
Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during our fiscal quarter ended June 27, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

29


Table of Contents

PART II—OTHER INFORMATION
Item 1.   Legal Proceedings
We are, from time to time, party to various legal proceedings arising out of our business. These proceedings primarily involve commercial claims, product liability claims, intellectual property claims, environmental claims, personal injury claims and workers’ compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on our business, results of operations, cash flows, or financial condition.
Item 1A.   Risk Factors
The reader should carefully consider the Risk Factors described in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission. Those risk factors described elsewhere in this report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2008 are not the only ones we face, but are considered to be the most material. These risk factors could cause our actual results to differ materially from those stated in forward looking statements contained in this Form 10-Q and elsewhere. All risk factors stated in our Annual Report on Form 10-K for the year ended December 31, 2008 are incorporated herein by reference.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.   Defaults Upon Senior Securities
None.
Item 4.   Submission of Matters to a Vote of Security Holders
Our annual meeting of stockholders was held on May 6, 2009. The following matters were voted upon:
Edmund M. Carpenter, Carl R. Christenson, Lyle G. Ganske, Michael L. Hurt, Michael S. Lipscomb, Larry P. McPherson and James H. Woodward, Jr. were elected to serve as Directors of the Company until the 2010 Annual Meeting of Stockholders and until the successors are duly elected and qualified, with the following vote:
                         
    Shares Voted     Shares        
    “FOR”     “WITHHELD”     Broker Non-Votes  
Edmund M. Carpenter
    15,102,149       8,554,290       N/A  
Carl R. Christenson
    22,343,529       1,312,910       N/A  
Lyle G. Ganske
    21,609,477       2,046,962       N/A  
Michael L. Hurt
    21,967,917       1,688,522       N/A  
Michael S. Lipscomb
    15,102,149       8,554,290       N/A  
Larry McPherson
    15,365,853       8,290,586       N/A  
James H. Woodward
    16,574,652       7,081,787       N/A  
The stockholders approved the ratification of the Audit Committee’s selection of Deloitte & Touche, LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2008, with the following vote:
             
Shares Voted   Shares Voted   Shares    
“FOR”   “AGAINST”   “ABSTAINING”   Broker Non-Votes
24,416,417   63,692   14,231   N/A
Item 5.   Other Information
None.

 

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Table of Contents

Item 6.   Exhibits
The following exhibits are filed as part of this report:
EXHIBIT INDEX
         
Exhibit    
Number   Description
       
 
  3.1 (1)  
Second Amended and Restated Certificate of Incorporation of the Registrant.
       
 
  3.2 (2)  
Second Amended and Restated Bylaws of the Registrant.
       
 
  10.1 *  
Credit Agreement, dated as of November 30, 2004, among Altra Industrial Motion, Inc. and certain subsidiaries of the Company, as Guarantors, the financial institutions listed therein, as Lenders, and Wells Fargo Bank, as Lead Arranger.
       
 
  10.35 *  
Credit Agreement, dated as of April 5, 2007, among Altra Industrial Motion, Inc. and certain of its subsidiaries, as Guarantors, the financial institutions listed therein, as Lenders, and Wells Fargo Foothill, Inc., as Arranger and Administrative Agent.
       
 
  10.41 (2)  
Form of Indemnification Agreement entered into between the Company and the Directors and Certain Officers.
       
 
  10.8 *  
Labor Agreement, effective as of February 1, 2009, between Warner Electric LLC and United Steelworkers and Local Union No. 3245.
       
 
  31.1 *  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2 *  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  32.1 **  
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2 **  
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
*   Filed herewith.
 
**   Furnished herewith.
 
(1)   Incorporated by reference to Altra Holdings, Inc.’s Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission on December 4, 2006.
 
(2)   Incorporated by reference to Altra Holdings, Inc.’s Current Report on form 8-K filed on October 27, 2008.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  ALTRA HOLDINGS, INC.
 
 
August 4, 2009  By:   /s/ Carl R. Christenson    
    Name:   Carl R. Christenson   
    Title:  President and Chief Executive Officer   
 
August 4, 2009  By:   /s/ Christian Storch    
    Name:   Christian Storch   
    Title:   Vice President and Chief Financial Officer   
 
August 4, 2009  By:   /s/ Todd B. Patriacca    
    Name:   Todd B. Patriacca   
    Title:   Vice President of Finance, Assistant Treasurer and Corporate Controller   

 

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EXHIBIT INDEX
         
Exhibit    
Exhibit   Description
       
 
  10.1 *  
Credit Agreement, dated as of November 30, 2004, among Altra Industrial Motion, Inc. and certain subsidiaries of the Company, as Guarantors, the financial institutions listed therein, as Lenders, and Wells Fargo Bank, as Lead Arranger.
       
 
  10.35 *  
Credit Agreement, dated as of April 5, 2007, among Altra Industrial Motion, Inc. and certain of its subsidiaries, as Guarantors, the financial institutions listed therein, as Lenders, and Wells Fargo Foothill, Inc., as Arranger and Administrative Agent.
       
 
  10.8 *  
Labor Agreement, dated March 28, 2010, between Warner Electric LLC and United Steelworkers and Local Union No. 3245.
       
 
  31.1 *  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2 *  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  32.1 **  
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2 **  
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
*   Filed herewith.
 
**   Furnished herewith.

 

33

Exhibit 10.1
EXECUTION COPY
CREDIT AGREEMENT
by and among
ALTRA INDUSTRIAL MOTION, INC.
as Parent,
and
EACH OF ITS SUBSIDIARIES THAT ARE SIGNATORIES HERETO
as Borrowers,
THE LENDERS THAT ARE SIGNATORIES HERETO
as the Lenders,
and
WELLS FARGO FOOTHILL, INC.
as the Arranger and Administrative Agent
Dated as of November 30, 2004

 

 


 

TABLE OF CONTENTS
         
 
       
1. DEFINITIONS AND CONSTRUCTION
      1
 
       
1.1 Definitions
      1
 
       
1.2 Accounting Terms
      1
 
       
1.3 Code
      1
 
       
1.4 Construction
      1
 
       
1.5 Schedules and Exhibits
      2
 
       
2. LOAN AND TERMS OF PAYMENT
      2
 
       
2.1 Revolver Advances
      2
 
       
2.2 Intentionally Omitted
      2
 
       
2.3 Borrowing Procedures and Settlements
      2
 
       
2.4 Payments
      7
 
       
2.5 Overadvances
      9
 
       
2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations
      9
 
       
2.7 Cash Management
      10
 
       
2.8 Crediting Payments
      11
 
       
2.9 Designated Account
      12
 
       
2.10 Maintenance of Loan Account; Statements of Obligations
      12
 
       
2.11 Fees
      12
 
       
2.12 Letters of Credit
      12
 
       
2.13 LIBOR Option
      15
 
       
2.14 Capital Requirements
      17
 
       
2.15 Joint and Several Liability of Borrowers
      17
 
       
3. CONDITIONS; TERM OF AGREEMENT
      19
 
       
3.1 Conditions Precedent to the Initial Extension of Credit
      19
 
       
3.2 Conditions Precedent to all Extensions of Credit
      19
 
       
3.3 Term
      20
 
       
3.4 Effect of Termination
      20
 
       
3.5 Early Termination by Borrowers
      20
 
       
3.6 Conditions Subsequent to the Initial Extension of Credit
      20

 

i


 

         
4. REPRESENTATIONS AND WARRANTIES
      21
 
       
4.1 No Encumbrances
      21
 
       
4.2 Eligible Accounts
      22
 
       
4.3 Eligible Inventory
      22
 
       
4.4 Equipment
      22
 
       
4.5 Location of Inventory and Equipment
      22
 
       
4.6 Inventory Records
      22
 
       
4.7 State of Incorporation; Location of Chief Executive Office; Organizational Identification Number; Commercial Tort Claims
      22
 
       
4.8 Due Organization and Qualification; Restricted Subsidiaries
      23
 
       
4.9 Due Authorization; No Conflict
      23
 
       
4.10 Litigation
      25
 
       
4.11 No Material Adverse Change
      25
 
       
4.12 Fraudulent Transfer
      25
 
       
4.13 Employee Compliance
      25
 
       
4.14 Environmental Condition
      26
 
       
4.15 Intellectual Property
      26
 
       
4.16 Leases
      26
 
       
4.17 Deposit Accounts and Securities Accounts
      26
 
       
4.18 Complete Disclosure
      26
 
       
4.19 Indebtedness
      27
 
       
4.20 Material Contracts
      27
 
       
5. AFFIRMATIVE COVENANTS
      27
 
       
5.1 Accounting System
      27
 
       
5.2 Collateral Reporting
      27
 
       
5.3 Financial Statements, Reports, Certificates
      27
 
       
5.4 Intentionally Omitted
      27
 
       
5.5 Inspection
      27

 

ii


 

         
5.6 Maintenance of Properties
      27
 
       
5.7 Taxes
      28
 
       
5.8 Insurance
      28
 
       
5.9 Location of Inventory and Equipment
      29
 
       
5.10 Compliance with Laws
      29
 
       
5.11 Leases
      29
 
       
5.12 Existence
      29
 
       
5.13 Environmental
      29
 
       
5.14 Intentionally Omitted
      30
 
       
5.15 Control Agreements
      30
 
       
5.16 Formation of Subsidiaries
      30
 
       
5.17 Real Property
      30
 
       
5.18 ERISA Compliance
      31
 
       
6. NEGATIVE COVENANTS
      32
 
       
6.1 Indebtedness
      32
 
       
6.2 Liens
      33
 
       
6.3 Restrictions on Fundamental Changes
      33
 
       
6.4 Disposal of Assets
      34
 
       
6.5 Change Name
      34
 
       
6.6 Nature of Business
      34
 
       
6.7 Prepayments and Amendments
      34
 
       
6.8 Intentionally Omitted
      34
 
       
6.9 Intentionally Omitted
      34
 
       
6.10 Distributions
      35
 
       
6.11 Fiscal Year
      36
 
       
6.12 Investments
      36
 
       
6.13 Transactions with Affiliates
      36
 
       
6.14 Use of Proceeds
      37
 
       
6.15 Intentionally Omitted
      37

 

iii


 

         
6.16 Financial Covenants
      38
 
       
6.17 Acquisition Documents
      38
 
       
6.18 Indenture Documents
      38
 
       
6.19 Governing Documents
      38
 
       
6.20 Real Property Collateral
      39
 
       
7. EVENTS OF DEFAULT
      39
 
       
8. THE LENDER GROUP’S RIGHTS AND REMEDIES
      41
 
       
8.1 Rights and Remedies
      41
 
       
8.2 Remedies Cumulative
      41
 
       
9. TAXES AND EXPENSES
      42
 
       
10. WAIVERS; INDEMNIFICATION
      42
 
       
10.1 Demand; Protest; etc
      42
 
       
10.2 The Lender Group’s Liability for Collateral
      42
 
       
10.3 Indemnification
      42
 
       
11. NOTICES
      43
 
       
12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
      44
 
       
13. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS
      44
 
       
13.1 Assignments and Participations
      44
 
       
13.2 Successors
      47
 
       
14. AMENDMENTS; WAIVERS
      47
 
       
14.1 Amendments and Waivers
      47
 
       
14.2 Replacement of Holdout Lender
      48
 
       
14.3 No Waivers; Cumulative Remedies
      48
 
       
15. AGENT; THE LENDER GROUP
      48
 
       
15.1 Appointment and Authorization of Agent
      48
 
       
15.2 Delegation of Duties
      49
 
       
15.3 Liability of Agent
      49
 
       
15.4 Reliance by Agent
      49
 
       
15.5 Notice of Default or Event of Default
      50

 

iv


 

         
15.6 Credit Decision
      50
 
       
15.7 Costs and Expenses; Indemnification
      50
 
       
15.8 Agent in Individual Capacity
      51
 
       
15.9 Successor Agent
      51
 
       
15.10 Lender in Individual Capacity
      51
 
       
15.11 Withholding Taxes
      52
 
       
15.12 Collateral Matters
      54
 
       
15.13 Restrictions on Actions by Lenders; Sharing of Payments
      55
 
       
15.14 Agency for Perfection
      55
 
       
15.15 Payments by Agent to the Lenders
      55
 
       
15.16 Concerning the Collateral and Related Loan Documents
      55
 
       
15.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information
    56
 
       
15.18 Several Obligations; No Liability
      56
 
       
15.19 Bank Product Providers
      57
 
       
16. GENERAL PROVISIONS
      57
 
       
16.1 Effectiveness
      57
 
       
16.2 Section Headings
      57
 
       
16.3 Interpretation
      57
 
       
16.4 Severability of Provisions
      57
 
       
16.5 Counterparts; Electronic Execution
      57
 
       
16.6 Revival and Reinstatement of Obligations
      57
 
       
16.7 Confidentiality
      58
 
       
16.8 Integration
      58
 
       
16.9 Altra Industrial Motion, Inc. as Agent for Borrowers
      58

 

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EXHIBITS AND SCHEDULES
     
Exhibit A-1  
Form of Assignment and Acceptance
Exhibit B-1  
Form of Borrowing Base Certificate
Exhibit C-1  
Form of Compliance Certificate
Exhibit L-1  
Form of LIBOR Notice
   
 
Schedule A-1  
Agent’s Account
Schedule C-1  
Commitments
Schedule D-1  
Designated Account
Schedule P-1  
Permitted Holders
Schedule P-2  
Permitted Liens
Schedule P-3  
Permitted Investments
Schedule R-1  
Real Property Collateral
Schedule 1.1  
Definitions
Schedule 2.7(a)  
Cash Management Banks
Schedule 3.1  
Conditions Precedent
Schedule 4.5(a)  
Inventory and Equipment Stored with Bailees or Warehousemen
Schedule 4.5(b)  
Locations of Inventory and Equipment
Schedule 4.7(a)  
States of Organization
Schedule 4.7(b)  
Chief Executive Offices
Schedule 4.7(c)  
Organizational Identification Numbers
Schedule 4.7(d)  
Commercial Tort Claims
Schedule 4.8(b)  
Capitalization of Borrowers
Schedule 4.8(c)  
Capitalization of Borrowers’ Restricted Subsidiaries
Schedule 4.10  
Litigation
Schedule 4.13(a)  
ERISA Plans
Schedule 4.14  
Environmental Matters
Schedule 4.17  
Deposit Accounts and Securities Accounts
Schedule 4.19  
Permitted Indebtedness
Schedule 5.2  
Collateral Reporting
Schedule 5.3  
Financial Statements, Reports, Certificates

 

 


 

CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this “ Agreement ”), is entered into as of November 30, 2004, by and among the lenders identified on the signature pages hereof (such lenders, together with their respective successors and permitted assigns, are referred to hereinafter each individually as a “ Lender ” and collectively as the “ Lenders ”), and WELLS FARGO FOOTHILL, INC., a California corporation, as the arranger and administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, “ Agent ”), and ALTRA INDUSTRIAL MOTION, INC. , a Delaware corporation (“ Parent ”), and each of Parent’s Subsidiaries identified on the signature pages hereof (Parent and such Subsidiaries are referred to hereinafter each individually as a “ Borrower ”, and individually and collectively, jointly and severally, as the “ Borrowers ”).
The parties agree as follows:
1.  DEFINITIONS AND CONSTRUCTION.
1.1 Definitions . Capitalized terms used in this Agreement shall have the meanings specified therefor on Schedule 1.1 .
1.2 Accounting Terms . All accounting terms not specifically defined herein shall be construed in accordance with GAAP. In the event of any change in GAAP that occurs after the date of this Agreement that would affect the calculation or application of the financial or other covenants contained herein, Agent and Borrowers agree to negotiate to amend such financial or other covenants (or the definitions used therein) to eliminate the effect of such change and no Event of Default shall be deemed to exist solely as a result of such change in GAAP during the period prior to the effectiveness of such amendment; provided . that such financial or other covenants shall continue to be calculated in the manner provided immediately prior to such change until such amendment has been executed by Borrowers and the Required Lenders. When used herein, the term “financial statements” shall include the notes and schedules thereto, if any. Whenever the term “Borrowers” or the term “Parent” is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrowers and their Subsidiaries or Parent and its Subsidiaries, as applicable, on a consolidated basis unless the context clearly requires otherwise.
1.3 Code . Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein, provided , however , that to the extent that the Code is used to define any term herein and such term is defined differently in different Articles of the Code, the definition of such term contained in Article 9 shall govern.
1.4 Construction . Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, and the terms “includes” and “including” are not limiting. The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the other Loan Documents to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein to the satisfaction, payment or repayment in full of the Obligations or the Bank Product Obligations, as the case may be, shall mean the repayment in full in cash (or cash collateralization or the provision of other security in accordance with the terms hereof) of all Obligations other than contingent indemnification Obligations and other than any Bank Product Obligations that, at such time, are allowed by the applicable Bank Product Provider to remain outstanding and are not required to be repaid or cash collateralized pursuant to the provisions of this Agreement. Any reference herein to any Person shall be construed to include such Person’s successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record.

 

 


 

1.5 Schedules and Exhibits . All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference.
2.  LOAN AND TERMS OF PAYMENT.
2.1 Revolver Advances .
(a) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender agrees (severally, not jointly or jointly and severally) to make advances (“ Advances ”) to Borrowers in an amount at any one time outstanding not to exceed such Lender’s Pro Rata Share of an amount equal to the lesser of (i) the Maximum Revolver Amount less the Letter of Credit Usage, or (ii) the Borrowing Base less the Letter of Credit Usage.
(b) Anything to the contrary in this Section 2.1 notwithstanding, Agent shall have the right to establish reserves in such amounts, and with respect to such matters, as Agent in its Permitted Discretion shall deem necessary, against the Borrowing Base, including reserves (i) with respect to (A) sums that Borrowers are required to pay by any Section of this Agreement or any other Loan Document (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and have failed to pay, and (B) amounts owing by Borrowers or their Restricted Subsidiaries to any Person to the extent secured by a Lien on, or trust over, any of the Collateral (other than a Permitted Lien), which Lien or trust, in the Permitted Discretion of Agent likely would have a priority superior to the Agent’s Liens (such as Liens or trusts in favor of landlords, warehousemen, carriers, mechanics, materialmen, laborers, or suppliers, or Liens or trusts for ad valorem , excise, sales, or other taxes where given priority under applicable law) in and to such item of the Collateral, and (ii) after the occurrence and during the continuance of an Event of Default, with respect to such other matters as Agent in its Permitted Discretion shall deem necessary or appropriate. In addition to the foregoing and subject to any specific limitations set forth in any other Loan Document, Agent shall have the right to have the Inventory reappraised by a qualified appraisal company selected by Agent from time to time after the Closing Date for the purpose of redetermining the Eligible Inventory portion of the Collateral and, as a result, redetermining the Borrowing Base.
(c) Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement.
(d) Notwithstanding anything to the contrary contained herein, Lenders shall not be obligated to make any Advances against any Inventory or Equipment located at any of the locations set forth on Schedule 4.5(a) unless and until Agent shall have received reasonably satisfactory information as to the value of the Inventory and/or Equipment stored at such locations and as to the monthly rent payable in respect of such locations.
2.2 Intentionally Omitted.
2.3 Borrowing Procedures and Settlements .
(a) Procedure for Borrowing. Each Borrowing shall be made by an irrevocable written request by an Authorized Person delivered to Agent. If Swing Lender is obligated to make a Swing Loan pursuant to Section 2.3(b) below, such notice must be received by Agent no later than 10:00 a.m. (California time) on the Business Day that is the requested Funding Date specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day; provided , however , that if Swing Lender is not obligated to make a Swing Loan as to a requested Borrowing, such notice must be received by Agent no later than 10:00 a.m. (California time) on the Business Day prior to the date that is the requested Funding Date. At Agent’s election, in lieu of delivering the above-described written request, any Authorized Person may give Agent telephonic notice of such request by the required time. In such circumstances, Borrowers agree that any such telephonic notice will be confirmed in writing within 24 hours of the giving of such telephonic notice, but the failure to provide such written confirmation shall not affect the validity of the request.

 

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(b)  Making of Swing Loans. In the case of a request for an Advance and so long as either (i) the aggregate amount of Swing Loans made since the last Settlement Date plus the amount of the requested Advance does not exceed $10,000,000, or (ii) Swing Lender, in its sole discretion, shall agree to make a Swing Loan notwithstanding the foregoing limitation, Swing Lender, as a Lender, shall make an Advance in the amount of such Borrowing (any such Advance made solely by Swing Lender as a Lender pursuant to this Section 2.3(b) being referred to as a “ Swing Loan ” and such Advances being referred to collectively as “ Swing Loans ”) available to Borrowers on the Funding Date applicable thereto by transferring immediately available funds to Borrowers’ Designated Account. Each Swing Loan shall be deemed to be an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, except that all payments on any Swing Loan shall be payable to Swing Lender as a Lender solely for its own account. Subject to the provisions of Section 2.3(d)(ii) , Swing Lender as a Lender shall not make and shall not be obligated to make any Swing Loan if Swing Lender has actual knowledge that (i) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing, or (ii) the requested Borrowing would exceed the Availability on such Funding Date. Swing Lender as a Lender shall not otherwise be required to determine whether the applicable conditions precedent set forth in Section 3 have been satisfied on the Funding Date applicable thereto prior to making any Swing Loan. The Swing Loans shall be secured by the Agent’s Liens, constitute Obligations hereunder, and bear interest at the rate applicable from time to time to Advances that are Base Rate Loans. Notwithstanding the foregoing, after a Swing Loan is made and after settlement of such Swing Loan is effected in accordance with Section 2.3(e) , Administrative Borrower shall have the right to request that such Swing Loan be eligible to be a LIBOR Rate Loan by exercising the LIBOR Option in accordance with Section 2.13 .
(c) Making of Loans.
(i) In the event that Swing Lender is not obligated to make a Swing Loan, then promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a) , Agent shall notify the Lenders, not later than 1:00 p.m. (California time) on the Business Day immediately preceding the Funding Date applicable thereto, by telecopy, telephone, or other similar form of transmission, of the requested Borrowing. Each Lender shall make the amount of such Lender’s Pro Rata Share of the requested Borrowing available to Agent in immediately available funds, to Agent’s Account, not later than 10:00 a.m. (California time) on the Funding Date applicable thereto. After Agent’s receipt of the proceeds of such Advances, Agent shall make the proceeds thereof available to Administrative Borrower on the applicable Funding Date by transferring immediately available funds equal to such proceeds received by Agent to Administrative Borrower’s Designated Account; provided , however , that, subject to the provisions of Section 2.3(d)(ii) , Agent shall not request any Lender to make, and no Lender shall have the obligation to make, any Advance if Agent shall have actual knowledge that (1) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (2) the requested Borrowing would exceed the Availability on such Funding Date.
(ii) Unless Agent receives notice from a Lender prior to 9:00 a.m. (California time) on the date of a Borrowing, that such Lender will not make available as and when required hereunder to Agent for the account of Borrowers the amount of that Lender’s Pro Rata Share of the Borrowing, Agent may assume that each Lender has made or will make such amount available to Agent in immediately available funds on the Funding Date and Agent may (but shall not be so required), in reliance upon such assumption, make available to Borrowers on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds and Agent in such circumstances has made available to Borrowers such amount, that Lender shall on the Business Day following such Funding Date make such amount available to Agent, together with interest at the Defaulting Lender Rate for each day during such period. A notice submitted by Agent to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. If such amount is so made available, such payment to Agent shall constitute such Lender’s Advance on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to Agent on the Business Day following the Funding Date, Agent will notify Administrative Borrower of such failure to fund and, upon demand by Agent, Borrowers shall pay such amount to Agent for Agent’s account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Advances composing such Borrowing. The failure of any Lender to make any Advance on any Funding Date shall not relieve any other Lender of any obligation hereunder to make an Advance on such Funding Date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on any Funding Date.

 

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(iii) Agent shall not be obligated to transfer to a Defaulting Lender any payments made by Borrowers to Agent for the Defaulting Lender’s benefit, and, in the absence of such transfer to the Defaulting Lender, Agent shall transfer any such payments to each other non-Defaulting Lender member of the Lender Group ratably in accordance with their Commitments (but only to the extent that such Defaulting Lender’s Advance was funded by the other members of the Lender Group) or, if so directed by Administrative Borrower and if no Default or Event of Default had occurred and is continuing (and to the extent such Defaulting Lender’s Advance was not funded by the Lender Group), retain same to be re-advanced to Borrowers as if such Defaulting Lender had made Advances to Borrowers. Subject to the foregoing, Agent may hold and, in its Permitted Discretion, re-lend to Borrowers for the account of such Defaulting Lender the amount of all such payments received and retained by Agent for the account of such Defaulting Lender. Solely for the purposes of voting or consenting to matters with respect to the Loan Documents, such Defaulting Lender shall be deemed not to be a “Lender” and such Lender’s Commitment shall be deemed to be zero. This Section shall remain effective with respect to such Lender until (x) the Obligations under this Agreement shall have been declared or shall have become immediately due and payable, (y) the non-Defaulting Lenders, Agent, and Administrative Borrower shall have waived such Defaulting Lender’s default in writing, or (z) the Defaulting Lender makes its Pro Rata Share of the applicable Advance and pays to Agent all amounts owing by Defaulting Lender in respect thereof. The operation of this Section shall not be construed to increase or otherwise affect the Commitment of any Lender, to relieve or excuse the performance by such Defaulting Lender or any other Lender of its duties and obligations hereunder, or to relieve or excuse the performance by Borrowers of their duties and obligations hereunder to Agent or to the Lenders other than such Defaulting Lender. Any such failure to fund by any Defaulting Lender shall constitute a material breach by such Defaulting Lender of this Agreement and shall entitle Administrative Borrower at its option, upon written notice to Agent, to arrange for a substitute Lender to assume the Commitment of such Defaulting Lender, such substitute Lender to be reasonably acceptable to Agent. In connection with the arrangement of such a substitute Lender, the Defaulting Lender shall have no right to refuse to be replaced hereunder, and agrees to execute and deliver a completed form of Assignment and Acceptance in favor of the substitute Lender (and agrees that it shall be deemed to have executed and delivered such document if it fails to do so) subject only to being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever; provided however, that any such assumption of the Commitment of such Defaulting Lender shall not be deemed to constitute a waiver of any of the Lender Groups’ or Borrowers’ rights or remedies against any such Defaulting Lender arising out of or in relation to such failure to fund.
(d) Protective Advances and Optional Overadvances.
(i) Agent hereby is authorized by Borrowers and the Lenders, from time to time in Agent’s sole discretion, (A) after the occurrence and during the continuance of a Default or an Event of Default, or (B) at any time that any of the other applicable conditions precedent set forth in Section 3 are not satisfied, to make Advances to Borrowers on behalf of the Lenders that Agent, in its Permitted Discretion deems necessary or desirable (1) to preserve or protect the Collateral, or any portion thereof, (2) to enhance the likelihood of repayment of the Obligations, or (3) to pay any other amount chargeable to Borrowers pursuant to the terms of this Agreement, including Lender Group Expenses and the costs, fees, and expenses described in Section 9 (any of the Advances described in this Section 2.3(d)(i) shall be referred to as “ Protective Advances ”).

 

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(ii) Any contrary provision of this Agreement notwithstanding, the Lenders hereby authorize Agent or Swing Lender, as applicable, and either Agent or Swing Lender, as applicable, may, but is not obligated to, knowingly and intentionally, continue to make Advances (including Swing Loans) to Borrowers notwithstanding that an Overadvance exists or thereby would be created, so long as (A) after giving effect to such Advances, the outstanding Revolver Usage does not exceed the Borrowing Base by more than $6,000,000, and (B) after giving effect to such Advances, the outstanding Revolver Usage (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) does not exceed the Maximum Revolver Amount. In the event Agent obtains actual knowledge that the Revolver Usage exceeds the amounts permitted by the immediately foregoing provisions, regardless of the amount of, or reason for, such excess, Agent shall notify the Lenders as soon as practicable (and prior to making any (or any additional) intentional Overadvances (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) unless Agent determines that prior notice would result in imminent harm to the Collateral or its value), and the Lenders thereupon shall, together with Agent, jointly determine the terms of arrangements that shall be implemented with Borrowers intended to reduce, within a reasonable time, the outstanding principal amount of the Advances to Borrowers to an amount permitted by the foregoing provisions. In such circumstances, if any Lender disagrees over the proposed terms of reduction or repayment of any Overadvance, the terms of reduction or repayment thereof shall be implemented according to the determination of the Required Lenders. Each Lender shall be obligated to settle with Agent as provided in Section 2.3(e) for the amount of such Lender’s Pro Rata Share of any unintentional Overadvances by Agent reported to such Lender, any intentional Overadvances made as permitted under this Section 2.3(d)(ii) , and any Overadvances resulting from the charging to the Loan Account of interest, fees, or Lender Group Expenses.
(iii) Each Protective Advance and each Overadvance shall be deemed to be an Advance hereunder, except that no Protective Advance or Overadvance shall be eligible to be a LIBOR Rate Loan and all payments on the Protective Advances shall be payable to Agent solely for its own account. The Protective Advances and Overadvances shall be repayable on demand, secured by the Agent’s Liens, constitute Obligations hereunder, and bear interest at the rate applicable from time to time to Advances that are Base Rate Loans. The provisions of this Section 2.3(d) are for the exclusive benefit of Agent, Swing Lender, and the Lenders and are not intended to benefit any Borrower in any way.
(e)  Settlement. It is agreed that each Lender’s funded portion of the Advances is intended by the Lenders to equal, at all times, such Lender’s Pro Rata Share of the outstanding Advances. Such agreement notwithstanding, Agent, Swing Lender, and the other Lenders agree (which agreement shall not be for the benefit of any Borrower) that in order to facilitate the administration of this Agreement and the other Loan Documents, settlement among the Lenders as to the Advances, the Swing Loans, and the Protective Advances shall take place on a periodic basis in accordance with the following provisions:
(i) Agent shall request settlement (“ Settlement ”) with the Lenders on a weekly basis, or on a more frequent basis if so determined by Agent, (1) on behalf of Swing Lender, with respect to each outstanding Swing Loan, (2) for itself, with respect to the outstanding Protective Advances, and (3) with respect to Borrowers’ or their respective Restricted Subsidiaries’ Collections received by Agent, as to each by notifying the Lenders by telecopy, telephone, or other similar form of transmission, of such requested Settlement, no later than 2:00 p.m. (California time) on the Business Day immediately prior to the date of such requested Settlement (the date of such requested Settlement being the “ Settlement Date ”). Such notice of a Settlement Date shall include a summary statement of the amount of outstanding Advances, Swing Loans, and Protective Advances for the period since the prior Settlement Date. Subject to the terms and conditions contained herein (including Section 2.3(c)(iii) ): (y) if a Lender’s balance of the Advances (including Swing Loans and Protective Advances) exceeds such Lender’s Pro Rata Share of the Advances (including Swing Loans and Protective Advances) as of a Settlement Date, then Agent shall, by no later than

 

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12:00 p.m. (California time) on the Settlement Date, transfer in immediately available funds to a Deposit Account of such Lender (as such Lender may designate), an amount such that each such Lender shall, upon receipt of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances (including Swing Loans and Protective Advances), and (z) if a Lender’s balance of the Advances (including Swing Loans and Protective Advances) is less than such Lender’s Pro Rata Share of the Advances (including Swing Loans and Protective Advances) as of a Settlement Date, such Lender shall no later than 12:00 p.m. (California time) on the Settlement Date transfer in immediately available funds to the Agent’s Account, an amount such that each such Lender shall, upon transfer of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances (including Swing Loans and Protective Advances). Such amounts made available to Agent under clause (z) of the immediately preceding sentence shall be applied against the amounts of the applicable Swing Loans or Protective Advances and, together with the portion of such Swing Loans or Protective Advances representing Swing Lender’s Pro Rata Share thereof, shall constitute Advances of such Lenders. If any such amount is not made available to Agent by any Lender on the Settlement Date applicable thereto to the extent required by the terms hereof, Agent shall be entitled to recover for its account such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate.
(ii) In determining whether a Lender’s balance of the Advances, Swing Loans, and Protective Advances is less than, equal to, or greater than such Lender’s Pro Rata Share of the Advances, Swing Loans, and Protective Advances as of a Settlement Date, Agent shall, as part of the relevant Settlement, apply to such balance the portion of payments actually received in good funds by Agent with respect to principal, interest, fees payable by Borrowers and allocable to the Lenders hereunder, and proceeds of Collateral. To the extent that a net amount is owed to any such Lender after such application, such net amount shall be distributed by Agent to that Lender as part of such next Settlement.
(iii) Between Settlement Dates, Agent, to the extent no Protective Advances or Swing Loans are outstanding, may pay over to Swing Lender any payments received by Agent, that in accordance with the terms of this Agreement would be applied to the reduction of the Advances, for application to Swing Lender’s Pro Rata Share of the Advances. If, as of any Settlement Date, Collections of Borrowers or their respective Restricted Subsidiaries received by Agent since the then immediately preceding Settlement Date have been applied to Swing Lender’s Pro Rata Share of the Advances other than to Swing Loans, as provided for in the previous sentence, Swing Lender shall pay to Agent for the accounts of the Lenders, and Agent shall pay to the Lenders, to be applied to the outstanding Advances of such Lenders, an amount such that each Lender shall, upon receipt of such amount, have, as of such Settlement Date, its Pro Rata Share of the Advances. During the period between Settlement Dates, Swing Lender with respect to Swing Loans, Agent with respect to Protective Advances, and each Lender (subject to the effect of agreements between Agent and individual Lenders) with respect to the Advances other than Swing Loans and Protective Advances, shall be entitled to interest at the applicable rate or rates payable under this Agreement on the daily amount of funds employed by Swing Lender, Agent, or the Lenders, as applicable.
(f)  Notation. Agent shall record on its books the principal amount of the Advances owing to each Lender, including the Swing Loans owing to Swing Lender, and Protective Advances owing to Agent, and the interests therein of each Lender, from time to time and such records shall, absent manifest error, conclusively be presumed to be correct and accurate.
(g)  Lenders’ Failure to Perform. All Advances (other than Swing Loans and Protective Advances) shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advance (or other extension of credit) hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder.

 

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2.4 Payments .
(a) Payments by Borrowers.
(i) Except as otherwise expressly provided herein, all payments by Borrowers shall be made to Agent’s Account for the account of the Lender Group and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Agent later than 11:00 a.m. (California time), shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day.
(ii) Unless Agent receives notice from Administrative Borrower prior to the date on which any payment is due to the Lenders that Borrowers will not make such payment in full as and when required, Agent may assume that Borrowers have made (or will make) such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrowers do not make such payment in full to Agent on the date when due, each Lender severally shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Defaulting Lender Rate for each day from the date such amount is distributed to such Lender until the date repaid.
(b) Apportionment and Application.
(i) Except as otherwise provided with respect to Defaulting Lenders and except as otherwise provided in the Loan Documents (including agreements between Agent and individual Lenders), aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations to which such payments relate held by each Lender) and payments of fees and expenses (other than fees or expenses that are for Agent’s separate account, after giving effect to any agreements between Agent and individual Lenders) shall be apportioned ratably among the Lenders having a Pro Rata Share of the Obligation to which a particular fee relates. Except as provided in Section 2.4(b)(iii) , all payments shall be remitted to Agent and all such payments, and all proceeds of Collateral received by Agent, shall be applied as follows:
(A)  first , ratably to pay any Lender Group Expenses then due to Agent or any of the Lenders under the Loan Documents until paid in full,
(B)  second , ratably to pay any fees or premiums then due to Agent (for its separate account, after giving effect to any agreements between Agent and individual Lenders) or any of the Lenders under the Loan Documents until paid in full,
(C)  third , to pay interest due in respect of all Protective Advances until paid in full,
(D)  fourth , to pay the principal of all Protective Advances until paid in full,
(E)  fifth , ratably to pay interest due in respect of the Advances (other than Protective Advances) and the Swing Loans until paid in full,
(F) sixth , to pay the principal of all Swing Loans until paid in full,
(G)  seventh , so long as no Event of Default has occurred and is continuing, to pay the principal of all Advances until paid in full,

 

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(H)  eighth , so long as no Event of Default has occurred and is continuing, and at Agent’s election (which election Agent agrees will not be made if an Overadvance would be created thereby), to pay amounts then due and owing by Administrative Borrower or its Subsidiaries in respect of Bank Products, until paid in full,
(I)  ninth , if an Event of Default has occurred and is continuing, ratably (i) to pay the principal of all Advances until paid in full, (ii) to Agent, to be held by Agent, for the ratable benefit of Issuing Lender and Lenders, as cash collateral in an amount up to 105% of the Letter of Credit Usage until paid in full, and (iii) to Agent, to be held by Agent, for the benefit of the Bank Product Providers, as cash collateral in an amount up to the amount of the Bank Product Reserve established prior to the occurrence of, and not in contemplation of, the subject Event of Default until the obligations of Borrowers and their respective Restricted Subsidiaries in respect of Bank Products have been paid in full or the cash collateral amount has been exhausted,
(J)  tenth , if an Event of Default has occurred and is continuing, to pay any other Obligations and Bank Product Obligations (including the provision of amounts to Agent, to be held by Agent, for the benefit of the Bank Product Providers, as cash collateral in an amount up to the amount determined by Agent in its Permitted Discretion as the amount necessary to secure the obligations of Borrowers and their respective Restricted Subsidiaries in respect of Bank Products), and
(K)  eleventh , to Borrowers (to be wired to the Designated Account) or such other Person entitled thereto under applicable law.
(ii) Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive, subject to a Settlement delay as provided in Section 2.3(e) .
(iii) In each instance, so long as no Event of Default has occurred and is continuing, this Section 2.4(b) shall not apply to any payment made by Borrowers to Agent and specified by Borrowers to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement.
(iv) For purposes of the foregoing, “paid in full” means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, whether or not any of the foregoing would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding.
(v) In the event of a direct conflict between the priority provisions of this Section 2.4 and other provisions contained in any other Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.4 shall control and govern.
(c) Mandatory Prepayments .
(i) At any time that an Event of Default has occurred and is continuing, subject to Section 5.8(b) , upon the receipt by Parent, any Borrower or any of their respective Subsidiaries of Net Cash Proceeds in connection with the sale or disposition by any Loan Party of property or assets pursuant to clauses (l) or (m) of the definition of Permitted Dispositions, Borrowers shall immediately prepay the outstanding principal of the Advances in an amount equal to 100% of such Net Cash Proceeds.

 

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(ii) At any time that an Event of Default has occurred and is continuing, upon the sale or issuance by any Loan Party or any of its Restricted Subsidiaries of any shares of Stock, Borrowers shall immediately prepay the outstanding principal of the Advances in an amount equal to 100% of the Net Cash Proceeds received by such Person in connection therewith.
2.5 Overadvances . If, at any time or for any reason, the amount of Obligations owed by Borrowers to the Lender Group pursuant to Section 2.1 or Section 2.12 is greater than any of the limitations set forth in Section 2.1 , Section 2.3 or Section 2.12 , as applicable (an “ Overadvance ”), Borrowers immediately shall pay to Agent, in cash, the amount of such excess, which amount shall be used by Agent to reduce the Obligations in accordance with the priorities set forth in Section 2.4(b) ; provided , however , that if an Overadvance occurs solely as a result of Agent making a change in the criteria used to determine Eligible Accounts, Eligible Finished Goods Inventory or Eligible Raw Materials Inventory, then Borrowers shall have 3 Business Days to pay Agent, in cash, the amount of such excess. In addition, Borrowers hereby promise to pay the Obligations (including principal, interest, fees, costs, and expenses) in Dollars in full as and when due and payable under the terms of this Agreement and the other Loan Documents.
2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations .
(a)  Interest Rates. Except as provided in clause (c) below, all Obligations (except for undrawn Letters of Credit) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof as follows: (i) if the relevant Obligation is an Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Margin, and (ii) otherwise, at a per annum rate equal to the Base Rate plus the Base Rate Margin.
The foregoing notwithstanding, at no time shall any portion of the Obligations bear interest on the Daily Balance thereof at a per annum rate less than 3.75%. To the extent that interest accrued hereunder at the rate set forth herein would be less than the foregoing minimum daily rate, the interest rate chargeable hereunder for such day automatically shall be deemed increased to the minimum rate.
(b)  Letter of Credit Fee. Borrowers shall pay Agent (for the ratable benefit of the Lenders, subject to any agreements between Agent and individual Lenders), a Letter of Credit fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.12(e) ) which shall accrue at a rate equal to 2.00% per annum times the Daily Balance of the undrawn amount of all outstanding Letters of Credit.
(c)  Default Rate. Upon the occurrence and during the continuation of an Event of Default, but solely at the election of Agent or the Required Lenders,
(i) all Obligations (except for undrawn Letters of Credit) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 2 percentage points above the per annum rate otherwise applicable hereunder, and
(ii) the Letter of Credit fee provided for above shall be increased to 2 percentage points above the per annum rate otherwise applicable hereunder.
(d)  Payment. Except as provided to the contrary in Section 2.11 or Section 2.13(a) , interest, Letter of Credit fees, and all other fees payable hereunder shall be due and payable, in arrears, on the first day of each month during the term hereof. Borrowers hereby authorize Agent, from time to time, without prior notice to Borrowers (except as otherwise specifically provided in any Loan Document), to charge all interest and fees (when due and payable), all Lender Group Expenses (as and when incurred), all charges, commissions, fees, and costs provided for in Section 2.12(e) (as and when accrued or incurred), all fees and costs provided for in Section 2.11 (as and when accrued or incurred), and all other payments as and when due and payable under any Loan Document (including any amounts due and payable to the Bank Product Providers in respect of Bank Products up to the amount of the Bank Product Reserve) to Borrowers’ Loan Account, which amounts thereafter shall constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded by being charged to Borrowers’ Loan Account and shall thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances that are Base Rate Loans hereunder.

 

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(e)  Computation. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate.
(f)  Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrowers and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided , however , that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto , as of the date of this Agreement, Borrowers are and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrowers in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess.
2.7 Cash Management .
(a) Subject to Section 3.6(b) , Borrowers shall and shall cause each of their Restricted Subsidiaries to (i) establish and maintain cash management services of a type and on terms reasonably satisfactory to Agent at one or more of the banks set forth on Schedule 2.7(a) (each a “ Cash Management Bank ”), and shall request in writing and otherwise take such reasonable steps to ensure that all of their and their Restricted Subsidiaries’ Account Debtors forward payment of the amounts owed by them directly to such Cash Management Bank, and (ii) deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all of their Collections (including those sent directly by their Account Debtors to Borrowers or their Restricted Subsidiaries) into a bank account in Agent’s name (a “ Cash Management Account ”) at one of the Cash Management Banks.
(b) Each Cash Management Bank shall establish and maintain Cash Management Agreements with Agent and Borrowers, in form and substance reasonably acceptable to Agent. Each such Cash Management Agreement shall provide, among other things, that (i) the Cash Management Bank will comply with any instructions (each, a “ Cash Disposition Instruction ”), originated by Agent directing the disposition of the funds in such Cash Management Account without further consent by a Borrower or its Restricted Subsidiary, as applicable, (ii) the Cash Management Bank has no rights of setoff or recoupment or any other claim against the applicable Cash Management Account, other than for payment of its service fees and other charges directly related to the administration of such Cash Management Account and for returned checks or other items of payment, (iii) at any time after which the Agent so instructs such Cash Management Bank (a “ Cash Sweep Instruction ”), it immediately will forward by daily sweep all amounts in the applicable Cash Management Account to the Agent’s Account until such time (if any) as Agent notifies it that the Cash Sweep Instruction is terminated pursuant to the last sentence of this Section 2.7(b) ; and (iv) if clause (iii) is not applicable, then Agent shall direct the Cash Management bank to immediately transfer all such amounts to Borrowers’ Designated Account. Agent may issue a Cash Sweep Instruction or Cash Disposition Instruction only on or after any date that: (x) an Event of Default shall have occurred and be continuing or (y) the Borrowers’ average Excess Availability during any consecutive 30-day period is less than $10,000,000. Agent shall terminate a Cash Sweep Instruction by issuing new instructions to the Cash Management Bank within three (3) Business Days after Borrowers’ average Excess Availability during any consecutive 30-day period exceeds $10,000,000; provided , however , that in no event shall Agent be required to terminate a Cash Sweep Instruction more than three (3) times during any consecutive twelve (12) month period.

 

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(c) So long as no Default or Event of Default has occurred and is continuing, Administrative Borrower may amend Schedule 2.7(a) to add or replace a Cash Management Bank or Cash Management Account; provided , however , that (i) such prospective Cash Management Bank shall be reasonably satisfactory to Agent, and (ii) prior to the time of the opening of such Cash Management Account, a Borrower or its Restricted Subsidiary, as applicable, and such prospective Cash Management Bank shall have executed and delivered to Agent a Cash Management Agreement. Borrowers (or their Restricted Subsidiaries, as applicable) shall close any of their Cash Management Accounts (and establish replacement cash management accounts in accordance with the foregoing sentence) promptly and in any event within 45 days of notice from Agent that the creditworthiness of any Cash Management Bank is no longer acceptable in Agent’s reasonable judgment, or as promptly as practicable and in any event within 75 days of notice from Agent that the operating performance, funds transfer, or availability procedures or performance of the Cash Management Bank with respect to Cash Management Accounts or Agent’s liability under any Cash Management Agreement with such Cash Management Bank is no longer acceptable in Agent’s reasonable judgment.
(d) The Cash Management Accounts shall be cash collateral accounts subject to Control Agreements.
(e) Notwithstanding anything to the contrary contained herein, Agent acknowledges that the Cash Management Accounts may contain from time to time Trust Funds (as defined below), which, by law, Borrowers and their Subsidiaries are required to collect and remit from time to time but which, pending such remittance, shall be contained or held in the Cash Management Accounts. Upon Agent’s delivery of a Cash Sweep Instruction, Cash Disposition Instruction or any other exercise of control by Agent under a Control Agreement or a Cash Management Agreement, Agent agrees to notify Borrowers and their Subsidiaries of such exercise (which notice may be by delivery of a copy of such Cash Sweep Instruction, if any). Upon receipt of such notice, Borrowers and their Subsidiaries shall send written notice to Agent certifying the type and amount of any Trust Funds contained or held in the Cash Management Accounts. Within 3 Business Days after receipt of such notice by Agent, Agent shall remit the amount of the Trust Funds to Borrowers and their Subsidiaries for payment to the appropriate Person; provided , that, during such 3 Business Day period, Agent shall have the right to ask for further clarification, verification or other supporting documentation with respect to any such type or amount certified by Borrowers or their Subsidiaries as constituting Trust Funds and Agent shall not be required to remit the amount of such Trust Funds so certified unless and until Agent is reasonably satisfied as to such clarification, verification or other supporting documentation. For the purposes of this Agreement, “ Trust Funds ” means all funds held by Borrowers and their Subsidiaries, as a fiduciary, all taxes required to be collected or withheld (including, without limitation, federal and state withholding taxes (including the employer’s share thereof), taxes owing to any governmental unit thereof, sales, use and excise taxes, customs duties, import duties and independent customs brokers’ charges), other taxes for which Borrowers and their Subsidiaries may become liable, and accrued and unpaid employee compensation (including salaries, wages, benefits and expense reimbursements).
2.8 Crediting Payments . The receipt of any payment item by Agent (whether from transfers to Agent by the Cash Management Banks pursuant to the Cash Management Agreements or otherwise) shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds made to the Agent’s Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrowers shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Agent only if it is received into the Agent’s Account on a Business Day on or before 11:00 a.m. (California time). If any payment item is received into the Agent’s Account on a non-Business Day or after 11:00 a.m. (California time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day.

 

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2.9 Designated Account . Agent is authorized to make the Advances, and Issuing Lender is authorized to issue the Letters of Credit, under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person or, without instructions, if pursuant to Section 2.6(d) . Administrative Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrowers and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Administrative Borrower, any Advance, Protective Advance, or Swing Loan requested by Borrowers and made by Agent or the Lenders hereunder shall be made to the Designated Account.
2.10 Maintenance of Loan Account; Statements of Obligations . Agent shall maintain an account on its books in the name of Borrowers (the “ Loan Account ”) on which Borrowers will be charged with all Advances (including Protective Advances and Swing Loans) made by Agent, Swing Lender, or the Lenders to Borrowers or for Borrowers’ account, the Letters of Credit issued by Issuing Lender for Borrowers’ account, and with all other payment Obligations hereunder or under the other Loan Documents, including, accrued interest, fees and expenses, and Lender Group Expenses. In accordance with Section 2.8 , the Loan Account will be credited with all payments received by Agent from Borrowers or for Borrowers’ account, including all amounts received in the Agent’s Account from any Cash Management Bank. In accordance with Section 2.6(d) , Agent shall render statements regarding the Loan Account to Administrative Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements, absent manifest error, shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrowers and the Lender Group unless, within 30 days after receipt thereof by Administrative Borrower, Administrative Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements.
2.11 Fees . Borrowers shall pay to Agent, as and when due and payable under the terms of the Fee Letter, the fees set forth in the Fee Letter.
2.12 Letters of Credit .
(a) Subject to the terms and conditions of this Agreement, the Issuing Lender agrees to issue letters of credit for the account of Borrowers (each, an “ L/C ”) or to purchase participations or execute indemnities or reimbursement obligations (each such undertaking, an “ L/C Undertaking ”) with respect to letters of credit issued by an Underlying Issuer (as of the Closing Date, the prospective Underlying Issuer is to be Wells Fargo) for the account of Borrowers. Each request for the issuance of a Letter of Credit or the amendment, renewal, or extension of any outstanding Letter of Credit shall be made in writing by an Authorized Person and delivered to the Issuing Lender and Agent via hand delivery, telefacsimile, or other electronic method of transmission reasonably in advance of the requested date of issuance, amendment, renewal, or extension. Each such request shall be in form and substance satisfactory to the Issuing Lender in its reasonable discretion and shall specify (i) the amount of such Letter of Credit, (ii) the date of issuance, amendment, renewal, or extension of such Letter of Credit, (iii) the expiration date of such Letter of Credit, (iv) the name and address of the beneficiary thereof (or the beneficiary of the Underlying Letter of Credit, as applicable), and (v) such other information (including, in the case of an amendment, renewal, or extension, identification of the outstanding Letter of Credit to be so amended, renewed, or extended) as shall be necessary to prepare, amend, renew, or extend such Letter of Credit. If requested by the Issuing Lender, Borrowers also shall be an applicant under the application with respect to any Underlying Letter of Credit that is to be the subject of an L/C Undertaking. The Issuing Lender shall have no obligation to issue a Letter of Credit if any of the following would result after giving effect to the issuance of such requested Letter of Credit:
(i) the Letter of Credit Usage would exceed the Borrowing Base less the outstanding amount of Advances, or
(ii) the Letter of Credit Usage would exceed $10,000,000, or
(iii) the Letter of Credit Usage would exceed the Maximum Revolver Amount less the outstanding amount of Advances.

 

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Borrowers and the Lender Group acknowledge and agree that certain Underlying Letters of Credit may be issued to support letters of credit that already are outstanding as of the Closing Date. Each Letter of Credit (and corresponding Underlying Letter of Credit) shall be in form and substance acceptable to the Issuing Lender (in the exercise of its reasonable discretion), including the requirement that the amounts payable thereunder must be payable in Dollars. If Issuing Lender is obligated to advance funds under a Letter of Credit, Borrowers immediately shall reimburse such L/C Disbursement to Issuing Lender upon receiving written or telephonic notice of such L/C Disbursement by paying to Agent an amount equal to such L/C Disbursement not later than 11:00 a.m., California time, on the date that such L/C Disbursement is made, provided , that Administrative Borrower has received written or telephonic notice of such L/C Disbursement prior to 10:00 a.m., California time, on such date, or, if such notice has not been received by Administrative Borrower prior to such time on such date, then not later than 11:00 a.m., California time, on the Business Day immediately following the day that Administrative Borrower receives such notice, pursuant to the foregoing, and, in the absence of such reimbursement, the L/C Disbursement immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances that are Base Rate Loans under Section 2.6 . To the extent an L/C Disbursement is deemed to be an Advance hereunder, Borrowers’ obligation to reimburse such L/C Disbursement shall be discharged and replaced by the resulting Advance. Promptly following receipt by Agent of any payment from Borrowers pursuant to this paragraph, Agent shall distribute such payment to the Issuing Lender or, to the extent that Lenders have made payments pursuant to Section 2.12(c) to reimburse the Issuing Lender, then to such Lenders and the Issuing Lender as their interests may appear.
(b) Promptly following receipt of a notice of L/C Disbursement pursuant to Section 2.12(a) , each Lender agrees to fund its Pro Rata Share of any Advance deemed made pursuant to the foregoing subsection on the same terms and conditions as if Borrowers had requested such Advance and Agent shall promptly pay to Issuing Lender the amounts so received by it from the Lenders. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Lender or the Lenders, the Issuing Lender shall be deemed to have granted to each Lender, and each Lender shall be deemed to have purchased, a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit, and each such Lender agrees to pay to Agent, for the account of the Issuing Lender, such Lender’s Pro Rata Share of any payments made by the Issuing Lender under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to Agent, for the account of the Issuing Lender, such Lender’s Pro Rata Share of each L/C Disbursement made by the Issuing Lender and not reimbursed by Borrowers on the date due as provided in clause (a) of this Section, or of any reimbursement payment required to be refunded to Borrowers for any reason. Each Lender acknowledges and agrees that its obligation to deliver to Agent, for the account of the Issuing Lender, an amount equal to its respective Pro Rata Share of each L/C Disbursement made by the Issuing Lender pursuant to this Section 2.12(b) shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or Default or the failure to satisfy any condition set forth in Section 3 hereof. If any such Lender fails to make available to Agent the amount of such Lender’s Pro Rata Share of each L/C Disbursement made by the Issuing Lender in respect of such Letter of Credit as provided in this Section, such Lender shall be deemed to be a Defaulting Lender and Agent (for the account of the Issuing Lender) shall be entitled to recover such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate until paid in full.

 

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(c) Each Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless from any loss, cost, expense, or liability, and reasonable attorneys fees incurred by the Lender Group arising out of or in connection with any Letter of Credit; provided , however , that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability to the extent that it is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. Each Borrower agrees to be bound by the Underlying Issuer’s regulations and interpretations of any Underlying Letter of Credit or by Issuing Lender’s interpretations of any L/C issued by Issuing Lender to or for such Borrower’s account, even though this interpretation may be different from such Borrower’s own, and each Borrower understands and agrees that the Lender Group shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrowers’ instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. Each Borrower understands that the L/C Undertakings may require Issuing Lender to indemnify the Underlying Issuer for certain costs or liabilities arising out of claims by Borrowers against such Underlying Issuer. Each Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by the Lender Group under any L/C Undertaking as a result of the Lender Group’s indemnification of any Underlying Issuer; provided , however , that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability to the extent that it is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. Each Borrower hereby acknowledges and agrees that neither the Lender Group nor the Issuing Lender shall be responsible for delays, errors, or omissions resulting from the malfunction of equipment in connection with any Letter of Credit.
(d) Each Borrower hereby authorizes and directs any Underlying Issuer to deliver to the Issuing Lender all instruments, documents, and other writings and property received by such Underlying Issuer pursuant to such Underlying Letter of Credit and to accept and rely upon the Issuing Lender’s instructions with respect to all matters arising in connection with such Underlying Letter of Credit and the related application.
(e) Any and all issuance charges, commissions, fees, and costs incurred by the Issuing Lender relating to Underlying Letters of Credit shall be Lender Group Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrowers to Agent for the account of the Issuing Lender; it being acknowledged and agreed by each Borrower that, as of the Closing Date, the issuance charge imposed by the prospective Underlying Issuer is .825% per annum times the face amount of each Underlying Letter of Credit, that such issuance charge may be changed from time to time, and that the Underlying Issuer also imposes a schedule of charges for amendments, extensions, drawings, and renewals.
(f) If by reason of (i) any change after the Closing Date in any applicable law, treaty, rule, or regulation or any change in the interpretation or application thereof by any Governmental Authority, or (ii) compliance by the Underlying Issuer or the Lender Group with any direction, request, or requirement (irrespective of whether having the force of law) of any Governmental Authority or monetary authority including, Regulation D of the Federal Reserve Board as from time to time in effect (and any successor thereto):
(i) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letter of Credit issued hereunder, or
(ii) there shall be imposed on the Underlying Issuer or the Lender Group any other condition regarding any Underlying Letter of Credit or any Letter of Credit issued pursuant hereto;
and the result of the foregoing is to increase, directly or indirectly, the cost to the Lender Group of issuing, making, guaranteeing, or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by the Lender Group, then, and in any such case, Agent may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Administrative Borrower, and Borrowers shall pay on demand such amounts as Agent may specify to be necessary to compensate the Lender Group for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate then applicable to Base Rate Loans hereunder. The determination by Agent of any amount due pursuant to this Section, as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto.

 

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2.13 LIBOR Option .
(a)  Interest and Interest Payment Dates. In lieu of having interest charged at the rate based upon the Base Rate, Borrowers shall have the option (the “ LIBOR Option ”) to have interest on all or a portion of the Advances be charged at a rate of interest based upon the LIBOR Rate. Interest on LIBOR Rate Loans shall be payable on the earliest of (i) the last day of the Interest Period applicable thereto ( provided , however , that, subject to the following clauses (ii) and (iii), in the case of any Interest Period greater than 3 months in duration, interest shall be payable at 3 month intervals after the commencement of the applicable Interest Period and on the last day of such Interest Period), (ii) the occurrence of an Event of Default in consequence of which the Required Lenders or Agent on behalf thereof have elected to accelerate the maturity of all or any portion of the Obligations, or (iii) termination of this Agreement pursuant to the terms hereof. On the last day of each applicable Interest Period, unless Administrative Borrower properly has exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall convert to the rate of interest then applicable to Base Rate Loans of the same type hereunder. At any time that an Event of Default has occurred and is continuing, Borrowers no longer shall have the option to request that Advances bear interest at a rate based upon the LIBOR Rate and Agent shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Base Rate Loans hereunder.
(b) LIBOR Election.
(i) Administrative Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Agent prior to 11:00 a.m. (California time) at least 3 Business Days prior to the commencement of the proposed Interest Period (the “ LIBOR Deadline ”). Notice of Administrative Borrower’s election of the LIBOR Option for a permitted portion of the Advances and an Interest Period pursuant to this Section shall be made by delivery to Agent of a LIBOR Notice received by Agent before the LIBOR Deadline, or by telephonic notice received by Agent before the LIBOR Deadline (to be confirmed by delivery to Agent of a LIBOR Notice received by Agent prior to 5:00 p.m. (California time) on the same day). Promptly upon its receipt of each such LIBOR Notice, Agent shall provide a copy thereof to each of the Lenders.
(ii) Each LIBOR Notice shall be irrevocable and binding on Borrowers. In connection with each LIBOR Rate Loan, each Borrower shall indemnify, defend, and hold Agent and the Lenders harmless against any loss, cost, or expense incurred by Agent or any Lender as a result of (A) the payment of any principal of any LIBOR Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (B) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (C) the failure to borrow, convert, continue or prepay any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, and expenses, collectively, “ Funding Losses ”). Funding Losses shall, with respect to Agent or any Lender, be deemed to equal the amount determined by Agent or such Lender to be the excess, if any, of (1) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period therefor), minus (2) the amount of interest that would accrue on such principal amount for such period at the interest rate which Agent or such Lender would be offered were it to be offered, at the commencement of such period, Dollar deposits of a comparable amount and period in the London interbank market. A certificate of Agent or a Lender delivered to Administrative Borrower setting forth any amount or amounts that Agent or such Lender is entitled to receive pursuant to this Section 2.13 shall be conclusive absent manifest error unless the Administrative Borrower shall object in writing within seven (7) Business Days of receipt thereof, specifying the basis for such objection in detail.

 

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(iii) Borrowers shall have not more than 5 LIBOR Rate Loans in effect at any given time. Borrowers only may exercise the LIBOR Option for LIBOR Rate Loans of at least $1,000,000 and integral multiples of $500,000 in excess thereof.
(c)  Prepayments. Borrowers may prepay LIBOR Rate Loans or convert such Loans to Base Rate Loans at any time; provided , however , that in the event that LIBOR Rate Loans are so prepaid or converted on any date that is not the last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Agent of proceeds of Borrowers’ and their respective Restricted Subsidiaries’ Collections in accordance with Section 2.4(b) or for any other reason, including early termination of the term of this Agreement or acceleration of all or any portion of the Obligations pursuant to the terms hereof, each Borrower shall indemnify, defend, and hold Agent and the Lenders and their Participants harmless against any and all Funding Losses in accordance with clause (b)(ii) above.
(d) Special Provisions Applicable to LIBOR Rate.
(i) The LIBOR Rate may be adjusted by Agent with respect to any Lender on a prospective basis to take into account any additional or increased costs to such Lender of maintaining or obtaining any eurodollar deposits or increased costs, in each case, due to changes in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes in tax laws (except changes of general applicability in tax laws relating to taxes based on income, profits, receipts or capital) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased costs would increase the cost of funding loans bearing interest at the LIBOR Rate. In any such event, the affected Lender shall give Administrative Borrower and Agent notice of such a determination and adjustment and Agent promptly shall transmit the notice to each other Lender and, upon its receipt of the notice from the affected Lender, Administrative Borrower may, by notice to such affected Lender (y) require such Lender to furnish to Administrative Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment accompanied by a certificate of such Lender stating that it is charging such similar increased costs to similarly situated borrowers, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any amounts due under clause (b)(ii) above).
(ii) In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of any Lender, make it unlawful or impractical for such Lender to fund or maintain LIBOR Rate Loans or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, such Lender shall give notice of such changed circumstances to Agent and Administrative Borrower and Agent promptly shall transmit the notice to each other Lender and (y) in the case of any LIBOR Rate Loans of such Lender that are outstanding, the date specified in such Lender’s notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans of such Lender thereafter shall accrue interest at the rate then applicable to Base Rate Loans, and (z) Borrowers shall not be entitled to elect the LIBOR Option until such Lender determines that it would no longer be unlawful or impractical to do so.
(e)  No Requirement of Matched Funding. Anything to the contrary contained herein notwithstanding, neither Agent, nor any Lender, nor any of their Participants, is required actually to acquire eurodollar deposits to fund or otherwise match fund any Obligation as to which interest accrues at the LIBOR Rate. The provisions of this Section shall apply as if each Lender or its Participants had match funded any Obligation as to which interest is accruing at the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans.

 

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2.14 Capital Requirements . If, after the date hereof, either (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by any Lender or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on such Lender’s or such holding company’s capital as a consequence of such Lender’s Commitments hereunder to a level below that which such Lender or such holding company could have achieved but for such adoption, change, or compliance (taking into consideration such Lender’s or such holding company’s then existing policies with respect to capital adequacy and assuming the full utilization of such entity’s capital) by any amount deemed in good faith by such Lender to be material and the result is an increase in the cost to any Lender of funding or maintaining any Advances to Borrowers, then such Lender may notify Administrative Borrower and Agent thereof. Following receipt of such notice, Borrowers agree to pay such Lender on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender’s calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error). In determining such amount, such Lender may use any reasonable averaging and attribution methods.
2.15 Joint and Several Liability of Borrowers .
(a) Each Borrower is accepting joint and several liability hereunder and under the other Loan Documents in consideration of the financial accommodations to be provided by the Lender Group under this Agreement, for the mutual benefit, directly and indirectly, of each Borrower and in consideration of the undertakings of the other Borrowers to accept joint and several liability for the Obligations.
(b) Each Borrower, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Obligations (including, without limitation, any Obligations arising under this Section 2.15 ), it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each Borrower without preferences or distinction among them.
(c) If and to the extent that any Borrower shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Borrowers will make such payment with respect to, or perform, such Obligation.
(d) The Obligations of each Borrower under the provisions of this Section 2.15 constitute the absolute and unconditional, full recourse Obligations of each Borrower enforceable against each Borrower to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstances whatsoever.
(e) Except as otherwise expressly provided in this Agreement, each Borrower hereby waives notice of acceptance of its joint and several liability, notice of any Advances or Letters of Credit issued under or pursuant to this Agreement, notice of the occurrence of any Default, Event of Default, or of any demand for any payment under this Agreement, notice of any action at any time taken or omitted by Agent or Lenders under or in respect of any of the Obligations, any requirement of diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement (except as otherwise provided in this Agreement). Each Borrower hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by Agent or Lenders at any time or times in respect of any default by any Borrower in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any Borrower. Without limiting the generality of the foregoing, each Borrower assents to any other action or delay in acting or failure to act on the part of any Agent or Lender with respect to the failure by any Borrower to comply with any of its respective Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of this Section 2.15 afford grounds for terminating, discharging or relieving any Borrower, in whole or in part, from any of its Obligations under this Section 2.15 , it being the intention of each Borrower that, so long as any of the Obligations hereunder remain unsatisfied, the Obligations of each Borrower under this Section 2.15 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of each Borrower under this Section 2.15 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Borrower or any Agent or Lender.

 

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(f) Each Borrower represents and warrants to Agent and Lenders that such Borrower is currently informed of the financial condition of Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Borrower further represents and warrants to Agent and Lenders that such Borrower has read and understands the terms and conditions of the Loan Documents. Each Borrower hereby covenants that such Borrower will continue to keep informed of Borrowers’ financial condition, the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Obligations.
(g) Each Borrower waives all rights and defenses arising out of an election of remedies by Agent or any Lender, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed Agent’s or such Lender’s rights of subrogation and reimbursement against such Borrower by the operation of Section 580(d) of the California Code of Civil Procedure or otherwise.
(h) Each Borrower waives all rights and defenses that such Borrower may have because the Obligations are secured by Real Property. This means, among other things:
(i) Agent and Lenders may collect from such Borrower without first foreclosing on any Collateral pledged by Borrowers.
(ii) If Agent or any Lender forecloses on any Real Property Collateral pledged by Borrowers:
(A) The amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price.
(B) Agent and Lenders may collect from such Borrower even if Agent or Lenders, by foreclosing on the Real Property Collateral, has destroyed any right such Borrower may have to collect from the other Borrowers.
This is an unconditional and irrevocable waiver of any rights and defenses such Borrower may have because the Obligations are secured by Real Property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure.
(i) The provisions of this Section 2.15 are made for the benefit of Agent, Lenders and their respective successors and assigns, and may be enforced by it or them from time to time against any or all Borrowers as often as occasion therefor may arise and without requirement on the part of any such Agent, Lender, successor or assign first to marshal any of its or their claims or to exercise any of its or their rights against any Borrower or to exhaust any remedies available to it or them against any Borrower or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy. The provisions of this Section 2.15 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by any Agent or Lender upon the insolvency, bankruptcy or reorganization of any Borrower, or otherwise, the provisions of this Section 2.15 will forthwith be reinstated in effect, as though such payment had not been made.

 

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(j) Each Borrower hereby agrees that it will not enforce any of its rights of contribution or subrogation against any other Borrower with respect to any liability incurred by it hereunder or under any of the other Loan Documents, any payments made by it to Agent or Lenders with respect to any of the Obligations or any collateral security therefor until such time as all of the Obligations have been paid in full in cash. Any claim which any Borrower may have against any other Borrower with respect to any payments to any Agent or Lender hereunder or under any other Loan Documents are hereby expressly made subordinate and junior in right of payment, without limitation as to any increases in the Obligations arising hereunder or thereunder, to the prior payment in full in cash of the Obligations and, in the event of any insolvency, bankruptcy, receivership, liquidation, reorganization or other similar proceeding under the laws of any jurisdiction relating to any Borrower, its debts or its assets, whether voluntary or involuntary, all such Obligations shall be paid in full in cash before any payment or distribution of any character, whether in cash, securities or other property, shall be made to any other Borrower therefor.
(k) Each Borrower hereby agrees that, after the occurrence and during the continuance of any Default or Event of Default, the payment of any amounts due with respect to the indebtedness owing by any Borrower to any other Borrower is hereby subordinated to the prior payment in full in cash of the Obligations. Each Borrower hereby agrees that after the occurrence and during the continuance of any Default or Event of Default, such Borrower will not demand, sue for or otherwise attempt to collect any indebtedness of any other Borrower owing to such Borrower until the Obligations shall have been paid in full in cash. If, notwithstanding the foregoing sentence, such Borrower shall collect, enforce or receive any amounts in respect of such indebtedness, such amounts shall be collected, enforced and received by such Borrower as trustee for Agent, and such Borrower shall deliver any such amounts to Agent for application to the Obligations in accordance with Section 2.4(b) .
3.  CONDITIONS; TERM OF AGREEMENT.
3.1 Conditions Precedent to the Initial Extension of Credit . The obligation of each Lender to make its initial extension of credit provided for hereunder, is subject to the fulfillment, to the satisfaction of Agent and each Lender of each of the conditions precedent set forth on Schedule 3.1 (the making of such initial extension of credit by a Lender being conclusively deemed to be its satisfaction or waiver of the conditions precedent).
3.2 Conditions Precedent to all Extensions of Credit . The obligation of the Lender Group (or any member thereof) to make any Advances hereunder at any time (or to extend any other credit hereunder) shall be subject to the following conditions precedent:
(a) the representations and warranties contained in this Agreement and in the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date);
(b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof;
(c) no injunction, writ, restraining order, or other order of any nature restricting or prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against any Borrower, Agent, any Lender, or any of their Affiliates; and
(d) no Material Adverse Change shall have occurred.

 

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3.3 Term . This Agreement shall continue in full force and effect for a term ending on the fifth anniversary of the date hereof (the “ Maturity Date ”). The foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default.
3.4 Effect of Termination . On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrowers with respect to outstanding Letters of Credit) and Bank Product Obligations immediately shall become due and payable without notice or demand and Borrowers agree to (a) either (i) provide cash collateral to be held by Agent for the benefit of those Lenders in an amount equal to 105% of the Letter of Credit Usage, or (ii) cause the original Letters of Credit to be returned to the Issuing Lender, and (b) provide cash collateral or other security reasonably satisfactory to Agent (in an amount determined by Agent as sufficient to satisfy the reasonably estimated credit exposure) to be held by Agent for the benefit of the Bank Product Providers with respect to the Bank Product Obligations). No termination of this Agreement, however, shall relieve or discharge Borrowers or their respective Restricted Subsidiaries of their duties, Obligations, Bank Product Obligations, or covenants hereunder or under any other Loan Document and the Agent’s Liens in the Collateral shall remain in effect until all Obligations and Bank Product Obligations have been paid in full and the Lender Group’s obligations to provide additional credit hereunder have been terminated. When this Agreement has been terminated and all of the Obligations and Bank Product Obligations have been paid in full and the Lender Group’s obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Agent will, at Borrowers’ sole expense, execute and deliver any termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, the Agent’s Liens and all notices of security interests and liens previously filed by Agent with respect to the Obligations and Bank Product Obligations.
3.5 Early Termination by Borrowers . Borrowers have the option, at any time upon 30 days prior written notice by Administrative Borrower to Agent, to terminate this Agreement by paying to Agent, in cash, the Obligations and the Bank Product Obligations (including (a) either (i) providing cash collateral to be held by Agent for the benefit of those Lenders in an amount equal to 105% of the Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender, and (b) providing cash collateral or other security reasonably satisfactory to Agent (in an amount determined by Agent as sufficient to satisfy the reasonably estimated credit exposure) to be held by Agent for the benefit of the Bank Product Providers with respect to the Bank Products Obligations), in full, together with the Applicable Prepayment Premium. If Administrative Borrower has sent a notice of termination pursuant to the provisions of this Section, then, absent an agreement to the contrary contained in any Loan Document, the Commitments shall terminate and Borrowers shall be obligated to repay the Obligations and the Bank Product Obligations (including (a) either (i) providing cash collateral to be held by Agent for the benefit of those Lenders in an amount equal to 105% of the Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender, and (b) providing cash collateral or other security reasonably satisfactory to Agent (in an amount determined by Agent as sufficient to satisfy the reasonably estimated credit exposure) to be held by Agent for the benefit of the Bank Product Providers with respect to the Bank Products Obligations), in full, together with the Applicable Prepayment Premium, on the date set forth as the date of termination of this Agreement in such notice.
3.6 Conditions Subsequent to the Initial Extension of Credit . The obligation of the Lender Group (or any member thereof) to continue to make Advances (or otherwise extend credit hereunder) is subject to the fulfillment, on or before the date applicable thereto, of each of the conditions subsequent set forth below (the failure by Borrowers to so perform or cause to be performed constituting an Event of Default):
(a) within 30 days after the Closing Date, Borrowers shall have delivered to Agent certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 5.8 , the form and substance of which shall be reasonably satisfactory to Agent and its counsel;

 

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(b) within 45 days after the Closing Date, Borrowers shall deliver to Agent Cash Management Agreements and Control Agreements, in form and substance reasonably satisfactory to Agent;
(c) within 90 days after the Closing Date, Borrowers shall use their commercially reasonable efforts to deliver to Agent Collateral Access Agreements with respect to all leased locations, including, without limitation, the following locations: Niagara International Trade Center, 2221 Niagara Falls Boulevard, Wheatfield, New York; 701 I-85 North, Charlotte, North Carolina; 14 Hayward Street, Quincy, Massachusetts; and 16319 Arthur Street, Cerritos, California (it being understood and agreed that Agent may, in its Permitted Discretion, take a reserve for rent payable in respect of any leased location for which a Collateral Access Agreement is not so obtained);
(d) within 5 days (or, in the case of clause (iv) below, 10 days) after the Closing Date, Borrowers shall deliver to Agent the following certificates representing shares of Stock pledged under the Security Agreement, as well as Stock powers with respect thereto endorsed in blank: (i) Certificate #5 for 65 Common Shares of 3091780 Nova Scotia Company, (ii) Certificate #7 for 65 Common Shares of 3091780 Nova Scotia Company, (iii) Certificate #102 for 10 shares of Kilian Manufacturing Corporation, and (iv) a certificate representing 65% of the Stock of Warner Electric UK Group Ltd.; and
(e) within 60 days after the Closing Date, the following conditions shall have been satisfied with respect to all Real Property Collateral (other than the Real Property Collateral located in the State of New York): (a) Agent shall have been granted a first priority Mortgage on such Real Property Collateral; (b) Agent shall have received mortgagee title insurance policies (or marked commitments to issue the same) for such Real Property Collateral issued by a title insurance company reasonably satisfactory to Agent in an amount reasonably satisfactory to Agent assuring Agent that the Mortgage on such Real Property Collateral is a valid and enforceable first priority mortgage Lien on such Real Property Collateral free and clear of all defects and encumbrances except Permitted Liens, and such mortgagee title insurance policies (or marked commitments to issue the same) otherwise shall be in form and substance reasonably satisfactory to Agent; (c) Borrowers and their Subsidiaries shall have paid to said title insurance company all expenses and premiums of said title insurance company in connection with the issuance of such mortgagee title insurance policies (or marked commitments to issue the same) and in addition shall, to the extent required, have paid all recording costs, stamp taxes, mortgage taxes, intangibles taxes and other fees and costs (including reasonable attorneys fees and expenses) incurred in connection therewith; and (d) Agent shall have received such other documentation and opinions of counsel, in form and substance reasonably satisfactory to Agent, in connection with the grant of such Mortgage as Agent shall request in its Permitted Discretion, including, without limitation, surveys (or existing surveys and survey affidavits that are (x) sufficient to have the “matters that would be shown on a survey” exception deleted from the mortgagee policy of title insurance and (y) reasonably satisfactory to Agent), financing statements and fixture filings.
4.  REPRESENTATIONS AND WARRANTIES.
In order to induce the Lender Group to enter into this Agreement, each Borrower makes the following representations and warranties to the Lender Group which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Advance (or other extension of credit) made thereafter, as though made on and as of the date of such Advance (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement:
4.1 No Encumbrances . Borrowers and their respective Restricted Subsidiaries have good and indefeasible title to, or a valid leasehold interest in, their material personal property assets and good and marketable title to, or a valid leasehold interest in, their Real Property, in each case, free and clear of Liens except for Permitted Liens.

 

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4.2 Eligible Accounts . As to each Account that is identified by a Borrower as an Eligible Account in a borrowing base report submitted to Agent, such Account is (a) a bona fide existing payment obligation of the applicable Account Debtors created by the sale and delivery of Inventory or the rendition of services to such Account Debtors in the ordinary course of Borrowers’ business, (b) owed to Borrowers without any known defenses, disputes, offsets, counterclaims, or rights of cancellation, and (c) not excluded as ineligible by virtue of one or more of the excluding criteria set forth in the definition of Eligible Accounts.
4.3 Eligible Inventory .
(a) As to each item of Inventory that is identified by a Borrower as Eligible Raw Materials Inventory in a borrowing base report submitted to Agent, such Inventory is not excluded as ineligible by virtue of one or more of the excluding criteria set forth in the definition of Eligible Raw Materials Inventory.
(b) As to each item of Inventory that is identified by a Borrower as Finished Goods Inventory in a borrowing base report submitted to Agent, such Inventory is (a) to such Borrower’s knowledge, of good and merchantable quality, free from known defects, and (b) not excluded as ineligible by virtue of one or more of the excluding criteria set forth in the definition of Eligible Finished Goods Inventory.
4.4 Equipment . Each material item of Equipment of Borrowers and their respective Restricted Subsidiaries is used or held for use in their business and, to such owner’s knowledge, is in good working order, ordinary wear and tear and damage by casualty excepted.
4.5 Location of Inventory and Equipment . The Inventory and Equipment (other than (i) vehicles, (ii) Equipment out for repair, (iii) Equipment and Inventory in transit between locations identified on Schedule 4.5(b) , (iv) dies, tools, patterns, molds and similar items maintained with customers in the ordinary course of business, and (v) items of de minimus value) of Borrowers and their respective Restricted Subsidiaries are not stored with a bailee, warehouseman, or similar party (except as identified on Schedule 4.5(a) , as such Schedule shall be required to be updated pursuant to the immediately succeeding sentence) and are located only at the locations identified on Schedule 4.5(b) (as such Schedule shall be required to be updated pursuant to the immediately succeeding sentence). Administrative Borrower shall be required to update Schedules 4.5(a) and Schedule 4.5(b) simultaneously with the delivery of quarterly financial statements required pursuant to Section 5.3; provided , that such Schedules shall be required to be updated only with respect to Equipment or Inventory having an aggregate value of $250,000 or greater.
4.6 Inventory Records . Each Borrower keeps correct and accurate records itemizing and describing the type, quality, and quantity of its and its Restricted Subsidiaries’ Inventory and the book value thereof.
4.7 State of Incorporation; Location of Chief Executive Office; Organizational Identification Number; Commercial Tort Claims .
(a) The jurisdiction of organization of Borrowers and each of their respective Restricted Subsidiaries is set forth on Schedule 4.7(a) .
(b) The chief executive office of Borrowers and each of their respective Restricted Subsidiaries is located at the address indicated on Schedule 4.7(b) (as such Schedule may be updated pursuant to Section 5.9 ).
(c) Borrowers’ and each of their respective Restricted Subsidiaries’ organizational identification numbers, if any, are identified on Schedule 4.7(c) .

 

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(d) As of the Closing Date, Borrowers and their respective Restricted Subsidiaries do not hold any commercial tort claims, except as set forth on Schedule 4.7(d) .
4.8 Due Organization and Qualification; Restricted Subsidiaries .
(a) Each Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of their organization and qualified to do business in any state where the failure to be so qualified reasonably could be expected to result in a Material Adverse Change.
(b) Set forth on Schedule 4.8(b) is a complete and accurate description of the authorized capital Stock of each Borrower and their respective Restricted Subsidiaries, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding. Other than as described on Schedule 4.8(b) , as of the Closing Date, there are no subscriptions, options, warrants, or calls relating to any shares of each Borrower’s or any of their respective Restricted Subsidiaries’ capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. None of Borrowers or any of their respective Restricted Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock.
(c) Set forth on Schedule 4.8(c) is a complete and accurate list of each Borrower’s direct and indirect Restricted Subsidiaries, showing, as of the Closing Date, the number and the percentage of the outstanding shares of each class of common and preferred Stock authorized for each of such Restricted Subsidiaries owned directly or indirectly by the applicable Borrower. All of the outstanding capital Stock of each such Restricted Subsidiary has been validly issued and is fully paid and non-assessable.
4.9 Due Authorization; No Conflict .
(a) The execution, delivery, and performance by each Borrower of this Agreement, the other Loan Documents and the Acquisition Documents to which each is a party have been duly authorized by all necessary action on the part of such Borrower.
(b) (i) The execution, delivery, and performance by each Borrower of this Agreement and the other Loan Documents to which it is a party do not (A) violate any material provision of federal, state, or local law or regulation applicable to any Borrower, the Governing Documents of any Borrower, or any material order, judgment, or decree of any court or other Governmental Authority binding on any Borrower, (B) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of any Borrower, (C) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of any Borrower, other than Permitted Liens, or (D) require any approval or consent of any Person under any material contractual obligation of any Borrower, other than consents or approvals that have been obtained and that are still in force and effect; and (ii) the execution, delivery, and performance by each Borrower of the Acquisition Documents to which it is a party do not (A) violate any provision of federal, state, or local law or regulation applicable to any Borrower, the Governing Documents of any Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on any Borrower, (B) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any contractual obligation of any Borrower, (C) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of any Borrower, other than Permitted Liens, or (D) require any approval or consent of any Person under any contractual obligation of any Borrower, other than consents or approvals that have been obtained and that are still in force and effect, which, in each of cases (A), (B), (C) and (D) of this clause (ii), could reasonably be expected to result in a Material Adverse Change.

 

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(c) (i) Other than the filing of financing statements, and the recordation of the Mortgages, the execution, delivery, and performance by each Borrower of this Agreement and the other Loan Documents to which it is a party do not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority, other than consents or approvals that have been obtained and that are still in force and effect; and (ii) other than the filing of financing statements, and the recordation of the Mortgages, the execution, delivery, and performance by each Borrower of the Acquisition Documents to which it is a party do not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority, other than consents or approvals that have been obtained and that are still in force and effect and other than those items which could not reasonably be expected to result in a Material Adverse Change.
(d) (i) This Agreement and the other Loan Documents to which each Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Borrower will be the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally; and (ii) the Acquisition Documents to which each Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Borrower will be the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally and except to the extent that the lack of such enforceability could not reasonably be expected to result in a Material Adverse Change.
(e) The Agent’s Liens in the Collateral are validly created, perfected, and first priority Liens to the extent provided for in the other Loan Documents, subject only to Permitted Liens.
(f) (i) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Guarantor; and (ii) the execution, delivery, and performance by each Guarantor of the Acquisition Documents to which it is a party have been duly authorized by all necessary action on the part of such Guarantor except to the extent that the lack of such authorization could not reasonably be expected to result in a Material Adverse Change.
(g) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party do not (i) violate any material provision of federal, state, or local law or regulation applicable to such Guarantor, the Governing Documents of such Guarantor, or any material order, judgment, or decree of any court or other Governmental Authority binding on such Guarantor, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of such Guarantor, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of such Guarantor, other than Permitted Liens, or (iv) require any approval or consent of any Person under any material contractual obligation of such Guarantor, other than consents or approvals that have been obtained and that are still in force and effect.
(h) Other than the filing of financing statements and the recordation of the Mortgages, the execution, delivery, and performance by each Guarantor of the Loan Documents to which such Guarantor is a party do not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority, other than consents or approvals that have been obtained and that are still in force and effect.
(i) (i) The Loan Documents to which each Guarantor is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Guarantor will be the legally valid and binding obligations of such Guarantor, enforceable against such Guarantor in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally; and (ii) the Acquisition Documents to which each Guarantor is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Guarantor will be the legally valid and binding obligations of such Guarantor, enforceable against such Guarantor in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally and except to the extent that the lack of such enforceability could not reasonably be expected to result in a Material Adverse Change.

 

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4.10 Litigation . Other than those matters disclosed on Schedule 4.10 , there are no actions, suits, or proceedings pending or, to the knowledge of each Borrower, threatened against any Borrower or any of its Restricted Subsidiaries that (a) if adversely determined, could result in a Material Adverse Change or (b) relate to this Agreement or any other Loan Documents or any transaction contemplated hereby or thereby.
4.11 No Material Adverse Change . All financial statements relating to Borrowers and their respective Restricted Subsidiaries that have been delivered by Borrowers to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrowers’ and their respective Restricted Subsidiaries’ financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrowers and their respective Restricted Subsidiaries since October 1, 2004.
4.12 Fraudulent Transfer .
(a) Each Borrower and each of their respective Restricted Subsidiaries, taken as a whole, is Solvent.
(b) No transfer of property is being made by any Borrower or any of its Restricted Subsidiaries and no obligation is being incurred by any Borrower or any of its Restricted Subsidiaries in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrowers or any of their respective Restricted Subsidiaries.
4.13 Employee Compliance .
(a) Set forth on Schedule 4.13(a) is a complete and accurate list of all Plans that meet the definition of an “employee pension benefit plan” under Section 3(2) of ERISA and that are currently maintained or contributed to by any Borrower, any of their respective Restricted Subsidiaries or any of their respective ERISA Affiliates as of the Closing Date.
(b) each Borrower, their respective Restricted Subsidiaries, and their respective ERISA Affiliates are in compliance in all material respects with all applicable provisions and requirements of ERISA and the regulations and published interpretations thereunder with respect to each Plan, and have performed all their obligations in all material respects under each Plan.
(c) No ERISA Event has occurred or is reasonably expected to occur.
(d) All liabilities under each Plan are (i) funded to at least the minimum level required by law or, if higher, to the level required by the terms governing the Plans, (ii) insured with a reputable insurance company, (iii) provided for or recognized in the financial statements most recently delivered to Agent pursuant to Section 5.3 hereof to the extent required by GAAP or (iv) estimated in the formal notes to the financial statements most recently delivered to Agent pursuant to Section 5.3 hereof to the extent required by GAAP.
(e) To the best knowledge of each Borrower, there are no circumstances which may give rise to a material liability in relation to any Plan which is not funded, insured, provided for, recognized or estimated in the manner described in subsection (d) above.

 

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4.14 Environmental Condition . Except as set forth on Schedule 4.14 or disclosed in the Phase I Environmental Site Assessment prepared by URS, and except for matters that would not reasonably be expected to result in the Borrowers or any of their respective Restricted Subsidiaries incurring material liability, (a) to Borrowers’ knowledge, none of Borrowers’ or their respective Restricted Subsidiaries’ properties or assets has ever been used by Borrowers, any of their respective Restricted Subsidiaries, or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, where such use, production, storage, handling, treatment, release or transport was in violation, in any material respect, of any applicable Environmental Law, (b) to Borrowers’ knowledge, none of Borrowers’ nor any of their respective Restricted Subsidiaries’ properties is or has ever been designated or identified pursuant to any environmental protection statute as a site requiring investigation or remediation due to the disposal or release of Hazardous Materials, (c) none of Borrowers nor any of their respective Restricted Subsidiaries have received notice that a Lien arising under any Environmental Law has attached to any revenues of any Borrower or any of its Restricted Subsidiaries or to any Real Property owned or operated by Borrowers or any of their respective Restricted Subsidiaries, and (d) none of Borrowers nor any of their respective Restricted Subsidiaries have received a summons, citation, notice, or directive from the United States Environmental Protection Agency or any other federal or state governmental agency (“ Environmental Claim ”) concerning any action or omission by any Borrower or any of its Restricted Subsidiaries resulting in the releasing or disposing of Hazardous Materials into the environment other than Environmental Claims that would not reasonably be expected to result in a Material Adverse Change, and there are no material Environmental Claims currently pending against Borrowers or any of their respective Restricted Subsidiaries.
4.15 Intellectual Property . Except for the matters which could not reasonably be expected to result in a Material Adverse Change, each Borrower and each of their respective Restricted Subsidiaries owns, or holds licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses that are necessary to the conduct of its business as currently conducted.
4.16 Leases . Except for the matters which could not reasonably be expected to result in a Material Adverse Change, Borrowers and their respective Restricted Subsidiaries enjoy peaceful and undisturbed possession under all leases material to their business and to which they are parties or under which they are operating and all of such material leases are valid and subsisting and no material default by Borrowers or their respective Restricted Subsidiaries exists under any of them except for payments which are the subject of a Permitted Protest.
4.17 Deposit Accounts and Securities Accounts . As of the Closing Date, set forth on Schedule 4.17 is a listing of all of Borrowers’ and their respective Restricted Subsidiaries’ Deposit Accounts and Securities Accounts, including, with respect to each bank or securities intermediary (a) the name and address of such Person, and (b) the account numbers of the Deposit Accounts or Securities Accounts maintained with such Person.
4.18 Complete Disclosure . All factual information furnished by or on behalf of Borrowers or their respective Restricted Subsidiaries with respect to Borrowers or such Restricted Subsidiaries in writing to Agent or any Lender for purposes of or in connection with this Agreement and the other Loan Documents is, when taken as a whole with all other furnished information, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (when taken as a whole with all other furnished information) not misleading in any material respect at such time in light of the circumstances under which such information was provided. On the Closing Date, the Projections received by Agent pursuant to clause (t) of Schedule 3.1 represent, and as of the date on which any other Projections are delivered to Agent, such additional Projections represent Borrowers’ good faith estimate of their and their respective Restricted Subsidiaries’ future performance for the periods covered thereby (it being understood that the Projections are subject to significant uncertainties and contingencies, many of which are beyond control and that no assurance is or can be given that the Projections will be realized and that actual results may vary from such Projections and such variances may be material).

 

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4.19 Indebtedness . Set forth on Schedule 4.19 is a true and complete list of all Indebtedness of each Borrower and each of their respective Restricted Subsidiaries outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and describes the principal terms thereof.
4.20 Material Contracts . Except for matters which, either individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change, each Material Contract (a) is in full force and effect and is binding upon and enforceable against each Person that is a party thereto in accordance with its terms, (b) has not been otherwise amended or modified (except as not otherwise prohibited hereby), and (c) is not in default due to the action of any Borrower or any of its Restricted Subsidiaries.
5.  AFFIRMATIVE COVENANTS.
Each Borrower covenants and agrees that, until termination of all of the Commitments and payment in full of the Obligations, Borrowers shall and shall cause each of their respective Restricted Subsidiaries to do all of the following:
5.1 Accounting System . Maintain a system of accounting that enables Borrowers to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent. Borrowers also shall keep a reporting system that shows all additions, sales, claims, returns, and allowances with respect to their and their respective Restricted Subsidiaries’ sales.
5.2 Collateral Reporting . Provide Agent with each of the reports set forth on Schedule 5.2 at the times specified therein. In addition, each Borrower agrees to cooperate fully with Agent to facilitate and implement, where appropriate, a system of electronic collateral reporting in order to provide electronic reporting of each of the items set forth above.
5.3 Financial Statements, Reports, Certificates . Deliver to Agent each of the financial statements, reports, or other items set forth on Schedule 5.3 at the time specified herein. In addition, Parent agrees that no Restricted Subsidiary of Parent will have a fiscal year different from that of Parent.
5.4 Intentionally Omitted .
5.5 Inspection . Subject to any specific limitations set forth in any other Loan Document, permit Agent and each of its duly authorized representatives or agents to visit any of its properties and inspect any of its assets or books and records, to examine and make copies of its books and records, and to discuss its affairs, finances, and accounts with, and to be advised as to the same by, its officers and employees at such reasonable times and intervals as Agent may designate and, so long as no Default or Event of Default exists, with reasonable prior notice to Administrative Borrower.
5.6 Maintenance of Properties . Maintain and preserve all of their properties which are necessary or useful in the proper conduct to their business in good working order and condition, ordinary wear, tear, and casualty excepted (and except where the failure to do so could not be expected to result in a Material Adverse Change), and comply at all times with the provisions of all material leases to which it is a party as lessee (except where the failure to do so could not reasonably be expected to result in a Material Adverse Change), so as to prevent any loss or forfeiture thereof or thereunder.

 

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5.7 Taxes . Cause all material assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrowers, their respective Restricted Subsidiaries, or any of their respective assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrowers will and will cause their respective Restricted Subsidiaries to make timely payment or deposit of all tax payments and withholding taxes required of them by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof reasonably satisfactory to Agent indicating that the applicable Borrower or applicable Restricted Subsidiary has made such payments or deposits (except to the extent the subject of a Permitted Protest).
5.8 Insurance .
(a) At Borrowers’ expense, maintain insurance respecting their and their respective Restricted Subsidiaries’ assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses and in the same geographic area. Borrowers also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Borrowers shall deliver copies of all such policies to Agent with an endorsement naming Agent as the sole loss payee (under a reasonably satisfactory lender’s loss payable endorsement) or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever.
(b) Administrative Borrower shall give Agent prompt notice of any loss exceeding $500,000 covered by such insurance. So long as no Event of Default has occurred and is continuing, Borrowers shall have the exclusive right to adjust any losses payable under any such insurance policies which are less than $500,000. Following the occurrence and during the continuation of an Event of Default, or in the case of any losses payable under such insurance exceeding $500,000, Agent shall have the exclusive right to adjust any losses payable under any such insurance policies, without any liability to Borrowers whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid over to Agent to be applied at the option of the Required Lenders either to the prepayment of the Obligations or to be disbursed to Administrative Borrower under staged payment terms reasonably satisfactory to the Required Lenders for application to the cost of repairs, replacements, or restorations; provided , however , that, with respect to any such monies in an aggregate amount during any 12 consecutive month period not in excess of $500,000, so long as (A) no Default or Event of Default shall have occurred and is continuing, (B) Borrowers’ Excess Availability is greater than $10,000,000, (C) Administrative Borrower shall have given Agent prior written notice of the intention of Borrowers or their respective Restricted Subsidiaries to apply such monies to the costs of repairs, replacement, or restoration of the property which is the subject of the loss, destruction, or taking by condemnation, (D) the monies are held in a cash collateral account in which Agent has a perfected first-priority security interest, and (E) Borrowers or their respective Restricted Subsidiaries complete such repairs, replacements, or restoration within 360 days after the initial receipt of such monies, Borrowers shall have the option to apply such monies to the costs of repairs, replacement, or restoration of the property which is the subject of the loss, destruction, or taking by condemnation unless and to the extent that such applicable period shall have expired without such repairs, replacements, or restoration being made, in which case, any amounts remaining in the cash collateral account shall be paid to Agent and applied as set forth above.
(c) Borrowers will not, and will not suffer or permit their respective Restricted Subsidiaries to, take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 5.8 , unless Agent is included thereon as an additional insured or loss payee under a lender’s loss payable endorsement. Administrative Borrower promptly shall notify Agent whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and copies of such policies promptly shall be provided to Agent.

 

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5.9 Location of Inventory and Equipment . Keep Borrowers’ and their respective Restricted Subsidiaries’ Inventory and Equipment (other than (i) vehicles, (ii) Equipment out for repair, (iii) Equipment and Inventory in transit between locations identified on Schedule 4.5(b) , (iv) items stored with a bailee, warehouseman, or similar party to the extent disclosed on Schedule 4.5(a) , (v) dies, tools, patterns, molds and similar items maintained with customers in the ordinary course of business, and (vi) items of de minimus value) only at the locations identified on Schedule 4.5(b) and their chief executive offices only at the locations identified on Schedule 4.7(b) ; provided , however , that Administrative Borrower may amend Schedule 4.5(b) or Schedule 4.7(b) so long as (A) with respect to Schedule 4.5(b) , such amendment occurs by written notice to Agent in accordance with the last sentence of Section 4.5 , and with respect to Schedule 4.7(b) , such amendment occurs by written notice to Agent not less than 30 days prior to the date on which such chief executive office is relocated, (B) such new location is within the continental United States, and (C) at the time of such written notification, the applicable Borrower or Restricted Subsidiary (x) with respect to any location at which books and records (other than prior years’ historical records) are maintained or Inventory and/or Equipment having an aggregate value of $2,000,000 or greater is maintained, obtains a Collateral Access Agreement with respect thereto and (y) with respect to any other location, uses its commercially reasonable efforts to provide Agent a Collateral Access Agreement with respect thereto.
5.10 Compliance with Laws . Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change.
5.11 Leases . Except for matters which could not reasonably be expected to result in a Material Adverse Change, pay when due all rents and other amounts payable under any material leases to which any Borrower or any of its Restricted Subsidiaries is a party or by which any Borrower’s or any of their respective Restricted Subsidiaries’ properties and assets are bound, unless such payments are the subject of a Permitted Protest.
5.12 Existence . Except as permitted by Section 6.3 and Section 6.4 , at all times preserve and keep in full force and effect each Borrower’s and each of their respective Restricted Subsidiaries’ valid existence and, except to the extent failure to do so could not reasonably be expected to result in a Material Adverse Change, good standing and any rights, franchises, permits, licenses, authorizations, approvals, entitlements and accreditations material to their businesses.
5.13 Environmental .
(a) Keep any property either owned or operated by any Borrower or any of its Restricted Subsidiaries free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Agent reasonable documentation of such compliance which Agent reasonably requests, provided that, so long as no Default or Event of Default shall have occurred and be continuing, Agent shall not make such a request more than once per any consecutive 12-month period, (c) promptly notify Agent of any release of a Hazardous Material in any reportable quantity from or onto property owned or operated by any Borrower or any of its Restricted Subsidiaries and take any Remedial Actions required to abate said release or otherwise to come into material compliance with applicable Environmental Law, and (d) promptly, but in any event within 10 Business Days of its receipt thereof, provide Agent with written notice of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of any Borrower or any of its Restricted Subsidiaries, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against any Borrower or any of its Restricted Subsidiaries which Environmental Action could reasonably be expected to result in any Borrower or any of its Restricted Subsidiaries incurring material liability under Environmental Laws, and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change.

 

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5.14 Intentionally Omitted .
5.15 Control Agreements . Subject to Section 3.6(b) , take all reasonable steps in order for Agent to obtain control in accordance with Sections 8-106, 9-104, 9-105, 9-106, and 9-107 of the Code with respect to (subject to the proviso contained in Section 6.12 ) all of its Securities Accounts, Deposit Accounts, electronic chattel paper, investment property, and letter of credit rights.
5.16 Formation of Subsidiaries . At the time that any Borrower or any Guarantor forms any direct or indirect Subsidiary or acquires any direct or indirect Subsidiary after the Closing Date and such Subsidiary is a Restricted Subsidiary, such Borrower or such Guarantor shall (a) cause such new Restricted Subsidiary to provide to Agent a joinder to this Agreement or the Guaranty, as applicable (it being understood and agreed that Agent shall determine, in its Permitted Discretion, whether such new Restricted Subsidiary would become a Borrower or a Guarantor, based primarily on whether such new Restricted Subsidiary would be an operating company that would generate Borrowing Base), and the Security Agreement, together with such other security documents (including Mortgages with respect to any Real Property of such new Restricted Subsidiary, subject to Section 5.17 ), as well as appropriate financing statements (and with respect to all property subject to a Mortgage, fixture filings), all in form and substance reasonably satisfactory to Agent (including being sufficient to grant Agent a first priority Lien (subject to Permitted Liens) in and to the assets of such newly formed or acquired Restricted Subsidiary), (b) provide to Agent a pledge agreement and appropriate certificates and powers or financing statements, hypothecating all of the direct or beneficial ownership interest in such new Restricted Subsidiary, in form and substance reasonably satisfactory to Agent, and (c) provide to Agent all other documentation, including one or more opinions of counsel reasonably satisfactory to Agent, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to above (including policies of title insurance or other documentation with respect to all property subject to a Mortgage). Notwithstanding the foregoing, if a Subsidiary that is so formed or acquired is a Controlled Foreign Corporation, then clause (a) of the immediately preceding sentence shall not be applicable and, with respect to clause (b) of the immediately preceding sentence, such pledge shall be limited to 65% of the voting power of all classes of capital Stock of such Subsidiary entitled to vote. Any document, agreement, or instrument executed or issued pursuant to this Section 5.16 shall be a Loan Document. Notwithstanding the foregoing, Agent and Lenders shall not be obligated to consent to any such formation or acquisition of a Subsidiary unless such formation or acquisition is otherwise expressly permitted hereunder.
5.17 Real Property . Upon the acquisition of any fee interest in Real Property with a purchase price or Fair Market Value in excess of $500,000 (other than Real Property located in the State of New York or in any other state having substantially similar real estate mortgage taxes), promptly notify Agent of the acquisition of such Real Property and within 60 days (or such longer time as Agent, in its reasonable discretion, may agree) thereafter: (a) grant Agent a first priority Mortgage on such Real Property; (b) deliver mortgagee title insurance policies (or marked commitments to issue the same) for such Real Property issued by a title insurance company reasonably satisfactory to Agent in an amount reasonably satisfactory to Agent assuring Agent that the Mortgage on such Real Property Collateral is a valid and enforceable first priority mortgage Lien on such Real Property Collateral free and clear of all defects and encumbrances except Permitted Liens, and such mortgagee title insurance policies (or marked commitments to issue the same) otherwise shall be in form and substance reasonably satisfactory to Agent; (c) Borrowers and their Subsidiaries shall pay to said title insurance company all expenses and premiums of said title insurance company in connection with the issuance of such mortgagee title insurance policies (or marked commitments to issue the same) and in addition shall, to the extent required, pay all recording costs, stamp taxes, mortgage taxes, intangibles taxes and other fees and costs (including reasonable attorneys fees and expenses) incurred in connection therewith; and (d) execute and/or deliver to Agent such other documentation and opinions of counsel, in form and substance reasonably satisfactory to Agent, in connection with the grant of such Mortgage as Agent shall request in its Permitted Discretion, including, without limitation, surveys (or existing surveys and survey affidavits that are (x) sufficient to have the “matters that would be shown on a survey” exception deleted from the mortgagee policy of title insurance and (y) reasonably satisfactory to Agent), financing statements and fixture filings.

 

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5.18 ERISA Compliance
(a) Each Borrower shall do, and shall cause each of their respective Restricted Subsidiaries and ERISA Affiliates to do, each of the following: (i) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the IRC and each other applicable federal or state law; (ii) cause each Qualified Plan to maintain its qualified status under Section 401(a) of the IRC; (iii) make all required contributions to each Plan; (iv) ensure that all liabilities under each Plan are (A) funded to at least the minimum level required by law or, if higher, to the level required by the terms governing such Plan; (B) insured with a reputable insurance company; or (C) provided for or recognized in the financial statements most recently delivered to Agent under Section 5.3 (to the extent required by GAAP); and (v) ensure that the contributions or premium payments to or in respect of each Plan are and continue to be promptly paid at no less than the rates required under the rules of such Plan and in accordance with the most recent actuarial advice received in relation to such Plan and applicable law.
(b) Deliver to Agent such certifications or other evidence of compliance with the provisions of Section 4.13 as Agent may from time to time reasonably request.
(c) Promptly notify Agent of each of the following ERISA events affecting any Borrower, any of their respective Restricted Subsidiaries or any ERISA Affiliates (but in no event more than ten (10) days after such event), together with a copy of each notice with respect to such event that may be required to be filed with a Governmental Authority and each notice delivered by a Governmental Authority to any Borrower, any of their respective Restricted Subsidiaries or any ERISA Affiliates with respect to such event:
(i) an ERISA Event;
(ii) the adoption of any new Pension Plan by any Borrower, any of their respective Restricted Subsidiaries or any ERISA Affiliates; or
(iii) except as required under the terms of any collective bargaining agreement, the adoption of any amendment to a Pension Plan, if such amendment will result in a material increase in benefits or unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA).
(d) Promptly deliver to Agent, upon request, copies of (i) each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by any Borrower, any of their respective Restricted Subsidiaries or any ERISA Affiliates with the Internal Revenue Service with respect to each Pension Plan; (ii) all notices received by any Borrower, any of their respective Restricted Subsidiaries or any of their respective ERISA Affiliates from a Multiemployer Plan sponsor concerning an ERISA Event; and (iii) such other documents or governmental reports or filings relating to any Plan as Agent shall reasonably request.

 

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6.  NEGATIVE COVENANTS.
Borrowers covenant and agree that, until termination of all of the Commitments and payment in full of the Obligations, Borrowers will not and will not permit any of their respective Restricted Subsidiaries to do any of the following:
6.1 Indebtedness . Create, incur, assume, suffer to exist, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except:
(a) Indebtedness evidenced by this Agreement and the other Loan Documents, together with Indebtedness owed to Underlying Issuers with respect to Underlying Letters of Credit,
(b) Indebtedness set forth on Schedule 4.19 ,
(c) Permitted Purchase Money Indebtedness,
(d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 6.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) such refinancings, renewals, or extensions do not result in an increase in the principal amount of the Indebtedness so refinanced, renewed, or extended, (ii) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or conditions, that, taken as a whole, are materially more burdensome or restrictive to the applicable Borrower, (iii) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension Indebtedness must include subordination terms and conditions that are at least as favorable to the Lender Group, taken as a whole, as those that were applicable to the refinanced, renewed, or extended Indebtedness, and (iv) the Indebtedness that is refinanced, renewed, or extended is not recourse to any Person that is liable on account of the Obligations other than those Persons which were obligated with respect to the Indebtedness that was refinanced, renewed, or extended or as otherwise permitted pursuant to Section 6.1 ,
(e) endorsement of instruments or other payment items for deposit,
(f) Indebtedness consisting of Permitted Investments,
(g) Indebtedness represented by any notes issued pursuant to the Indenture, including any Senior Notes (or any other evidence of indebtedness for borrowed money under the Senior Notes or the Indenture) in an aggregate principal amount not to exceed $165,000,000 ( provided , however , that such Indebtedness may exceed $165,000,000 up to $250,000,000 so long as with respect to the incurrence of any such Indebtedness in excess of $165,000,000, both immediately before and immediately after giving effect to any such incurrence, (i) no Default or Event of Default shall have occurred and be continuing and (ii) the Borrowers and the Restricted Subsidiaries shall be in pro forma compliance with the covenants set forth in Section 6.16 ) at any one time outstanding and any Refinancing Indebtedness in respect thereof (whether in whole or in part),
(h) Hedge Agreements entered into in the ordinary course of business and not for speculative purposes;
(i) Indebtedness of a Loan Party to another Loan Party and any Refinancing Indebtedness in respect thereof (whether in whole or in part) so long as such Indebtedness is subject to the Intercompany Subordination Agreement;
(j) Guarantees by a Loan Party of Indebtedness incurred by another Loan Party so long as the incurrence of such Indebtedness is otherwise permitted by the terms hereof;
(k) Permitted Subordinated Indebtedness in an aggregate principal amount not to exceed $75,000,000 and any Refinancing Indebtedness in respect thereof so long as with respect to the incurrence of any such Permitted Subordinated Indebtedness, both immediately before and immediately after giving effect to any such incurrence, the Borrowers and the Restricted Subsidiaries shall be in pro forma compliance with the covenants set forth in Section 6.16 ;

 

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(l) Indebtedness (other than for borrowed money) solely to the extent subject to Permitted Liens;
(m) (i) Permitted Acquired Indebtedness and (ii) Indebtedness of any Borrower and the Restricted Subsidiaries owed to the seller of any property acquired in a Permitted Acquisition on an unsecured subordinated basis, which subordination shall be on terms reasonably satisfactory to Agent, in each case, so long as both immediately prior and after giving effect thereto, (x) no Event of Default shall exist or result therefrom, and (y) the Borrowers and the Restricted Subsidiaries will be in pro forma compliance with the covenants set forth in Section 6.16 , after giving effect to such Permitted Acquisition and the incurrence or issuance of such Indebtedness;
(n) Indebtedness consisting of promissory notes issued by any Borrower or any Restricted Subsidiary to current or former directors, officers, employees and consultants, their respective estates, spouses or former spouses to finance the purchase or redemption of Stock permitted by Section 6.10 ;
(o) Indebtedness consisting of obligations of any Borrower or any Restricted Subsidiary under deferred compensation, adjustment of purchase price, earn outs, indemnification or other similar arrangements incurred by such Person in connection with the Acquisition Transactions, Permitted Acquisitions and Permitted Dispositions;
(p) cash management obligations and other Indebtedness in respect of netting services, overdraft protections and similar arrangements, in each case in connection with cash management and Deposit Accounts and incurred in the ordinary course of business; and
(q) additional Indebtedness of Borrowers and their Restricted Subsidiaries in an aggregate principal amount not to exceed $15,000,000 at any time outstanding solely to the extent that such Indebtedness consists of either (i) Purchase Money Indebtedness or (ii) Indebtedness that is subordinated to the Obligations on terms reasonably satisfactory to Agent.
6.2 Liens . Create, incur, assume, or suffer to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed, or extended under Section 6.1 and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed, or extended Indebtedness and proceeds thereof or additions or accessions thereto).
6.3 Restrictions on Fundamental Changes . Enter into any merger, consolidation, reorganization, or recapitalization, or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution), except that:
(a) any Borrower or any Restricted Subsidiary may merge with (i) any Borrower (including a merger, the purpose of which is to reorganize such Borrower into a new jurisdiction), or (ii) any one or more other Restricted Subsidiaries; provided that a Borrower shall be the continuing or surviving Person or the continuing or surviving Person shall expressly assume the obligations of such Borrower in a manner reasonably acceptable to Agent;
(b) any Borrower or Restricted Subsidiary may liquidate or dissolve or change its legal form so long as its assets are transferred to (i) in the case of a Borrower, to another Borrower and (ii) in the case of a Restricted Subsidiary, to a Loan Party or any other Restricted Subsidiary;
(c) so long as no Default or Event of Default has occurred and is continuing or would result therefrom, any Borrower or Restricted Subsidiary may merge with any other Person in order to effect an Investment permitted pursuant to Section 6.12 ; provided that the continuing or surviving Person shall be a Restricted Subsidiary, which together with each of its Restricted Subsidiaries, shall have complied with the requirements of Section 5.16 ;

 

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(d) the Borrowers and the Restricted Subsidiaries may consummate the Acquisition Transactions; and
(e) so long as no Event of Default exists or would result therefrom, a merger, consolidation, reorganization, recapitalization, liquidation, windup or dissolution, the sole purpose of which is to effect a Disposition permitted pursuant to Section 6.4 .
6.4 Disposal of Assets . Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer, or otherwise dispose of (collectively, a “ Disposition ”) any of the assets of any Borrower or any of its Restricted Subsidiaries.
6.5 Change Name . Change any Borrower’s or any of their respective Restricted Subsidiaries’ name, organizational identification number, jurisdiction of organization, or organizational identity; provided , however , that any Borrower or any of its Restricted Subsidiaries may change its name upon at least 10 days prior written notice by Parent or Administrative Borrower to Agent of such change so long as, (a) at the time of such written notification, such Borrower or such Restricted Subsidiary provides any financing statements necessary to perfect and continue perfected the Agent’s Liens and (b) immediately after such name change, Administrative Borrower provides Agent with evidence of such name change (including copies of any related public filings).
6.6 Nature of Business . Engage in any material line of business substantially different from those lines of business conducted by Borrowers and the Restricted Subsidiaries on the Closing Date other than any businesses reasonably related or ancillary thereto.
6.7 Prepayments and Amendments . Except in connection with a refinancing permitted by Section 6.1 ,
(a) optionally prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of any Borrower or any Restricted Subsidiary of a Borrower, except (i) Purchase Money Indebtedness, (ii) the Obligations in accordance with this Agreement; (iii) Borrowers may optionally redeem the Senior Notes to the extent permitted by the Indenture so long as (x) no Event of Default has occurred and is continuing or would result therefrom and (y) Borrowers’ Excess Availability exceeds $10,000,000 after giving effect to any such payment, and (iv) any other Indebtedness (other than Permitted Subordinated Indebtedness) so long as (x) no Event of Default has occurred and is continuing or would result therefrom and (y) Borrowers’ Excess Availability exceeds $10,000,000 after giving effect to any such payment;
(b) make any payment on account of Indebtedness that has been contractually subordinated in right of payment if such payment is not permitted at such time under the subordination terms and conditions, or
(c) directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning the Senior Notes or any Permitted Subordinated Indebtedness in a manner materially adverse to the interests of the Lender Group other than to consummate a Refinancing Indebtedness in respect thereof.
6.8 Intentionally Omitted .
6.9 Intentionally Omitted .

 

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6.10 Distributions . Make any distribution or declare or pay any dividends (in cash or other property, other than common Stock) on, or purchase, acquire, redeem, or retire (a “ Restricted Payment ”) any of Parent’s Stock, of any class, whether now or hereafter outstanding, except as follows:
(a) to pay Holdings to enable it to pay general corporate overhead expenses of Holdings, including franchise taxes and other fees required to maintain the existence of Holdings, insurance premiums and indemnification claims made by directors or officers of Holdings attributable to the ownership or operation of any Loan Party;
(b) (i) so long as (x) no Default or Event of Default has occurred and is continuing or would result therefrom and (y) immediately after giving effect thereto, Borrowers shall have Excess Availability of not less than $10,000,000, to pay reasonable fees paid to non-independent members of Holdings’ Board of Directors, (ii) to pay reasonable expenses incurred by non-independent members of Holdings’ Board of Directors, and (iii) to pay reasonable fees paid to and expenses incurred by independent members of Holdings’ Board of Directors, collectively for clauses (i), (ii) and (iii), in an aggregate amount not to exceed $500,000 in any fiscal year;
(c) so long as (i) no Default or Event of Default has occurred and is continuing or would result therefrom and (ii) immediately after giving effect thereto, Borrowers shall have Excess Availability of not less than $3,000,000, to permit Holdings to purchase, repurchase, redeem or otherwise acquire shares of capital Stock of any Loan Party from employees, former employees, directors or former directors of such Loan Party (or permitted transferees of such employees, former employees, directors or former directors), pursuant to the terms of agreements (including employment agreements) or plans (or amendments thereto) approved by such Loan Party’s Board of Directors under which such Persons purchase or sell, or are granted the option to purchase or sell, shares of such Stock; provided , that the aggregate amount of such repurchases and other acquisitions in any calendar year shall not exceed $500,000;
(d) so long as (i) no Default or Event of Default has occurred and is continuing or would result therefrom and (ii) immediately after giving effect thereto, Borrowers shall have Excess Availability of not less than $1,000,000, to permit Holdings to pay management fees pursuant to the terms of the Management Agreement; provided , that the aggregate amount of such management fees in any calendar year shall not exceed $1,000,000; provided, further, that in the event the payment of such management fees is restricted based on Excess Availability, such management fees shall continue to accrue, and all accrued but unpaid amounts shall be payable following the increase in Excess Availability above such limitation (after giving effect to any payment of such accrued but unpaid amounts);
(e) Restricted Payments made on the Closing Date to consummate the Acquisition Transactions;
(f) to the extent constituting Restricted Payments, the Borrowers and the Restricted Subsidiaries may enter into transactions expressly permitted by Section 6.4 or Section 6.12 ;
(g) cashless repurchases of Stock deemed to occur upon exercise of stock options or warrants if such Stock represents a portion of the exercise price of such options or warrants;
(h) to Holdings (or any direct or indirect parent of Holdings) to be used solely to pay federal, state and local income taxes made no earlier than five days prior to the date on which such Person is required to make such payment in an amount not to exceed the aggregate tax liability attributable to Borrowers and their respective Subsidiaries for such calendar year determined as if Borrowers and their respective Subsidiaries were a separate affiliated group (as defined in Section 1504 of the IRC, as amended) filing a consolidated return, or, to the extent applicable, a separate group filing combined or unitary returns, and then only to the extent that any such payments are actually paid by Holdings to governmental entities; and

 

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(i) so long as (i) no Default or Event of Default has occurred and is continuing or would result therefrom and (ii) immediately after giving effect thereto, Borrowers shall have Excess Availability of not less than $10,000,000, other Restricted Payments not to exceed $10,000,000 in the aggregate since the Closing Date; provided that such amount may be increased by an amount equal to amounts available for Restricted Payments pursuant to Section 4.09(iii) of the Indenture.
6.11 Fiscal Year . Modify or change its fiscal year.
6.12 Investments . Except for Permitted Investments, directly or indirectly, make or acquire any Investment, or incur any liabilities (including contingent obligations) for or in connection with any Investment; provided , however , that Borrowers and their respective Restricted Subsidiaries shall not have Permitted Investments (other than in the Cash Management Accounts) in Deposit Accounts or Securities Accounts in an aggregate amount in excess of $50,000 (exclusive of Trust Funds) at any one time unless the applicable Borrower or the applicable Restricted Subsidiary, and the applicable securities intermediary or bank have entered into Control Agreements governing such Permitted Investments in order to perfect (and further establish) the Agent’s Liens in such Permitted Investments. Subject to the foregoing proviso, Borrowers shall not and shall not permit their respective Restricted Subsidiaries to establish or maintain any Deposit Account or Securities Account unless Agent shall have received a Control Agreement in respect of such Deposit Account or Securities Account.
6.13 Transactions with Affiliates . Directly or indirectly enter into or permit to exist any transaction with any Affiliate of any Borrower except for transactions that (a) are in the ordinary course of Borrowers’ business, (b) are upon fair and reasonable terms and (c) are no less favorable to Borrowers or their respective Restricted Subsidiaries, as applicable, than would be obtained in an arm’s length transaction with a non-Affiliate; provided , however , that if any such transaction involves aggregate payments or other property with a Fair Market Value in excess of $2,500,000, it shall be approved by a majority of the members of the Board of Directors of Parent (including a majority of the disinterested members thereof), such approval to be evidenced by board resolutions stating that the Parent’s Board of Directors has determined that such transactions comply with the foregoing provisions, and if any such transaction involves an aggregate Fair Market Value of more than $5,000,000, Parent will, prior to the consummation thereof, obtain a favorable opinion as to the fairness of the financial terms of such transactions or series of related transactions to the applicable Loan Party, from an Independent Financial Advisor and file the same with Agent; provided , further , however , that such restrictions shall not apply to:
(a) transactions exclusively between or among Holdings and its Subsidiaries permitted hereby;
(b) reasonable fees and compensation paid to, and indemnity provided for directors, officers, employees and consultants to Holdings and its Subsidiaries (provided, that to the extent otherwise covered by clauses (b) or (d) of Section 6.10 , then such clauses of Section 6.10 shall also apply);
(c) any Permitted Acquisition from a non-Affiliate that is an arm’s length transaction and fails to comply with this Section solely because such a non-Affiliate becomes an Affiliate as a result of such Permitted Acquisition;
(d) transactions otherwise permitted by this Agreement;
(e) any Investment permitted pursuant to Section 6.12 ;
(f) any sale of the Stock of any Loan Party in exchange for equity contributions from Parent;

 

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(g) any merger or other transaction with an Affiliate solely for the purpose of reincorporating a Loan Party in another jurisdiction or creating a holding company, to the extent otherwise permitted by this Agreement;
(h) any employment, stock option, stock repurchase, employee benefit compensation, business expense reimbursement, severance, termination or other employment-related agreements, arrangements or plans entered into in good faith by a Loan Party in the ordinary course of business;
(i) sales or purchases of inventory, other products or services to or from any Affiliate of the Borrowers entered into in the ordinary course of business on terms no less favorable to the Borrowers and its Subsidiaries than those that could be obtained at the time of such sale or purchase in arm’s-length dealings with a Person who is not an Affiliate;
(j) any agreement in effect as of the Closing Date or any transaction contemplated thereby and any amendment thereto so long as any such amendment or replacement agreement is not more disadvantageous to Borrowers or the Restricted Subsidiaries in any material respect than the original agreement as in effect on the Closing Date; and
(k) the Management Agreement.
6.14 Use of Proceeds . Use the proceeds of the Advances for any purpose other than (a) on the Closing Date, to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby and to backstop or replace Letters of Credit, and (b) thereafter, consistent with the terms and conditions hereof, to finance ongoing working capital, capital expenditure, and general corporate needs of Borrowers, including Permitted Acquisitions, and for its lawful and permitted purposes.
6.15 Intentionally Omitted .

 

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6.16 Financial Covenants .
(a)  Fixed Charge Coverage Ratio. Fail to maintain or achieve a Fixed Charge Coverage Ratio, measured on a fiscal quarter-end basis, of at least the required amount set forth in the following table for the “Applicable Period” set forth opposite thereto; provided , however , that, with respect to any “Applicable Period”, if daily average Excess Availability was at least $12,500,000 during the 30 day period immediately preceding the applicable date of determination and on the applicable date of determination, then the foregoing covenant shall not apply for such applicable period:
         
Applicable Ratio     Applicable Period
1.05:1.0    
For the 4 quarter period
ending March 31, 2005
1.10:1.0    
For the 4 quarter period
ending June 30, 2005
1.10:1.0    
For the 4 quarter period
ending September 30, 2005
1.10:1.0    
For the 4 quarter period
ending December 31, 2005
1.20:1.0    
For the 4 quarter period
ending each fiscal quarter thereafter
(b)  Capital Expenditures. Make Capital Expenditures in any fiscal year in excess of the amount set forth in the following table for the applicable period:
         
Applicable Amount     Applicable Period
$ 7,900,000    
fiscal year 2005
$ 8,200,000    
fiscal year 2006
$ 8,300,000    
fiscal year 2007
$ 8,500,000    
fiscal year 2008
$ 8,800,000    
fiscal year 2009 and each fiscal year thereafter
provided , however , that up to 75% of the difference between the amount of Capital Expenditure that may be made in any fiscal year and the amount of Capital Expenditures actually made in such fiscal year, may be made in the immediately succeeding fiscal year; provided further , however , that with respect to any Permitted Acquisitions, the “Applicable Amount” for the “Applicable Period” in which such Permitted Acquisition is consummated shall be increased by an amount equal to the product of (a) 1.25 times (b) the average amount per year of Capital Expenditures made by such acquired Person during the immediately preceding three (3) year period.
6.17 Acquisition Documents . Amend, modify or waive in any way materially adverse to the Lender Group, any term or provision of the Acquisition Documents.
6.18 Indenture Documents . Amend, modify or waive in any way materially adverse to the Lender Group, any term or provision of the Indenture Documents.
6.19 Governing Documents . Amend, modify or waive in any way materially adverse to the Lender Group, any term or provision of any Governing Document of any Borrower or Guarantor.

 

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6.20 Real Property Collateral . Without in any manner limiting Section 6.2 , execute and deliver a mortgage with respect to any Real Property located in the State of New York or any other Real Property for which Borrowers and their Restricted Subsidiaries are not required to grant a Mortgage pursuant to Section 5.17 , except (a) in favor of Agent or (b) if the Agent has been, or will simultaneously be, granted a first priority mortgage with respect thereto, in favor of the Trustee as a second priority mortgage to the extent permitted by the Intercreditor Agreement.
7.  EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event of default (each, an “ Event of Default ”) under this Agreement:
7.1 If Borrowers fail to pay when due and payable, or when declared due and payable, (a) all or any portion of the Obligations consisting of interest, fees, or charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts (other than any portion thereof constituting principal) constituting Obligations (including any portion thereof that accrues after the commencement of an Insolvency Proceeding, regardless of whether allowed or allowable in whole or in part as a claim in any such Insolvency Proceeding), and such failure continues for a period of 3 Business Days, or (b) all or any portion of the principal of the Obligations);
7.2 If any Borrower or any of its Restricted Subsidiaries
(a) fails to perform or observe any covenant or other agreement contained in any of Sections 5.5 , 5.8 , 5.12 (as to existence), and 6.1 through 6.20 of this Agreement or Section 6 of the Security Agreement;
(b) fails to perform or observe any covenant or other agreement contained in any of Sections 2.7, 5.2 , and 5.3 of this Agreement and such failure continues for a period of 3 Business Days after written notice thereof is given to Administrative Borrower by Agent;
(c) fails to perform or observe any covenant or other agreement contained in any of Sections 5.6 , 5.7 , 5.9 , 5.15 , 5.16 , and 5.17 of this Agreement and such failure continues for a period of 10 Business Days after written notice thereof is given to Administrative Borrower by Agent; or
(d) fails to perform or observe any covenant or other agreement contained in this Agreement, or in any of the other Loan Documents; in each case, other than any such covenant or agreement that is the subject of another provision of this Section 7 (in which event such other provision of this Section 7 shall govern), and such failure continues for a period of 20 Business Days after written notice thereof is given to Administrative Borrower by Agent;
7.3 If any of any Borrower’s or any of its Restricted Subsidiaries’ assets with an individual fair market value of $1,000,000 or more or assets with an aggregate fair market value of $3,000,000 or more is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any third Person and the same is not discharged before the earlier of 30 days after the date it first arises or 5 days prior to the date on which such property or asset is subject to forfeiture by such Borrower or the applicable Restricted Subsidiary;
7.4 If an Insolvency Proceeding is commenced by any Borrower or any of its Restricted Subsidiaries;

 

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7.5 If an Insolvency Proceeding is commenced against any Borrower or any of its Restricted Subsidiaries, and any of the following events occur: (a) the applicable Borrower or Restricted Subsidiary consents to the institution of such Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, any Borrower or any such Restricted Subsidiary, or (e) an order for relief shall have been issued or entered therein;
7.6 If any Borrower or any of its Restricted Subsidiaries is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs;
7.7 If one or more judgments, orders, or awards involving an individual amount of $1,000,000 or more or an aggregate amount of $3,000,000, or more (except to the extent fully covered by insurance pursuant to which the insurer has accepted liability therefor in writing) shall be entered or filed against any Borrower or any of its Restricted Subsidiaries or with respect to any of their respective assets, and the same is not released, discharged, bonded against, or stayed pending appeal before 30 days after the date it first arises;
7.8 If there is a default in one or more agreements to which any Borrower or any of its Restricted Subsidiaries is a party with one or more third Persons relative to Indebtedness of any Borrower or any of its Restricted Subsidiaries involving an aggregate amount of $3,000,000 or more, and (a) such default (i) occurs at the final maturity of the obligations thereunder, or (ii) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of the applicable Borrower’s or Restricted Subsidiary’s obligations thereunder, or (b) or any such Indebtedness obligations shall be required to be prepaid or redeemed (other than by a regularly scheduled required prepayment or redemption), prior to the stated maturity thereof;
7.9 If any warranty, representation, statement, or Record made herein or in any other Loan Document or delivered to Agent or any Lender in connection with this Agreement or any other Loan Document proves to be untrue in any material respect as of the date of issuance or making or deemed making thereof;
7.10 If the obligation of any Guarantor under the Guaranty is limited or terminated by operation of law or by such Guarantor or any such Guarantor becomes the subject of an Insolvency Proceeding;
7.11 If the Security Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby, except as permitted under this Agreement;
7.12 Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Borrower or any of its Restricted Subsidiaries, or a proceeding shall be commenced by any Borrower or any of its Restricted Subsidiaries, or by any Governmental Authority having jurisdiction over any Borrower or any of its Restricted Subsidiaries, seeking to establish the invalidity or unenforceability thereof, or any Borrower or any of its Restricted Subsidiaries shall deny that it has any liability or obligation purported to be created under any Loan Document;
7.13 If any Change of Control shall have occurred;

 

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7.14 If (a) there shall occur and be continuing any “Event of Default” (or any comparable term) under, and as defined in any Indenture Document, (b) any of the Obligations for any reason shall cease to be “Credit Agreement Secured Obligations” (or any comparable terms) under, and as defined in the Intercreditor Agreement, (c) any Indebtedness other than the Obligations shall constitute “Credit Agreement Senior Obligations” (or any comparable term) under, and as defined in, any Intercreditor Agreement or any other document evidencing or governing any Indebtedness that has been contractually subordinated in right of payment to the Obligations, except as expressly permitted by this Agreement, (d) any holder of any Senior Note shall fail to perform or comply with any of the subordination provisions of the documents evidencing or governing such Indebtedness, or (e) the subordination provisions of the Intercreditor Agreement shall, in whole or in part, terminate, cease to be effective or cease to be legally valid, binding and enforceable against any holder of such Indebtedness; or
7.15 If there occurs one or more ERISA Events which results in or otherwise is associated with liability of any Borrower, any of its Restricted Subsidiaries, or any of their respective ERISA Affiliates in excess of $3,000,000 in the aggregate during the term of this Agreement.
8.  THE LENDER GROUP’S RIGHTS AND REMEDIES.
8.1 Rights and Remedies . Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may authorize and instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group), all of which are authorized by Borrowers:
(a) Declare all or any portion of the Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable;
(b) Cease or restrict advancing money or extending credit to or for the benefit of Borrowers under this Agreement, under any of the Loan Documents, or under any other agreement between Borrowers and the Lender Group;
(c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting any of the Agent’s Liens in the Collateral and without affecting the Obligations; and
(d) The Lender Group shall have all other rights and remedies available at law or in equity or pursuant to any other Loan Document.
The foregoing to the contrary notwithstanding, upon the occurrence of any Event of Default described in Section 7.4 or Section 7.5 , in addition to the remedies set forth above, without any notice to Borrowers or any other Person or any act by the Lender Group, the Commitments shall automatically terminate and the Obligations then outstanding, together with all accrued and unpaid interest thereon and all fees and all other amounts due under this Agreement and the other Loan Documents, shall automatically and immediately become due and payable, without presentment, demand, protest, or notice of any kind, all of which are expressly waived by Borrowers.
8.2 Remedies Cumulative . The rights and remedies of the Lender Group under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it.

 

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9.  TAXES AND EXPENSES.
If any Borrower or any of its Restricted Subsidiaries fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to such Person, may do any or all of the following: (a) except for payments which are the subject of a Permitted Protest, make payment of the same or any part thereof, (b) set up such reserves against the Borrowing Base or the Maximum Revolver Amount as Agent deems necessary in its Permitted Discretion to protect the Lender Group from the exposure created by such failure, or (c) in the case of the failure to comply with Section 5.8 hereof, obtain and maintain insurance policies of the type described in Section 5.8 and take any action with respect to such policies as Agent deems prudent in its Permitted Discretion. Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement. Except in connection with payments made by Agent pursuant to clause (a) above, Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing.
10.  WAIVERS; INDEMNIFICATION.
10.1 Demand; Protest; etc . Each Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which any Borrower may in any way be liable.
10.2 The Lender Group’s Liability for Collateral . Each Borrower hereby agrees that: (a) so long as Agent complies with its obligations, if any, under the Code, the Lender Group shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Collateral shall be borne by Borrowers.
10.3 Indemnification . Each Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, the Lender-Related Persons, and each Participant (each, an “ Indemnified Person ”) harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, liabilities, fines, costs, penalties and damages, and all reasonable fees and disbursements of attorneys, experts and consultants and other costs and expenses actually incurred in connection therewith or in connection with the enforcement of this indemnification (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration (including any restructuring or workout with respect hereto) of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby or the monitoring of Borrowers’ and their respective Restricted Subsidiaries’ compliance with the terms of the Loan Documents, (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto, and (c) in connection with or arising out of any presence or release of Hazardous Materials at, on, under, to or from any assets or properties owned, leased or operated by any Borrower or any of its Subsidiaries or any Environmental Actions, Environmental Liabilities and Costs or Remedial Actions related in any way to any such assets or properties of any Borrower or any of its Subsidiaries (all the foregoing, collectively, the “ Indemnified Liabilities ”) provided , however , that any claim with respect to taxes should be governed solely by Section 15.11 . The foregoing to the contrary notwithstanding, Borrowers shall have no obligation to any Indemnified Person under this Section 10.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrowers were required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrowers with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON.

 

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11.  NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by Borrowers or Agent to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as Parent, Administrative Borrower or Agent, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrowers in care of Administrative Borrower or to Agent, as the case may be, at its address set forth below:
         
 
  If to Parent of Administrative Borrower:   ALTRA INDUSTRIAL MOTION, INC.
 
      14 Hayward St.
 
      Quincy, Massachusetts 02171
 
      Attn: Michael L. Hurt
 
      Fax No.: (617) 689-6202
 
       
 
  with copies to:   GENSTAR CAPITAL, L.P.
 
      Four Embarcadero Center
 
      Suite 1900
 
      San Francisco, CA 94111
 
      Attn: Darren J. Gold
 
      Fax No.: (415) 834-2383
 
       
 
      and
 
       
 
      WEIL, GOTSHAL & MANGES LLP
 
      200 Crescent Court, Suite 300
 
      Dallas, Texas 75201
 
      Attn: Angela L. Fontana, Esq.
 
      Fax No.: (214) 746-7777
 
       
 
  If to Agent:   WELLS FARGO FOOTHILL, INC.
 
      One Boston Place
 
      Boston, Massachusetts 02108
 
      Attn: Business Finance Manager
 
      Fax No.: (617) 523-5839
 
       
 
  with copies to:   MORRISON & FOERSTER LLP
 
      1290 Avenue of the Americas, 40 th Floor
 
      New York, New York 10104-0050
 
      Attn: Mark B. Joachim, Esq.
 
      Fax No.: (212) 468-7900

 

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Agent and Borrowers may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 11 , other than notices by Agent in connection with enforcement rights against the Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 Business Days after the deposit thereof in the mail or, where permitted by law, transmitted by telefacsimile or any other method set forth above.
12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
(a)  THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(b)  THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, PROVIDED , HOWEVER , THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH BORROWER AND EACH MEMBER OF THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 12(b) .
(c)  EACH BORROWER AND EACH MEMBER OF THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH BORROWER AND EACH MEMBER OF THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
13. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.
13.1 Assignments and Participations .
(a) Any Lender may assign and delegate to one or more assignees (each an “ Assignee ”) that are Eligible Transferees all, or any ratable part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $5,000,000; provided , however , that Borrowers and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Administrative Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Administrative Borrower and Agent an Assignment and Acceptance, and (iii) the assigning Lender or Assignee has paid to Agent for Agent’s separate account a processing fee in the amount of $3,500. Anything contained herein to the contrary notwithstanding, the payment of any fees shall not be required and the Assignee need not be an Eligible Transferee if such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of the assigning Lender.

 

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(b) From and after the date that Agent notifies the assigning Lender (with a copy to Administrative Borrower) that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee and the satisfaction of the other conditions in Section 13.1(a) , (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assigning Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 10.3 hereof) and be released from any future obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall effect a novation between Borrowers and the Assignee; provided , however , that nothing contained herein shall release any assigning Lender from obligations that survive the termination of this Agreement, including such assigning Lender’s obligations under Article 16 and Section 16.7 of this Agreement.
(c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrowers or the performance or observance by Borrowers of any of their obligations under this Agreement or any other Loan Document furnished pursuant hereto, (iii) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (iv) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, (v) such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (vi) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender.
(d) Immediately upon Agent’s receipt of the required processing fee payment and the fully executed Assignment and Acceptance and the satisfaction of the other conditions in Section 13.1(a) , this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto .
(e) Any Lender may at any time sell to one or more commercial banks, financial institutions, or other Persons (a “ Participant ”) participating interests in all or any portion of its Obligations, the Commitment, and the other rights and interests of that Lender (the “ Originating Lender ”) hereunder and under the other Loan Documents; provided , however , that (i) the Originating Lender shall remain a “Lender” for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Commitments, and the other rights and interests of the Originating Lender hereunder shall not constitute a “Lender” hereunder or under the other Loan Documents and the Originating Lender’s obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrowers, Agent, and the Lenders shall continue to deal solely and directly with the Originating Lender in connection with the Originating Lender’s rights and obligations under this Agreement and the other Loan Documents, (iv) no Originating Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to

 

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the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or substantially all of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums, and (v) all amounts payable by Borrowers hereunder shall be determined as if such Lender had not sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Borrowers, the Collections of Borrowers or their respective Subsidiaries, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves.
(f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may, subject to the provisions of Section 16.7 , disclose all documents and information which it now or hereafter may have relating to Borrowers and their respective Restricted Subsidiaries and their respective businesses.
(g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR § 203.24, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law.
(h) Agent (on behalf of Borrowers) shall maintain, or cause to be maintained, a register (the “ Register ”) on which it enters the name of a Lender as the registered owner of each Advance held by such Lender. Other than in connection with an assignment by a Lender of all or any portion of its Commitment to an Affiliate of such Lender (i) a Registered Loan may be assigned or sold in whole or in part only by registration of such assignment or sale on the Register and (ii) any assignment or sale of all or part of such Registered Loan may be effected only by registration of such assignment or sale on the Register, together with the surrender of any note, if any, evidencing the same duly endorsed by (or accompanied by a written instrument of assignment or sale duly executed by) the holder of such note, if any, whereupon, at the request of the designated assignee(s) or transferee(s), one or more new notes in the same aggregate principal amount shall be issued to the designated assignee(s) or transferee(s). Prior to the registration of assignment or sale of any Registered Loan, Borrowers shall treat the Person in whose name such Loan is registered as the owner thereof for the purpose of receiving all payments thereon and for all other purposes, notwithstanding notice to the contrary. In the case of any assignment by a Lender of all or any portion of its Commitment to an Affiliate of such Lender, and which assignment is not recorded in the Register, the assigning Lender, on behalf of Borrowers, shall maintain a register comparable to the Register.

 

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13.2 Successors . This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided , however , that Borrowers may not assign this Agreement or any rights or duties hereunder without the Lenders’ prior written consent and any prohibited assignment shall be absolutely void ab initio . No consent to assignment by the Lenders shall release any Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 13.1 hereof and, except as expressly required pursuant to Section 13.1 hereof, no consent or approval by any Borrower is required in connection with any such assignment.
14. AMENDMENTS; WAIVERS.
14.1 Amendments and Waivers . No amendment or waiver of any provision of this Agreement or any other Loan Document (other than Bank Product Agreements), and no consent with respect to any departure by Borrowers or any of their respective Restricted Subsidiaries therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Administrative Borrower (on behalf of all Loan Parties) and then any such waiver or consent shall be effective, but only in the specific instance and for the specific purpose for which given; provided , however , that no such waiver, amendment, or consent shall, unless in writing and signed by all of the Lenders affected thereby and Administrative Borrower (on behalf of all Loan Parties), do any of the following:
(a) increase or extend any Commitment of any Lender,
(b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees, or other amounts due hereunder or under any other Loan Document,
(c) reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document,
(d) change the Pro Rata Share that is required to take any action hereunder,
(e) amend or modify this Section or any provision of this Agreement providing for consent or other action by all Lenders,
(f) other than as permitted by Section 15.12 , release Agent’s Lien in and to any of the Collateral,
(g) change the definition of “Required Lenders” or “Pro Rata Share”,
(h) contractually subordinate any of the Agent’s Liens,
(i) release any Borrower or any Guarantor from any obligation for the payment of money,
(j) change the definition of Borrowing Base or the definitions of Eligible Accounts, Eligible Inventory, Maximum Revolver Amount, or change Section 2.1(b) , or
(k) amend any of the provisions of Section 15 .
and, provided further , however , that no amendment, waiver or consent shall, unless in writing and signed by Agent, Issuing Lender, or Swing Lender, as applicable, affect the rights or duties of Agent, Issuing Lender, or Swing Lender, as applicable, under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of, or with respect to, any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrowers, shall not require consent by or the agreement of Borrowers.

 

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14.2 Replacement of Holdout Lender .
(a) If any action to be taken by the Lender Group or Agent hereunder requires the unanimous consent, authorization, or agreement of all Lenders, and a Lender (“ Holdout Lender ”) fails to give its consent, authorization, or agreement, then Agent, upon at least 5 Business Days prior irrevocable notice to the Holdout Lender, may permanently replace the Holdout Lender with one or more substitute Lenders (each, a “ Replacement Lender ”), and the Holdout Lender shall have no right to refuse to be replaced hereunder. Such notice to replace the Holdout Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given.
(b) Prior to the effective date of such replacement, the Holdout Lender and each Replacement Lender shall execute and deliver an Assignment and Acceptance, subject only to the Holdout Lender being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever. If the Holdout Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance prior to the effective date of such replacement, the Holdout Lender shall be deemed to have executed and delivered such Assignment and Acceptance. The replacement of any Holdout Lender shall be made in accordance with the terms of Section 13.1 . Until such time as the Replacement Lenders shall have acquired all of the Obligations, the Commitments, and the other rights and obligations of the Holdout Lender hereunder and under the other Loan Documents, the Holdout Lender shall remain obligated to make the Holdout Lender’s Pro Rata Share of Advances and to purchase a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit.
14.3 No Waivers; Cumulative Remedies . No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement or any other Loan Document, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or any Lender on any occasion shall affect or diminish Agent’s and each Lender’s rights thereafter to require strict performance by Borrowers or any of their respective Restricted Subsidiaries of any provision of this Agreement. Agent’s and each Lender’s rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Agent or any Lender may have.
15. AGENT; THE LENDER GROUP.
15.1 Appointment and Authorization of Agent . Each Lender hereby designates and appoints WFF as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to execute and deliver each of the other Loan Documents on its behalf and to take such other action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 15 . The provisions of this Section 15 (other than the proviso to Section 15.11(a) ) are solely for the benefit of Agent, and the Lenders, and Borrowers and their respective Restricted Subsidiaries shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word “Agent” is for convenience only, that WFF is merely the representative of the Lenders, and only has the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and

 

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may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with the Loan Documents and its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections of Borrowers and their respective Restricted Subsidiaries, and related matters, (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply, and distribute the Collections of Borrowers and their respective Restricted Subsidiaries as provided in the Loan Documents, (e) open and maintain such bank accounts and cash management arrangements as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections of Borrowers and their respective Restricted Subsidiaries, (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to the Loan Parties, the Obligations, the Collateral, the Collections of Borrowers and their respective Restricted Subsidiaries, or otherwise related to any of same as provided in the Loan Documents, and (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents.
15.2 Delegation of Duties . Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys in fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney in fact that it selects as long as such selection was made without gross negligence or willful misconduct.
15.3 Liability of Agent . None of the Agent-Related Persons shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (b) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by any Borrower or any Subsidiary or Affiliate of any Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of any Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the books and records or properties of Borrowers or the books or records or properties of any of Borrowers’ Subsidiaries or Affiliates.
15.4 Reliance by Agent . Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, telefacsimile or other electronic method of transmission, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrowers or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice of legal counsel and until such advice is received, Agent shall act, or refrain from acting, as it deems reasonably advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the requisite Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders.

 

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15.5 Notice of Default or Event of Default . Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders and, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Administrative Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a “notice of default.” Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 15.4 , Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 8 ; provided , however , that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable.
15.6 Credit Decision . Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrowers and their respective Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrowers and any other Person party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrowers. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrowers and any other Person party to a Loan Document. Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrowers and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons.
15.7 Costs and Expenses; Indemnification . Agent may incur and pay Lender Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including court costs, attorneys fees and expenses, fees and expenses of financial accountants, advisors, consultants, and appraisers, costs of collection by outside collection agencies, auctioneer fees and expenses, and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrowers are obligated to reimburse Agent or Lenders for such expenses pursuant to this Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from the Collections of Borrowers and their respective Restricted Subsidiaries received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from the Collections of Borrowers and their respective Restricted Subsidiaries received by Agent, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender’s Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrowers and without

 

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limiting the obligation of Borrowers to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided , however , that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities resulting solely from such Person’s gross negligence or willful misconduct nor shall any Lender be liable for the obligations of any Defaulting Lender in failing to make an Advance or other extension of credit hereunder. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender’s Pro Rata Share of any costs or out of pocket expenses (including reasonable attorneys, accountants, advisors, and consultants fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment, or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein or therein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrowers. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent.
15.8 Agent in Individual Capacity . WFF and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with Borrowers and their respective Subsidiaries and Affiliates and any other Person party to any Loan Documents as though WFF were not Agent hereunder, and, in each case, without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, WFF or its Affiliates may receive information regarding Borrowers or their respective Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obligations in favor of Borrowers or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall not be under any obligation to provide such information to them. The terms “Lender” and “Lenders” include WFF in its individual capacity.
15.9 Successor Agent . Agent may resign as Agent upon 45 days notice to the Lenders. If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers, and duties of the retiring Agent and the term “Agent” shall mean such successor Agent and the retiring Agent’s appointment, powers, and duties as Agent shall be terminated. After any retiring Agent’s resignation hereunder as Agent, the provisions of this Section 15 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent’s notice of resignation, the retiring Agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above.
15.10 Lender in Individual Capacity . Any Lender and its respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrowers and their respective Subsidiaries and Affiliates and any other Person party to any Loan Documents as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates may receive information regarding Borrowers or their Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obligations in favor of Borrowers or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its reasonable best efforts to obtain), such Lender shall not be under any obligation to provide such information to them. With respect to the Swing Loans and Protective Advances, Swing Lender shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the sub-agent of Agent.

 

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15.11 Withholding Taxes .
(a) All payments made by any Borrower hereunder or under any note or other Loan Document will be made without setoff, counterclaim, or other defense. In addition, except as provided in this Section, all such payments will be made free and clear of, and without deduction or withholding for, any present or future Taxes, and in the event any deduction or withholding of Taxes is required, each Borrower shall comply with the penultimate sentence of this Section 15.11(a) . “Taxes” shall mean, any taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding (i) any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein measured by or based on the net income, capital, receipts or profits of any Lender, (ii) franchise or similar taxes, (iii) any non-United States taxes imposed by the jurisdictions under the laws of which the Lender or Agent, as the case may be, is organized, conducts business or has a present or former connection (other than by reason of the transactions contemplated hereby or by the other Loan Documents), or any political subdivision thereof, in effect on the Closing Date (or, in the case of (A) an Assignee, the date of the Assignment and Acceptance, (B) a successor Lender, the date such successor Lender becomes a Lender hereunder and (C) a successor Agent, the date of the appointment of such Agent) applicable to such Lender or Agent, as the case may be, but not excluding any United States withholding tax payable with respect to interest arising under any Loan Document as a result of any change in such laws occurring after the Closing Date (or the date of such Assignment and Acceptance, the date such successor Lender becomes a Lender or the date of the appointment of such Agent), (iv) any taxes that are attributable to such Lender’s or Agent’s failure to comply with the requirements of Section 15.11(b) and (v) all liabilities, penalties and interest with respect to any of the forgoing excluded taxes) and all interest, penalties or similar liabilities with respect thereto. If any Taxes are so levied or imposed, each Borrower agrees to pay the full amount of such Taxes and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement, any note, or Loan Document, including any amount paid pursuant to this Section 15.11(a) after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein; provided, however, that Borrowers shall not be required to increase any such amounts if the increase in such amount payable results from Agent’s or such Lender’s own willful misconduct or gross negligence (as finally determined by a court of competent jurisdiction). Each Borrower will furnish to Agent as promptly as is commercially reasonable after the date the payment of any Tax is due pursuant to applicable law certified copies of any tax receipts provided by the taxing authority evidencing such payment by any Borrower.
(b) (i) Each Lender, Assignee, successor Lender, Agent or successor Agent that is not a “United States person” within the meaning of Section 7701(a)(30) of the IRC (each, a “ Foreign Lender ”) shall deliver to the Administrative Borrower and Agent, on or prior to the date which is fifteen (15) Business Days after the Closing Date (or upon accepting an assignment of an interest herein), two duly signed, properly completed copies of either IRS Form W-8BEN or any successor thereto (relating to such Foreign Lender and entitling it to an exemption from, or reduction of, United States withholding tax on all payments to be made to such Foreign Lender by a Borrower or any other Loan Party pursuant to this Agreement or any other Loan Document) or IRS Form W-8ECI or any successor thereto (relating to all payments to be made to such Foreign Lender by a Borrower or any other Loan Party pursuant to this Agreement or any other Loan Document) or such other evidence reasonably satisfactory to Administrative Borrower and Agent that such Foreign Lender is entitled to an exemption from, or reduction of, United States withholding tax, including any exemption pursuant to Section 881(c) of the IRC, and in the case of a Foreign Lender claiming such an exemption under Section 881(c) of the IRC, a certificate that establishes in writing to the Administrative Borrower and the Administrative Agent that such Foreign Lender is not (i) a “bank” as defined in Section 881(c)(3)(A) of the IRC, (ii) a 10-percent shareholder within the meaning of Section 871(h)(3)(B) of the IRC, or (iii) a Controlled Foreign Corporation related to

 

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a Borrower with the meaning of Section 864(d) of the IRC. Thereafter and from time to time, each such Foreign Lender shall (A) within a commercially reasonable period submit to the Administrative Borrower and Agent such additional duly and properly completed and signed copies of one or more of such forms or certificates (or such successor forms or certificates as shall be adopted from time to time by the relevant United States taxing authorities) as may then be available under then current United States laws and regulations to avoid, or such evidence as is reasonably satisfactory to the Administrative Borrower and Agent of any available exemption from, or reduction of, United States withholding taxes in respect of all payments to be made to such Foreign Lender by a Borrower or other Loan Party pursuant to this Agreement, or any other Loan Document, in each case, (1) on or before the date that any such form, certificate or other evidence expires or becomes obsolete, (2) after the occurrence of any event requiring a change in the most recent form, certificate or evidence previously delivered by it to the Administrative Borrower and Agent and (3) from time to time thereafter if reasonably requested by the Administrative Borrower or the Administrative Agent, and (B) within a commercially reasonable period notify the Administrative Borrower and Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction.
(ii) The Borrowers shall not be required to pay any additional amount or any indemnity payment to (A) any Foreign Lender with respect to any taxes required to be deducted or withheld solely on the basis of the information, certificates or statements of exemption such Lender transmits pursuant to this Section 15.11(b) or (B) any Lender if such Lender shall have failed to satisfy the foregoing provisions of this Section 15.11(b) .
(c) If a Lender claims an exemption from withholding tax in a jurisdiction other than the United States, Lender agrees with and in favor of Agent and Borrowers, to deliver to Agent any such form or forms, as may be required under the laws of such jurisdiction as a condition to exemption from, or reduction of, foreign withholding or backup withholding tax before receiving its first payment under this Agreement and at any other time reasonably requested by Agent or Administrative Borrower.
Lender agrees promptly to notify Agent and Administrative Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction.
(d) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (b) or (c) of this Section 15.11 are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax.
(e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender due to a failure on the part of the Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify and hold Agent harmless for all amounts paid, directly or indirectly, by Agent, as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section 15.11 , together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent.

 

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(f) Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 15.11(a) with respect to such Lender, it will, if requested by the Administrative Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any loans affected by such event with the object of avoiding the consequences of such event; provided , that such designation is made on terms that cause such Lender and its lending office(s) to suffer no economic, legal or regulatory disadvantage, and provided , further , that nothing in this Section shall affect or postpone any of the obligations of the Borrowers or the rights of any Lender pursuant to Section 15.11(a) . In determining whether designating another lending office would cause such Lender or its lending office(s) to suffer economic disadvantage, such Lender shall disregard any economic disadvantage that the Administrative Borrower agrees, in form and substance reasonably satisfactory to such Lender, to indemnify and hold such Lender harmless therefrom. If, after such reasonable efforts by such Lender, such Lender does not so designate a different one of its lending offices so as to avoid the consequences of such event, then the Administrative Borrower may, at its sole expense and effort, upon notice to such Lender and the Agent, require such Lender to assign and delegate, without recourse, all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment, and which assignee shall be reasonably acceptable to Agent). A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling such Borrower to require such assignment and delegation cease to apply.
15.12 Collateral Matters .
(a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrowers of all non-contingent Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Administrative Borrower certifies to Agent that the sale or disposition is permitted under Section 6.4 of this Agreement or the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which none of any Borrower or any of its Restricted Subsidiaries owned any interest at the time the Agent’s Lien was granted nor at any time thereafter, or (iv) constituting property leased to a Borrower or any of its Restricted Subsidiaries under a lease that has expired or is terminated in a transaction permitted under this Agreement. Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders, or (z) otherwise, the Required Lenders. Upon request by Agent or Administrative Borrower at any time, the Lenders will confirm in writing Agent’s authority to release any such Liens on particular types or items of Collateral pursuant to this Section 15.12 ; provided , however , that (1) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent’s opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrowers in respect of) all interests retained by Borrowers or any of their respective Restricted Subsidiaries, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral.
(b) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrowers or any of their respective Restricted Subsidiaries or is cared for, protected, or insured or has been encumbered, or that the Agent’s Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission, or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent’s own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein.

 

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15.13 Restrictions on Actions by Lenders; Sharing of Payments .
(a) Each of the Lenders agrees that it shall not, without the express written consent of Agent, set off against the Obligations, any amounts owing by such Lender to Borrowers or any of their respective Restricted Subsidiaries or any deposit accounts of Borrowers or any of their respective Restricted Subsidiaries now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so in writing by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral.
(b) If, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff, or otherwise, any proceeds of Collateral or any payments with respect to the Obligations, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender’s ratable portion of all such distributions by Agent, such Lender promptly shall (A) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (B) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided , however , that to the extent that such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment.
15.14 Agency for Perfection . Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Agent’s Liens in assets which, in accordance with Article 8 or Article 9, as applicable, of the Code can be perfected only by possession or control. Should any Lender obtain possession or control of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent’s request therefor shall deliver possession or control of such Collateral to Agent or in accordance with Agent’s instructions.
15.15 Payments by Agent to the Lenders . All payments to be made by Agent to the Lenders shall be made by bank wire transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, fees, or interest of the Obligations.
15.16 Concerning the Collateral and Related Loan Documents . Each member of the Lender Group authorizes and directs Agent to enter into this Agreement and the other Loan Documents. Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders.

 

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15.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information . By becoming a party to this Agreement, each Lender:
(a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a “ Report ” and collectively, “ Reports ”) prepared by or at the request of Agent, and Agent shall so furnish each Lender with such Reports,
(b) expressly agrees and acknowledges that neither the Borrowers nor the Agent (i) make any representation or warranty as to the accuracy of any Report, and (ii) shall be liable for any information contained in any Report,
(c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrowers and their respective Restricted Subsidiaries and will rely significantly upon the books and records of Borrowers and their respective Restricted Subsidiaries, as well as on representations of Borrowers’ and their respective Restricted Subsidiaries’ personnel,
(d) agrees to keep all Reports and other material, non-public information regarding Borrowers and their respective Restricted Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner in accordance with Section 16.7 , and
(e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any such other Lender preparing a Report harmless from any action the indemnifying Lender may take or fail to take or any conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrowers, or the indemnifying Lender’s participation in, or the indemnifying Lender’s purchase of, a loan or loans of Borrowers; and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender.
In addition to the foregoing: (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrowers and their respective Restricted Subsidiaries to Agent that has not been contemporaneously provided by Borrowers and their respective Restricted Subsidiaries to such Lender, and, upon receipt of such request, Agent promptly shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrowers and their respective Restricted Subsidiaries, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender’s notice to Agent, whereupon Agent promptly shall request of the applicable Person the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from the applicable Person, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Administrative Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender.
15.18 Several Obligations; No Liability . Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 15.7 , no member of the Lender Group shall have any liability for the acts of any other member of the Lender Group. No Lender shall be responsible to any Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein.

 

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15.19 Bank Product Providers . Each Bank Product Provider shall be deemed a party hereto for purposes of any reference in a Loan Document to the parties for whom Agent is acting; it being understood and agreed that the rights and benefits of such Bank Product Provider under the Loan Documents consist exclusively of such Bank Product Provider’s right to share in payments and collections out of the Collateral as more fully set forth herein. In connection with any such distribution of payments and collections, Agent shall be entitled to assume no amounts are due to any Bank Product Provider unless such Bank Product Provider has notified Agent in writing of the amount of any such liability owed to it prior to such distribution.
16. GENERAL PROVISIONS.
16.1 Effectiveness . This Agreement shall be binding and deemed effective when executed by each Borrower, Agent, and each Lender whose signature is provided for on the signature pages hereof.
16.2 Section Headings . Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement.
16.3 Interpretation . Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against the Lender Group or Borrowers, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto.
16.4 Severability of Provisions . Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.
16.5 Counterparts; Electronic Execution . This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis .
16.6 Revival and Reinstatement of Obligations . If the incurrence or payment of the Obligations by any Borrower or any Guarantor or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors’ rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a “ Voidable Transfer ”), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrowers or such Guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made.

 

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16.7 Confidentiality . Agent and Lenders each individually (and not jointly or jointly and severally) agree that material, non-public information regarding Borrowers and their respective Subsidiaries, their operations, assets, and existing and contemplated business plans shall be treated by Agent and the Lenders in a confidential manner, and shall not be disclosed by Agent and the Lenders to Persons who are not parties to this Agreement, except: (a) to attorneys for and other advisors, accountants, auditors, and consultants to any member of the Lender Group for matters in connection with this Agreement, (b) to Subsidiaries and Affiliates of any member of the Lender Group (including the Bank Product Providers), provided that any such Subsidiary or Affiliate shall have agreed to receive such information hereunder subject to the terms of this Section 16.7 , (c) as may be required by statute, decision, or judicial or administrative order, rule, or regulation, (d) as may be agreed to in advance by Parent or Administrative Borrower or its Subsidiaries or as requested or required by any Governmental Authority pursuant to any subpoena or other legal process, (e) as to any such information that is or becomes generally available to the public (other than as a result of prohibited disclosure by Agent or the Lenders or their respective Affiliates and Subsidiaries), (f) in connection with any assignment, prospective assignment, sale, prospective sale, participation or prospective participations, or pledge or prospective pledge of any Lender’s interest under this Agreement, provided that any such assignee, prospective assignee, purchaser, prospective purchaser, participant, prospective participant, pledgee, or prospective pledgee shall have agreed in writing to receive such information hereunder and keep it confidential subject to the terms of this Section, and (g) in connection with any litigation or other adversary proceeding involving parties hereto which such litigation or adversary proceeding involves claims related to the rights or duties of such parties under this Agreement or the other Loan Documents. The provisions of this Section 16.7 shall survive for 2 years after the payment in full of the Obligations.
16.8 Integration . This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof.
16.9 Altra Industrial Motion, Inc. as Agent for Borrowers . Each Borrower hereby irrevocably appoints Altra Industrial Motion, Inc. as the borrowing agent and attorney-in-fact for all Borrowers (the “ Administrative Borrower ”) which appointment shall remain in full force and effect unless and until Agent shall have received prior written notice signed by each Borrower that such appointment has been revoked and that another Loan Party has been appointed Administrative Borrower. Each Borrower hereby irrevocably appoints and authorizes the Administrative Borrower (a) to provide Agent with all notices with respect to Advances and Letters of Credit obtained for the benefit of any Borrower and all other notices and instructions under this Agreement and (b) to take such action as the Administrative Borrower deems appropriate on its behalf to obtain Advances and Letters of Credit and to exercise such other powers as are reasonably necessary to carry out the purposes of this Agreement. It is understood that the handling of the Loan Account and Collateral in a combined fashion, as more fully set forth herein, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and that Lender Group shall not incur liability to any Borrower as a result hereof. Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued successful performance of the integrated group. To induce the Lender Group to do so, and in consideration thereof, each Borrower hereby jointly and severally agrees to indemnify each member of the Lender Group and hold each member of the Lender Group harmless against any and all liability, expense, loss or claim of damage or injury, made against the Lender Group by any Borrower or by any third party whosoever, arising from or incurred by reason of (a) the handling of the Loan Account and Collateral as herein provided, (b) the Lender Group’s relying on any instructions of the Administrative Borrower, or (c) any other action taken by the Lender Group hereunder or under the other Loan Documents, except that Borrowers will have no liability to the relevant Agent-Related Person or Lender-Related Person under this Section 16.9 with respect to any liability that has been finally determined by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of such Agent-Related Person or Lender-Related Person, as the case may be.
[Signature pages to follow.]

 

58


 

IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed and delivered as of the date first above written.
                     
    ALTRA INDUSTRIAL MOTION, INC. , a Delaware corporation,
WARNER ELECTRIC LLC , a Delaware limited liability company,
KILIAN MANUFACTURING CORPORATION , a Delaware corporation,
WARNER ELECTRIC TECHNOLOGY LLC , a Delaware limited liability company,
FORMSPRAG LLC , a Delaware limited liability company,
BOSTON GEAR LLC , a Delaware limited liability company,
NUTTALL GEAR LLC , a Delaware limited liability company
   
 
                   
 
  By:                
             
        Name: Michael L. Hurt    
        Title: Chief Executive Officer    
 
                   
    AMERIDRIVES INTERNATIONAL, L.P. , a Delaware limited partnership,    
 
                   
    By:   American Enterprises MPT Corp., its general partner    
 
                   
 
      By:            
                 
            Name: Michael L. Hurt    
            Title: Chief Executive Officer    
 
                   
    WELLS FARGO FOOTHILL, INC.,
a California corporation, as Agent and as a Lender
   
 
                   
 
      By:            
                 
 
          Title:        
 
             
 
   

 

59


 

Final Version
EXHIBIT A-1
FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT
This ASSIGNMENT AND ACCEPTANCE AGREEMENT (“Assignment Agreement”) is entered into as of                      between  _____  (“Assignor”), solely in its capacity as Lender, and  _____  (“Assignee”). Reference is made to the Agreement described in Annex I hereto (the “Credit Agreement”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Credit Agreement.
1. In accordance with the terms and conditions of Section 13 of the Credit Agreement, the Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to the Assignor’s rights and obligations under the Loan Documents as of the date hereof with respect to the Obligations owing to the Assignor, and Assignor’s portion of the Commitments, all to the extent specified on Annex I .
2. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim and (ii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment Agreement and to consummate the transactions contemplated hereby; (b) makes no representation or warranty and assumes no responsibility with respect to (i) any statements, representations or warranties made in or in connection with the Loan Documents, or (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any other instrument or document furnished pursuant thereto; (c) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Borrower or any Guarantor or the performance or observance by any Borrower or any Guarantor of any of their respective obligations under the Loan Documents or any other instrument or document furnished pursuant thereto, and (d) represents and warrants that the amount set forth as the purchase price on Annex I represents the amount owed by Borrowers to Assignor with respect to Assignor’s share of the Advances assigned hereunder, as reflected on Assignor’s books and records.
3. The Assignee (a) confirms that it has received copies of the Credit Agreement and the other Loan Documents, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement; (b) agrees that it will, independently and without reliance upon Agent, Assignor, or any other Lender, based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under the Loan Documents; (c) confirms that it is an Eligible Transferee; (d) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (e) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender, [and (f) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee’s status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty.]

 

 


 

4. Following the execution of this Assignment Agreement by the Assignor and Assignee, the Assignor will deliver this Assignment Agreement to the Agent for recording by the Agent. The effective date of this Assignment (the “Settlement Date”) shall be the latest to occur of (a) the date of the execution and delivery hereof by the Assignor and the Assignee, (b) the receipt by Agent for its sole and separate account a processing fee in the amount of $3,500 (if required by the Credit Agreement), (c) the receipt of any required consent of the Agent, and (d) the date specified in Annex I .
5. As of the Settlement Date (a) the Assignee shall be a party to the Credit Agreement and, to the extent of the interest assigned pursuant to this Assignment Agreement, have the rights and obligations of a Lender thereunder and under the other Loan Documents, and (b) the Assignor shall, to the extent of the interest assigned pursuant to this Assignment Agreement, relinquish its rights and be released from its obligations under the Credit Agreement and the other Loan Documents, provided, however , that nothing contained herein shall release any assigning Lender from obligations that survive the termination of this Assignment Agreement, including such assigning Lender’s obligations under Article 13 , Article 15 and Section 16.7 of the Credit Agreement.
6. Upon the Settlement Date, Assignee shall pay to Assignor the purchase price (as set forth in Annex I ). From and after the Settlement Date, Agent shall make all payments that are due and payable to the holder of the interest assigned hereunder (including payments of principal, interest, fees and other amounts) to Assignor for amounts which have accrued up to but excluding the Settlement Date and to Assignee for amounts which have accrued from and after the Settlement Date. On the Settlement Date, Assignor shall pay to Assignee an amount equal to the portion of any interest, fee, or any other charge that was paid to Assignor prior to the Settlement Date on account of the interest assigned hereunder and that are due and payable to Assignee with respect thereto, to the extent that such interest, fee or other charge relates to the period of time from and after the Settlement Date.
7. This Assignment Agreement may be executed in counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. This Assignment Agreement may be executed and delivered by telecopier or other facsimile transmission all with the same force and effect as if the same were a fully executed and delivered original manual counterpart.
8. THIS ASSIGNMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

 

 


 

IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement and Annex I hereto to be executed by their respective officers, as of the first date written above.
         
  [NAME OF ASSIGNOR]

as Assignor
 
 
  By:      
    Name:      
    Title:      
 
  [NAME OF ASSIGNEE]

as Assignee
 
 
  By:      
    Name:      
    Title:      
         
ACCEPTED THIS                 DAY OF                    
 
       
WELLS FARGO FOOTHILL, INC.,
a California corporation, as Agent
 
       
By: 
 
 
   
 
 Name: 
 
   
 
 Title:
 
   

 

 


 

ANNEX FOR ASSIGNMENT AND ACCEPTANCE
ANNEX I
1. Borrowers:
Altra Industrial Motion, Inc., a Delaware corporation, Warner Electric LLC, a Delaware limited liability company, Kilian Manufacturing Corporation, a Delaware corporation, Warner Electric Technology LLC, a Delaware limited liability company, Formsprag LLC, a Delaware limited liability company, Boston Gear LLC, a Delaware limited liability company, Nuttall Gear LLC, a Delaware limited liability company, and Ameridrives International, L.P., a Delaware limited partnership.
2. Name and Date of Credit Agreement:
Credit Agreement, dated as of November 30, 2004, by and among Altra Industrial Motion, Inc., a Delaware corporation (“Parent”), Borrowers, the lenders from time to time a party thereto (the “Lenders”), Wells Fargo Foothill, Inc., a California corporation, as the arranger and administrative agent for the Lenders.
         
3. Date of Assignment Agreement:
                             
 
4. Amounts:
       
 
a. Assigned Amount of Commitment
  $                             
 
b. Assigned Amount of Advances
  $                             
 
5. Settlement Date:
                                
 
6. Purchase Price
  $                             
 
7. Notice and Payment Instructions, etc.
       
                 
 
  Assignee:       Assignor:    
 
               
 
 
 
     
 
   
 
               
 
 
 
     
 
   
 
               
 
 
 
     
 
   

 

 


 

                                 
8. Agreed and Accepted:                
 
                               
    [ASSIGNOR]       [ASSIGNEE]    
 
                               
 
  By:               By:            
                         
 
      Name:               Name:        
                                 
 
      Title:               Title:        
 
         
 
             
 
   
             
Accepted:

WELLS FARGO FOOTHILL, INC.,
a California corporation, as Agent
   
 
           
By:
           
           
 
  Name:          
 
  Title:          

 

 


 

FINAL VERSION
EXHIBIT B-1
FORM OF BORROWING BASE CERTIFICATE
Wells Fargo Foothill, Inc.
One Boston Place, 18 th Floor
Boston, Massachusetts 02108
Attn: Business Finance Manager
The undersigned, Altra Industrial Motion, Inc., a Delaware corporation (“Parent”), pursuant to Schedule 5.2 of that certain Credit Agreement dated as of November 30, 2004 (as amended, restated, amended and restated, modified, supplemented, refinanced, renewed, or extended from time to time, the “Credit Agreement”), entered into among Parent, its subsidiaries signatory thereto (collectively with Parent, “Borrowers”), the lenders signatory thereto from time to time and Wells Fargo Foothill, Inc., a California corporation, as the arranger and administrative agent (in such capacity, together with its successors and assigns, if any, in such capacity, “Agent”), hereby certifies to Agent that the following items, calculated in accordance with the terms and definitions set forth in the Credit Agreement for such items are true and correct in all material respects, and that no Default or Event of Default has occurred and is continuing after giving effect to any currently requested Advances nor shall either be the result from making the requested Advance.
All initially capitalized terms used in this Borrowing Base Certificate have the meanings set forth in the Credit Agreement unless specifically defined herein.
[Remainder of page intentionally left blank.]

 

 


 

Effective Date of Calculation:  _____________ 
                 
A. Borrowing Base Calculation
               
 
1. Eligible Accounts
               
 
a. 85% of Eligible Accounts 1
  $                               
 
b. the amount, if any, of the Dilution Reserve
  $                               
 
c. Item 1.a. minus Item 1.b
          $                       
 
2. Eligible Inventory
               
 
a. $15,000,000
  $ 15,000,000          
 
b. 50% of the net book value of Eligible Inventory 2
  $                               
 
c. The lesser of Items 2.a. and 2.b.
          $                       
 
3. Eligible Real Property and Equipment
               
 
a. $7,500,000
  $ 7,500,000          
 
b. 20% of the Eligible Real Property and Equipment Book Value 3
  $                               
 
c. The lesser of Items 3.a. and 3.b.
          $                       
 
4. Reserves
               
 
a. Bank Products Reserve
  $                               
     
1  
See Annex A
 
2  
See Annex B
 
3  
See Annex C

 

- 2 -


 

                 
b. the sum of the aggregate amount of reserves, if any, established by Agent under Section 2.1(b) of the Credit Agreement (including reserves implemented in respect of Eligible Inventory and Eligible Equipment located at one of the locations on Schedule 4.5(a) that are not subject to a Collateral Access Agreement)
  $                               
 
c. Sum of Items 4.a. and 4.b.
          $                       
 
5. Borrowing Base (Item 1.c. plus Item 2.c. plus Item 3.c. minus Item 4.c.):
          $                       
 
6. Availability Calculation
               
 
a. (i) Maximum Revolver Amount
  $ 30,000,000          
 
(ii) Letter of Credit Usage
  $                               
 
(iii) outstanding Advances
  $                               
 
(iv) Item 6.a.(i) minus Item 6.a.(ii) minus Item 6.a.(iii)
  $                               
 
b. (i) Borrowing Base
  $                               
 
(ii) Letter of Credit Usage
  $                               
 
(iii) outstanding Advances
  $                               
 
(iv)  Item 6.b.(i) minus Item 6.b.(ii) minus Item 6.b.(iii)
  $                               
 
c. lesser of Item 6.a. and 6.b.
          $                       

 

- 3 -


 

                 
B. Letters of Credit Calculation
               
 
1. maximum L/C amount
          $ 10,000,000  
 
2. L/Cs permitted under Borrowing Base
               
 
a. Borrowing Base (from Section A , Item 5 )
  $                               
 
b. Amount of current outstanding Advances
  $                               
 
c. Item 2.a. minus Item 2.b.
          $                       
 
3. Maximum Revolver Limitation
               
 
a. Maximum Revolver Amount
  $                               
 
b. Amount of current outstanding Advances
  $                               
 
c. Item 3.a minus Item 3.b
          $                       
 
4. Letter of Credit Usage plus the amount of any proposed Letters of Credit
          $                       
 
5. No L/C Availability if Item 4 is greater than Item 1, Item 2.c or Item 3.c.
          $                       

 

- 4 -


 

Additionally, the undersigned hereby certifies and represents and warrants to the Lender Group on behalf of Borrowers that (i) as of the date hereof, each representation or warranty contained in or pursuant to any Loan Document, any agreement, instrument, certificate, document or other writing furnished at any time under or in connection with any Loan Document, is true and correct in all material respects (except to the extent any representation or warranty expressly related to an earlier date), (ii) no Default or Event of Default has occurred and is continuing on the date hereof, nor will any thereof occur after giving effect to the request above, and (iii) all of the foregoing is true and correct as of the effective date of the calculations set forth above and that such calculations have been made in accordance with the requirements of the Credit Agreement.
Effective date of calculation:                     
         
  ALTRA INDUSTRIAL MOTION, INC.,
a Delaware corporation, as Administrative Borrower
 
 
  By:      
    Name:      
    Title:      

 

- 5 -


 

         
Annex A
                 
Total Accounts : Accounts created by a Borrower in the ordinary course arising out of sale of goods or rendition of services
          $                       
 
               
less (without duplication)
               
 
               
Accounts that the Account Debtor (i) has failed to pay within 90 days (or, with respect to Accounts with selling terms of more than 60 days, 105 days) after the original invoice date, (ii) are more than 60 days after the due date, or (iii) Accounts with selling terms of more than 120 days,
  $                               
 
               
Accounts owed by an Account Debtor (or its Affiliates) where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under the immediately preceding clause
  $                               
 
               
Accounts with respect to which the Account Debtor is an Affiliate of any Borrower or an employee or agent of any Borrower or any Affiliate of Borrower
  $                               
 
               
Accounts arising in a transaction wherein goods are placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or any other terms by reason of which the payment by the Account Debtor may be conditional
  $                               
 
               
Accounts that are not payable in Dollars
  $                               
 
               
Accounts with respect to which the Account Debtor either (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any state thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (x) the Account is supported by an irrevocable letter of credit reasonably satisfactory to Agent (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Agent and is directly drawable by Agent, or (y) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, reasonably satisfactory to Agent,
  $                               

 

- 6 -


 

                 
Accounts with respect to which the Account Debtor is the United States or any department, agency, or instrumentality of the United States or any state of the United States (exclusive, however, of Accounts with respect to which the applicable Borrower has complied, to the reasonable satisfaction of Agent, with the Assignment of Claims Act, 31 USC § 3727, or any similar state or local law, if applicable),
  $                               
 
               
Accounts with respect to which the Account Debtor claims a credit from any Borrower, has or has asserted a right of setoff, or has disputed its obligation to pay all or any portion of the Account, to the extent of such claim, right of setoff, or dispute,
  $                               
 
               
Accounts with respect to an Account Debtor whose total obligations owing to Borrowers exceed 10% (such percentage, as applied to a particular Account Debtor, being subject to reduction by Agent in its Permitted Discretion if the creditworthiness of such Account Debtor deteriorates) of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage; provided , however , that as to the following Account Debtors, a percentage limitation of 20% (in lieu of 10%) shall apply for purposes hereof: Motion Industries, Kaman, John Deere, Mitsubishi, W.W. Granger and AIT; provided , further , however , that, in each case, the amount of Eligible Accounts that are excluded because they exceed the foregoing percentage shall be determined by Agent based on all of the otherwise Eligible Accounts prior to giving effect to any eliminations based upon the foregoing concentration limit,
  $                               
 
               
Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent, or as to which a Borrower has received written notice of an imminent Insolvency Proceeding of such Account Debtor,
  $                               
 
               
Accounts with respect to which the Account Debtor is located in a state or jurisdiction (e.g., New Jersey, Minnesota, and West Virginia) that requires, as a condition to access to the courts of such jurisdiction, that a creditor qualify to transact business, file a business activities report or other report or form, or take one or more other actions, unless the applicable Borrower has so qualified, filed such reports or forms, or taken such actions (and, in each case, paid any required fees or other charges), except to the extent that the applicable Borrower may qualify subsequently as a foreign entity authorized to transact business in such state or jurisdiction and gain access to such courts, without incurring any cost or penalty viewed by Agent, in its Permitted Discretion, to be significant in amount, and such later qualification cures any access to such courts to enforce payment of such Account,
  $                               

 

- 7 -


 

                 
Accounts, the collection of which, Agent, in its Permitted Discretion, believes to be doubtful by reason of the Account Debtor’s financial condition,
      $                           
 
               
Accounts that are not subject to a valid and perfected first priority Agent’s Lien,
      $                           
 
               
Accounts with respect to which (i) the goods giving rise to such Account have not been shipped and billed to the Account Debtor, or (ii) the services giving rise to such Account have not been performed and billed to the Account Debtor
      $                           
 
               
Accounts that represent the right to receive progress payments or other advance billings that are due prior to the completion of performance by the applicable Borrower of the subject contract for goods or services.
      $                           
 
               
Total Excluded Accounts
          $                         
 
               
Eligible Accounts (Total Accounts less Total Excluded Accounts):
          $                         

 

- 8 -


 

Annex B
                 
1. Total Finished Goods Inventory : Inventory consisting of first quality finished goods held for sale in the ordinary course of Borrowers’ business
          $                       
 
               
less (without duplication)
               
 
               
Inventory which Borrower does not have good, valid, and marketable title thereto
  $                               
 
               
Inventory not located at one of the locations in the continental United States set forth on Schedule 4.5(a) or 4.5(b) to the Credit Agreement (or in-transit from one such location to another such location)
  $                               
 
Inventory not subject to a valid and perfected first priority Agent’s Lien
  $                               
 
               
Inventory consisting of goods returned or rejected by a Borrower’s customers
  $                               
 
               
Inventory consisting of goods that are obsolete or slow moving, work-in-process, raw materials or goods that constitute spare parts, packaging and shipping materials, supplies used or consumed in Borrower’s business, bill and hold goods, defective goods, “seconds,” or Inventory acquired on consignment
  $                               
 
               
Total Excluded Finished Goods Inventory
          $                       
 
               
Eligible Finished Goods Inventory (Total Finished Goods Inventory less Total Excluded Finished Goods Inventory):
          $                       
 
               
2. Total Raw Materials Inventory : Inventory consisting of first quality raw materials to be used in Borrowers’ production process
          $                       
 
               
less (without duplication)
               
 
Inventory which Borrower does not have good, valid, and marketable title thereto
  $                               
 
               
Inventory not located at one of the locations in the continental United States set forth on Schedule 4.5(a) or 4.5(b) to the Credit Agreement (or in-transit from one such location to another such location)
  $                               
 
               
Inventory not subject to a valid and perfected first priority Agent’s Lien
  $                               

 

- 9 -


 

                 
Inventory consisting of goods that are obsolete or slow moving, work-in-process, finished goods, or goods that constitute spare parts, packaging and shipping materials, supplies used or consumed in Borrower’s business, bill and hold goods, defective goods, “seconds,” or Inventory acquired on consignment
  $                               
 
               
Total Excluded Raw Materials Inventory
          $                       
 
               
Eligible Raw Materials Inventory (Total Raw Materials Inventory less Total Excluded Raw Materials Inventory):
          $                       
 
               
Eligible Inventory (Eligible Finished Goods Inventory plus Eligible Raw Materials Inventory):
          $                       

 

- 10 -


 

Annex C
         
Eligible Equipment : Net book value of Equipment of Borrowers located at the locations identified on Schedule 4.5(a) or 4.5(b) hereto, as such schedules may be amended or supplemented from time to time in accordance with the Credit Agreement, such value to be as determined from time to time by a qualified appraisal company selected by Agent, net of all related costs and expense.
  $                       
 
       
Eligible Real Property : Net book value of the Real Property Collateral of Borrowers located in the United States as determined from time to time by a qualified appraisal company selected by Agent, net of all related costs and expenses; provided , however , that no such Real Property Collateral shall be deemed to be “Eligible Real Property” until all of the following conditions are satisfied with respect thereto: (a) Agent shall have been granted a first priority Mortgage on such Real Property Collateral; (b) Agent shall have received mortgagee title insurance policies (or marked commitments to issue the same) for such Real Property Collateral issued by a title insurance company reasonably satisfactory to Agent in an amount reasonably satisfactory to Agent assuring Agent that the Mortgage on such Real Property Collateral is a valid and enforceable first priority mortgage Lien on such Real Property Collateral free and clear of all defects and encumbrances except Permitted Liens, and such mortgagee title insurance policies (or marked commitments to issue the same) otherwise shall be in form and substance reasonably satisfactory to Agent; (c) Borrowers and their Subsidiaries shall have paid to said title insurance company all expenses and premiums of said title insurance company in connection with the issuance of such mortgagee title insurance policies (or marked commitments to issue the same) and in addition shall, to the extent required, have paid all recording costs, stamp taxes, mortgage taxes, intangibles taxes and other fees and costs (including reasonable attorneys fees and expenses) incurred in connection therewith; and (d) Agent shall have received such other documentation and opinions of counsel, in form and substance reasonably satisfactory to Agent, in connection with the grant of such Mortgage as Agent shall request in its Permitted Discretion, including, without limitation, surveys (or existing surveys and survey affidavits that are (x) sufficient to have the “matters that would be shown on a survey” exception deleted from the mortgagee policy of title insurance and (y) reasonably satisfactory to Agent), financing statements and fixture filings.
  $                       
 
       
Eligible Real Property and Equipment Book Value (Eligible Equipment plus Eligible Real Property)
  $                       

 

- 11 -


 

F inal V ersion
EXHIBIT C-1
FORM OF COMPLIANCE CERTIFICATE
[on Parent’s letterhead]
To:  
Wells Fargo Foothill, Inc.
One Boston Place, 18 th Floor
Boston, Massachusetts 02108
Attn: Business Finance Division Manager
  Re:  
Compliance Certificate dated                   
Ladies and Gentlemen:
Reference is made to that certain CREDIT AGREEMENT (the “ Credit Agreement ”) dated as of November 30, 2004, by and among the lenders identified on the signature pages thereof (such lenders, together with their respective successors and permitted assigns, are referred to hereinafter each individually as a “ Lender ” and collectively as the “ Lenders ”), WELLS FARGO FOOTHILL, INC., a California corporation, as the arranger and administrative agent for the Lenders (“ Agent ”), ALTRA INDUSTRIAL MOTION, INC., a Delaware corporation (“ Parent ”), and each of its Subsidiaries party thereto. Capitalized terms used in this Compliance Certificate have the meanings set forth in the Credit Agreement unless specifically defined herein.
Pursuant to Schedule 5.3 of the Credit Agreement, the undersigned officer of Parent hereby certifies on behalf of Parent, and not individually, that:
1. The financial information of Parent and its Subsidiaries furnished in Schedule 1 attached hereto, has been prepared in accordance with GAAP (except for year-end adjustments and the lack of footnotes), and fairly presents in all material respects the financial condition of Parent and its Subsidiaries.
2. Such officer has reviewed the terms of the Credit Agreement and has made, or caused to be made under his/her supervision, a review in reasonable detail of the transactions and condition of the Loan Parties during the accounting period covered by the financial statements delivered pursuant to Schedule 5.3 of the Credit Agreement.
3. Such review has not disclosed the existence on and as of the date hereof, and the undersigned does not have actual knowledge of the existence as of the date hereof, of any event or condition that constitutes a Default or Event of Default, except for such conditions or events listed on Schedule 2 attached hereto, specifying the nature and period of existence thereof and what action the Loan Parties have taken, are taking, or propose to take with respect thereto.
4. The representations and warranties of the Loan Parties set forth in the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the date hereof (except to the extent they relate to a specified date), except as set forth on Schedule 3 attached hereto.
5. The Loan Parties are in compliance with the applicable covenants contained in Section 6.16 of the Credit Agreement as demonstrated on Schedule 4 hereof.

 

 


 

IN WITNESS WHEREOF, this Compliance Certificate is executed by the undersigned this                      day of                      ,                      .
         
  ALTRA INDUSTRIAL MOTION, INC.,
a Delaware corporation
 
 
  By:      
    Name:     
    Title:      

 

 


 

SCHEDULE 1
Financial Information

 

 


 

SCHEDULE 2
Default or Event of Default

 

 


 

SCHEDULE 3
Representations and Warranties

 

 


 

SCHEDULE 4
Financial Covenants
1. Fixed Charge Coverage Ratio .
Parent’s and its Subsidiaries’ Fixed Charge Coverage Ratio, measured on a quarter-end basis, for the 4 quarter period ending                      ,                      is                      :1.0, which [is/is not] greater than or equal to the amount set forth in Section 6.16(a) of the Credit Agreement for the corresponding period.
2. Capital Expenditures .
Parent’s and Borrowers’ Capital Expenditures from the beginning of Parent’s most recent fiscal year to the date hereof is                      , (i) which [is/is not] less than or equal to the amount set forth in Section 6.16(b) of the Credit Agreement for the corresponding period.

 

 


 

F inal V ersion
EXHIBIT L-1
FORM OF LIBOR NOTICE
Wells Fargo Foothill, Inc., as Agent
under the below referenced Credit Agreement
One Boston Place
Boston, Massachusetts 02108
Ladies and Gentlemen:
Reference hereby is made to that certain Credit Agreement, dated as of November 30, 2004 (the “ Credit Agreement ”), among Altra Industrial Motion, Inc., a Delaware corporation (“ Parent ”), each of its Subsidiaries signatory thereto (Parent and such Subsidiaries each, a “ Borrower ” and collectively, “ Borrowers ”), the lenders signatory thereto (the “ Lenders ”), and Wells Fargo Foothill, Inc., a California corporation, as the arranger and administrative agent for the Lenders (“ Agent ”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.
This LIBOR Notice represents Administrative Borrower’s request to elect the LIBOR Option with respect to [all or a portion of [outstanding Advances] bearing interest at a rate determined by reference to the Base Rate] [the continuation of an outstanding LIBOR Rate Loan] in the amount of $                      (the “ LIBOR Rate Advance ”)[, and is a written confirmation of the telephonic notice of such election given to Agent].
The LIBOR Rate Advance will have an Interest Period of [1, 2, 3 or 6] month(s) commencing on                      .
This LIBOR Notice further confirms Borrowers’ acceptance, for purposes of determining the rate of interest based on the LIBOR Rate under the Credit Agreement, of the LIBOR Rate as determined pursuant to the Credit Agreement.
Administrative Borrower represents and warrants that (i) as of the date hereof, each representation or warranty contained in or pursuant to any Loan Document is true and correct in all material respects (except to the extent any representation or warranty expressly related to an earlier date) and (ii) no Default or Event of Default has occurred and is continuing on the date hereof, nor will any thereof occur after giving effect to the request above.

 

 


 

Wells Fargo Foothill, Inc., as Agent
Page 2
             
 
  Dated:    
           
 
           
    ALTRA INDUSTRIAL MOTION, INC.,
a Delaware corporation, as Administrative Borrower
 
           
 
  By:        
         
 
      Name:   
 
           
 
      Title:   
 
           
Acknowledged by:
WELLS FARGO FOOTHILL, INC.,
a California corporation, as Agent
             
By:
           
 
       
   
Name:
       
 
           
   
Title:
       
 
           

 

 


 

Schedule A-1
Agent’s Account
An account at a bank designated by Agent from time to time as the account into which Administrative Borrower shall make all payments to Agent for the benefit of the Lender Group and into which the Lender Group shall make all payments to Agent under this Agreement and the other Loan Documents; unless and until Agent notifies Administrative Borrower and the Lender Group to the contrary, Agent’s Account shall be that certain deposit account bearing account number 323-266193 and maintained by Agent with JPMorgan Chase Bank, 4 New York Plaza, 15th Floor, New York, New York 10004, ABA #021000021.

 

 


 

SCHEDULE C-1
COMMITMENTS
         
Name of Lender   Commitment
 
Wells Fargo Foothill, Inc.
  $ 30,000,000.00

 

2


 

SCHEDULE D-1
DESIGNATED ACCOUNT
Account Name: WFBIUS6S
ABA Routing #: 121000248
Bank Name: Wells Fargo Bank, National Association
Bank Account #: 4121073308

 

3


 

SCHEDULE P-1
PERMITTED HOLDERS
Genstar Capital, L.P. and its Affiliates.

 

4


 

SCHEDULE P-2
PERMITTED LIENS
                 
            Original File    
            Number, Lien    
            Number, or    
            Judgment Case    
Jurisdiction   Debtor Name   Secured Party   Number and Date   Description
 
               
DE-SOS
  Boston Gear LLC   J.P. Morgan Leasing Inc.   1125259 7 09/27/2001   Equipment
DE-SOS
      Dell Financial Services   2225191 0 09/06/2002   Equipment
DE-SOS
      Dell Financial Services   3233068 9 09/09/2003   Equipment
DE-SOS
      Dell Financial Services   3243294 9 09/19/2003   Equipment
DE-SOS
      Dell Financial Services   4054198 9 02/26/2004   Equipment
DE-SOS
      Cisco Systems Capital Corporation   1078983 9 08/07/2001   Equipment
MA-SOS
      Dell Financial Services   759100 11/28/2000   Equipment
MA-SOS
      Dell Financial Services   763361 12/15/2000   Equipment
MA-SOS
      Dell Financial Services   774826 01/30/2001   Equipment
MA-SOS
      CIT Communications Finance
Corporation
  778262 02/09/2001   Equipment
MA-SOS
      Dell Financial Services, L.P.   200100109030
02/22/2001
  Equipment
MA-SOS
      Dell Financial Services, L.P.   200102209350
05/11/2001
  Equipment
MA-SOS
      Dell Financial Services, L.P.   200102915710
06/05/2001
  Equipment
MA-SOS
      Dell Financial Services, L.P.   200106320150
08/02/2001
  Equipment

 

5


 

                 
            Original File    
            Number, Lien    
            Number, or    
            Judgment Case    
Jurisdiction   Debtor Name   Secured Party   Number and Date   Description
 
               
MA-SOS
      Dell Financial Services, L.P.   2001104475140-08/07/2001   Equipment
MA-SOS
      Cisco Systems Capital Corporation   200104484700 08/07/2001   Equipment
MA-SOS
      Dell Financial Services, L.P.   200105122070 08/31/2001   Equipment
MA-SOS
      Dell Financial Services, L.P.   200105372600 09/14/2001   Equipment
MA-SOS
      Dell Financial Services, L.P.   200106879540 11/14/2001   Equipment
MA-SOS
      Dell Financial Services, L.P.   200106946530 11/16/2001   Equipment
MA-SOS
      Dell Financial Services, L.P.   200107543260 12/12/2001   Equipment
MA-SOS
      Dell Financial Services, L.P.   200107903640 12/27/2001   Equipment
MA-SOS
      Dell Financial Services, L.P.   200208302270 01/14/2002   Equipment
MA-SOS
      Dell Financial Services, L.P.   200208371050 01/17/2002   Equipment
MA-SOS
      Dell Financial Services, L.P.   200208446190 01/22/2002   Equipment
 
               
CA-LA County
  Warner Electric, Inc.   State Tax Lien   96 1358381 08/21/1996   Franchise Tax Lien $194.00
DE-SOS
      CISCO Systems Capital Corporation   1019952 6 03/05/2001   Equipment
DE-SOS
      Avnet Computer, a division of Avent, Inc.   2000791 8 01/02/2002   Equipment
DE-SOS
      Dana Commercial Credit Corporation   2063389 5 02/19/2002   Equipment

 

6


 

                 
            Original File    
            Number, Lien    
            Number, or    
            Judgment Case    
Jurisdiction   Debtor Name   Secured Party   Number and Date   Description
 
               
DE-SOS
      US Bancorp   2251335 0 09/30/2002   Equipment
DE-SOS
      US Bancorp   2299060 8 11/15/2002   Equipment
DE-SOS
      CISCO Systems Capital Corporation   2325910 2 12/11/2002   In lieu of filing
DE-SOS
      CIT Communications Finance
Corporation
  3036825 1 03/06/2003   Equipment
DE-SOS
      Dell Financial Services   3054953 8 03/06/2003   Equipment
DE-SOS
      Dell Financial Services   3089161 7 04/04/2003   Equipment
DE-SOS
      CIT Communications Finance
Corporation
  3093379 9 04/10/2003   Equipment
DE-SOS
      CitiCapital Technology Finance, Inc.   3095480 3 04/04/2003   Equipment
DE-SOS
      US Bancorp   3286769 8 10/31/2003   Equipment
DE-SOS
      CIT Communications Finance
Corporation
  4068791 5 03/11/2004   Equipment
DE-SOS
      Dell Financial Services   4172700 9 06/22/2004   Equipment
DE-SOS
      US Bancorp   4213764 6 07/29/2004   Equipment
IL-SOS
      Dell Financial Services, L.P.   4152504 FS
01/14/2000
  Equipment
IL-SOS
      Dell Financial Services, L.P.   4259461 FS
08/28/2000
  Equipment
IL-SOS
      CISCO Systems Capital Corporation   4347998 FS 03/02/01   Equipment
IL-SOS
      Dell Financial Services, L.P.   4368943 FS
04/11/2001
  Equipment
IL-SOS
      Dana Commercial Credit Corporation   4407565 FS
06/28/2001
  Equipment

 

7


 

                 
            Original File    
            Number, Lien    
            Number, or    
            Judgment Case    
Jurisdiction   Debtor Name   Secured Party   Number and Date   Description
 
               
IL-SOS
      CCA Financial, LLC   4407567 FS
06/28/2001
  Equipment
IL-SOS
      CCA Financial, LLC   4407568 FS
06/28/2001
  Equipment
IL-SOS
      Dell Financial Services, L.P.   7402252 FS
08/11/2003
  Equipment
IL-SOS
      Dell Financial Services, L.P.   7402260 FS
08/11/2003
  Equipment
IL-SOS
      Dell Financial Services, L.P.   8120528 FS
01/16/2004
  Equipment
IL-SOS
      Dell Financial Services, L.P.   8171238 FS
01/28/2004
  Equipment
IL-SOS
      Dell Financial Services, L.P.   8649383 FS
05/06/2004
  Equipment
IL-SOS
      Dell Financial Services, L.P.   8959072 FS
08/05/2004
  Equipment
IL-SOS
      Dell Financial Services, L.P.   8959285 FS
08/05/2004
  Equipment
IL-SOS
      Dell Financial Services, L.P.   9003916 FS
08/20/2004
  Equipment
IL-SOS
      Dell Financial Services, L.P.   9149503 FS
10/07/2004
  Equipment
IL-SOS
      Dell Financial Services, L.P.   9160604 FS
10/12/2004
  Equipment
IL-SOS
      Dell Financial Services, L.P.   9242376 FS
11/05/2004
  Equipment
VA-SOS
      US Bancorp   021021/7176-7 10/16/??   Equipment
 
               
DE-SOS
  Kilian Manufacturing Corporation   Toyota Motor Credit Corporation   22071862
8/9/2002
  Equipment

 

8


 

                 
            Original File    
            Number, Lien    
            Number, or    
            Judgment Case    
Jurisdiction   Debtor Name   Secured Party   Number and Date   Description
 
               
DE-SOS
      IOS Capital   42964692 10/15/2004   Equipment
NY-SOS
      Pangate Handling Systems of New York, Inc.   [                      ]
12/1/97
  Equipment
NY-SOS
      Pangate Handling Systems of New York, Inc.   069039
4/7/2000
  Equipment
 
  Ameridrives International, L.P.   Bankers Trust Company 1       Trademarks
 
     
1  
Certain trademarks may be subject to a Security Agreement between Zurn Industries, Inc. and Bankers Trust Company, in favor of Bankers Trust Company, as of January 21, 1997, recorded on February 12, 1997 at Reel/Frame 1555/0945.

 

9


 

SCHEDULE P-3
PERMITTED INVESTMENTS
Equity Investments in:
1.  
The subsidiaries listed on Schedule 4.7(c) .
 
2.  
3091780 Nova Scotia Company
 
3.  
Kilian Canada, ULC
 
4.  
Warner Electric UK Group Ltd. (UK)
 
5.  
Warner Electric UK Holding Ltd.
 
6.  
Wichita Company Ltd. (UK)
 
7.  
Warner Electric (Holding) SAS
 
8.  
Warner Electric Europe SAS
 
9.  
Warner Electric Group GmbH
 
10.  
Warner Electric Verwaltungs GmbH
 
11.  
Stieber GmbH
 
12.  
Warner Electric (Neth) Holding, B.V.
 
13.  
Warner Electric (Singapore) Ltd.
 
14.