-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SATrNnwwa4SGhb13pJ/q0HZ4Oy0wXXaxq1srLgOjOjgKTA6iWiaxK3++DD8M6n1S 4tgfpdlc1Upqri2IvbBnHw== 0000950172-97-000077.txt : 19970130 0000950172-97-000077.hdr.sgml : 19970130 ACCESSION NUMBER: 0000950172-97-000077 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970129 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESTERLINE TECHNOLOGIES CORP CENTRAL INDEX KEY: 0000033619 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 132595091 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06357 FILM NUMBER: 97513758 BUSINESS ADDRESS: STREET 1: 10800 NE 8TH ST STREET 2: STE 600 CITY: BELLEVUE STATE: WA ZIP: 98004 BUSINESS PHONE: 2064539400 MAIL ADDRESS: STREET 1: 10800 N E 8TH STREET CITY: BELLEVUE STATE: WA ZIP: 98004 FORMER COMPANY: FORMER CONFORMED NAME: ESTERLINE CORP DATE OF NAME CHANGE: 19910317 FORMER COMPANY: FORMER CONFORMED NAME: BOYAR SCHULTZ INC DATE OF NAME CHANGE: 19671101 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 1-6357 ESTERLINE TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-2595091 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 10800 NE 8TH STREET BELLEVUE, WASHINGTON 98004 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 206/453-9400 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock ($.20 par value) New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange 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. X Yes No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) As of January 17, 1997, 8,518,800 shares of the Registrant's common stock were outstanding. The aggregate market value of such common stock held by non-affiliates at such date was $216,164,550 (based upon the closing sales price of $25.375 per share). DOCUMENTS INCORPORATED BY REFERENCE Portions of Annual Report to Shareholders for Fiscal Year ended October 31, 1996 -- Parts I, II and IV. Portions of Definitive Proxy Statement relating to the 1997 Annual Meeting of Shareholders, to be held on March 5, 1997 -- Part III. FORWARD-LOOKING STATEMENTS AND RISK FACTORS Certain statements in the Form 10-K and documents incorporated by reference contain forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve risks and uncertainties, certain of which are discussed below, regarding matters that could significantly affect expected results including information about industry trends, growth and backlog. Thus, these forward-looking statements may be materially different from actual future outcomes. The Company does not undertake any obligation to publicly release the results of any revisions that may be made to these forward-looking statements to reflect any future events or circumstances. Cyclicality of Business. The Company's business is susceptible to economic cycles and its results can vary widely based on a number of factors, including domestic and foreign economic conditions and developments affecting the specific industries and customers served. The products sold by most of the Company businesses represent capital investment or support for capital investment by either the initial customer or the ultimate end-user. Also, a significant portion of the sales and profitability of some Company businesses is derived from the telecommunications, computer and aerospace markets and defense and other government contracts. Changes in general economic conditions or conditions in these and other specific industries, capital acquisition cycles and government policies, collectively or individually, can have a significant effect on the Company's results of operations and financial condition. For example, in fiscal 1995, strong demand for the Automation Group's manufacturing equipment products, particularly at Excellon, was primarily responsible for the Company's sales increases. Subsequently in 1996, the Automation Group experienced a drop off due to uncertainty among automated manufacturing equipment users, while at the same time, the Aerospace Group was benefiting from improvements in the aerospace markets. There can be no assurance that such trends will continue at their current levels. Dependence on Major Customers; Backlog. Certain of the Company's subsidiaries are dependent on a relatively small number of customers and defense programs which change from time to time. For example, Armtec is dependent on the U.S. Army. Significant customers in fiscal 1996 included the U.S. Army, Snecma and Boeing. There can be no assurance that the Company's current customers will continue to buy the Company's products at their current levels. Moreover, orders included in backlog are generally subject to cancellation by the Company's customers. The inability to replace sales due to the loss of any major customer or defense program could have a material adverse effect on the Company's results of operations and financial condition. Dependence on Proprietary Technology. The Company's subsidiaries take precautionary steps to protect their technological advantages and rely in part on patent, trademark, trade secret and copyright law to protect their intellectual property. There can be no assurances that the precautionary steps taken by the Company will prevent misappropriation of its technology. Litigation may be necessary in the future to enforce the Company's patents and other intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of proprietary rights of others or to defend against claims of infringement or invalidity by others. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's operating results and financial condition. Risk of Foreign Operations. Foreign sales represented approximately 35% of the Company's total sales in fiscal 1996. Foreign sales are subject to numerous risks, including political and economic instability in foreign markets, restrictive trade policies of foreign governments, economic conditions in local markets, inconsistent product regulation by foreign agencies or governments, the imposition of product tariffs and the burdens of complying with a wide variety of international and U.S. export laws and differing regulatory requirements. To the extent that foreign sales are transacted in a foreign currency, the Company would be subject to the risk of losses due to foreign currency fluctuations. In addition, the Company has substantial assets denominated in foreign currencies which are not offset by liabilities denominated in such foreign currencies. These net foreign currency investments are subject to material changes in the event of fluctuations in foreign currencies against the U.S. dollar. Product Liability. The Company is subject to the risk of claims arising from injuries to persons or property due to the use of its products. Although the Company maintains general liability and product liability insurance, there can be no assurance that such insurance will be sufficient to cover any claims that may arise. Volatility of Stock Price. The trading price of the Company's Common Stock has from time to time fluctuated widely and in the future may be subject to similar fluctuations in response to quarter-to-quarter variations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, announcements of marketing and distribution arrangements by the Company, general conditions in the industries in which the Company competes and other events or factors. In addition, in recent years broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations also may adversely affect the future trading price of the Common Stock. Risks Associated With Acquisitions. A key operating strategy of the Company is the pursuit of selective acquisitions. Although the Company reviews many possible acquisitions, including some outside of its current markets and acquisition criteria, the Company currently has no commitments or agreements to acquire any specific businesses or other material assets. There can be no assurance that any acquisition will be consummated, or if consummated, that any such acquisition will be successfully integrated or will not have a material adverse effect upon the Company's financial condition or results of operations. Certain Anti-Takeover Provisions. The Company's Restated Certificate of Incorporation, as amended, and Bylaws contain provisions for a classified Board of Directors and restricting the ability of stockholders to call special meetings. These provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving the Company, even if such events might be favorable to the Company's stockholders. In addition, certain agreements to which the Company is a party, including loan and employment agreements, contain provisions that impose substantial penalties upon the Company in the event of a change of control. The Company's Stockholder Rights Plan is designed to cause substantial dilution to any "Acquiring Person" that attempts to merge or consolidate with, or that takes certain other actions affecting the Company on terms that are not approved by the Board of Directors of the Company. The Company is also subject to the "business combination" statute of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging various "business combination" transactions with any "interested stockholder" for a period of three years after the date of the transaction in which such person became an "interested stockholder," unless the business combination is approved in a prescribed manner. These provisions could discourage or make more difficult a merger, tender offer or other similar transaction, even if favorable to the Company's stockholders. PART I ITEM 1. BUSINESS (a) General Development of Business. Esterline Technologies Corporation, a Delaware corporation formed in 1967 (the "Company"), is a diversified manufacturing company that has strong market positions within, or in support of, a variety of general manufacturing industries, including electronic equipment, metal fabrication, commercial aerospace and defense. The Company conducts its operations through three business segments: its Automation Group, Aerospace and Defense Group, and Instrumentation Group. The six principal subsidiaries of the Company generated approximately 81% and 82% of net sales and 81% and 83% of operating earnings in fiscal 1996 and 1995, respectively. The six principal subsidiaries are Excellon Automation Co. ("Excellon") and W. A. Whitney Co. ("Whitney") in the Automation Group, Armtec Defense Products Co. ("Armtec") and Auxitrol S. A. ("Auxitrol") in the Aerospace and Defense Group, and Federal Products Co. ("Federal") and Korry Electronics Co. ("Korry") in the Instrumentation Group. The Company's senior management group joined the Company in 1987. In its efforts to improve shareholder returns, management has downsized and restructured the Company and navigated it through extended downturns in both the electronics capital goods and commercial aerospace and defense markets. Since October 31, 1989, senior management has reduced the Company's total debt from $172.1 million to $40.9 million at October 31, 1996. During February 1996, the Company completed a public offering (the "Public Offering") which generated funds that are available for general corporate purposes including the acquisition of companies. In August 1996, the Company acquired the assets of Mason Electric Co. which became a part of the Aerospace and Defense Group. Also during the year, the Company acquired a noncontrolling equity interest in a company and executed an agreement to acquire a product line. The Company is continuing its plan for growth through the acquisition of companies and product lines, the development of new products and the search for new applications of current products. (b) Financial Information About Industry Segments. A summary of net sales to unaffiliated customers, operating earnings and identifiable assets attributable to the Company's business segments for the fiscal years ended October 31, 1996, 1995 and 1994 is incorporated herein by reference to Note 13 to the Company's Consolidated Financial Statements on pages 44 and 45 of the Annual Report to Shareholders for the fiscal year ended October 31, 1996. (c) Narrative Description of Business. The Company consists of 13 individual businesses segmented into three groups. Specific comments covering all of the Company's business segments and operating units are set forth below. AUTOMATION GROUP The Automation Group consists of four subsidiaries of which Excellon and Whitney are the principal subsidiaries. In fiscal 1996 and 1995, the Automation Group accounted for 42% and 44%, respectively, of the Company's net sales. Equipment Sales Co. ("ESCI") and Tulon Co. ("Tulon") comprise the remaining members of the Automation Group. Excellon Excellon is a leading manufacturer of highly efficient automated drilling systems for the printed circuit board manufacturing industry. Excellon experienced significant growth during 1995 but experienced a drop off midway through 1996 due to uncertainty among automated manufacturing equipment users, especially in the printed circuit board ("PCB") industry, as they delayed capital purchase decisions. Nonetheless, growing capacity requirements of printed circuit board manufacturers and the proliferation of increasingly more complex boards is continuing to render older printed circuit board drilling machines obsolete, therefore providing continued demand for Excellon machines. As the number of electronic applications multiply, board designers are forced to integrate increasingly more functions into smaller packages, requiring more PCB holes, smaller holes and much tighter tolerances between holes. Management believes that its drilling systems enable its customers to achieve one of the lowest costs per hole, an increasingly important consideration in the cost-conscious electronics industry. Excellon's high levels of research and development expenditures are key to maintaining its important technology lead. Excellon's latest product developments are micro-drilling machines that automatically load or unload circuit boards in combination with fully integrated material handling systems. These drilling equipment systems, in combination with Excellon's powerful software, respond to customer needs for increased flexibility and smaller, shorter production runs in an automated production environment. These units feature a tool management system that provides access to 600 tools per spindle, integrated laser inspection for broken bits and full Z-axis control for precision depth drilling. Depending on the configuration ordered, Excellon's System 2000 machine, for example, can automatically load circuit board material onto one of five drilling stations, drill the board to exact pre-programmed specifications and then unload the finished boards. This level of automation translates into dramatic productivity advantages for Excellon's customers. An Excellon system can provide access to any function of the drilling machine, full process analysis traceability of system or operator performance and statistical process control. Its color touch-screen with easy-to-read menus available in nine different languages provides for ease of operation. In fiscal 1996, 1995 and 1994, printed circuit board drilling equipment accounted for 22%, 26% and 18% respectively, of the Company's consolidated net sales. Whitney Whitney designs and builds highly productive automated machine tool and material handling systems for cutting and punching sheet, plate and structural steel for construction, transportation, agricultural and mining equipment manufacturers and independent steel fabrication centers. Whitney produces equipment specifically designed for mid- to heavy-plate metal that enables manufacturers to meet rigid cut quality and accuracy standards. Whitney's computer-controlled heavy punching and cutting machines significantly reduce setup time, decrease work-in-process time and material handling and enable customers to utilize just-in-time production to lower inventory and costs. Management believes that Whitney's proprietary TRUECut(TM) oxygen plasma cutting technology virtually eliminates rejected parts and additional finish work, resulting in improved throughput and reduced cost per part. In its niche, Whitney is a leading supplier in the United States and has market positions in both Europe and Asia. Whitney continually evaluates new approaches to metal cutting such as laser technology, but to date has not found such technology to be competitive with Whitney's current systems in its market niche. Other ESCI acts as a sales representative for various manufacturers' products sold to the PCB assembly industry, including high-speed assembly equipment. Tulon produces tungsten carbide drill and router bits, commonly ranging in size from 7mm down to .25mm -- but some are as small as .10mm -- for use in PCB drilling equipment. Tulon utilizes computerized equipment which automatically inspects drill bits and provides the product consistency customers need for higher-technology drilling. Tulon's products can be used in drilling machines produced by other companies as well as the machines produced by Excellon. Backlog At October 31, 1996 the backlog of the Automation Group (all of which is expected to be filled during fiscal 1997) was $19.2 million compared with $35.9 million at October 31, 1995. The decrease was primarily attributable to uncertainty experienced by automated manufacturing equipment users. AEROSPACE AND DEFENSE GROUP The Aerospace and Defense Group consists of six subsidiaries of which Auxitrol and Armtec are the principal subsidiaries. In fiscal 1996 and 1995, the Aerospace and Defense Group accounted for 32% and 28%, respectively, of the Company's net sales. Hytek Finishes Co. ("Hytek"), Midcon Cables Co. ("Midcon"), TA Mfg. Co. ("TA") and Mason Electric Co. ("Mason") comprise the remaining companies in the Aerospace and Defense Group. Armtec Armtec manufactures molded fiber cartridge cases, mortar increments, igniter tubes and other combustible ammunition components for the United States Armed Forces and licenses such technology to foreign defense contractors and governments. Armtec currently is the only U.S. producer of combustible ordnance products utilized by the U.S. Army. These products include the 120mm combustible case used as the main armament system on the U.S. Army's M-1A1 and M-1A2 tanks, the 60mm, 81mm and 120mm combustible mortar increments and the 155mm combustible case for artillery ammunition. As opposed to metal cartridge casings, Armtec's products are part of the ammunition propulsion system and are combusted when fired. In fiscal 1996, Armtec was designated by the U.S. Army as having the preferred technology for its new generation 155mm artillery system. Auxitrol Auxitrol, headquartered in France, manufactures high precision temperature and pressure sensing devices used primarily in aerospace applications; liquid level measurement devices for ships and storage tanks; pneumatic accessories (including pressure gauges and regulators); and industrial alarms. Auxitrol's principal customers are jet and rocket engine manufacturers, aerospace equipment manufacturers, shipbuilders, petroleum companies, processors and electric utilities. Exhaust gas temperature sensing equipment for a jet engine manufacturer constitutes a significant portion of Auxitrol's sales. Auxitrol also distributes products manufactured by others, including valves, temperature and pressure switches and flow gauges. In addition, Auxitrol manufactures electrical penetration devices for nuclear power plants under license for sale in territories which cover European and certain other foreign countries. These penetration devices permit electrical signals to pass through containment domes while maintaining pressure integrity and signal continuity. Auxitrol is also part of a joint venture with a Russian company to facilitate use of its penetration devices in nuclear plants for Eastern Europe. Other Hytek provides specialized metal finishing and inspection services, including plating, anodizing, polishing, nondestructive testing and organic coatings, primarily to the commercial aircraft, aerospace and electronics markets. Hytek also serves the semi-conductor industry using an automated tin-lead plating line which employs some of the most advanced automated plating technology available. Midcon manufactures electronic and electrical cable assemblies and cable harnesses for the military, government contractors and the commercial electronics market, offering both product design services and product assembly to customer specifications. Its proprietary cable, EverFlex(TM), uses an internally developed, patented design to provide a unique solution to significant problems in wiring applications involving vibration, abrasion and repetitive movement. TA designs and manufactures specialty clamps and elastomeric compounds in custom molded shapes for wiring and tubing installations for airframe and jet engine manufacturers as well as military and commercial airline aftermarkets. TA's products include proprietary elastomers which are specifically formulated for various extreme applications, including high-temperature environments on or near a jet engine. Mason was acquired in August 1996 and is the newest addition to the Aerospace and Defense Group. Mason primarily manufactures control sticks, grips and wheels to aerospace customer specifications. Mason also manufactures specialized switching systems for commercial and military aircraft as well as for land- based military vehicles such as tanks and missile launchers. Backlog At October 31, 1996 the backlog of the Aerospace and Defense Group (of which $16.1 million is expected to be filled after fiscal 1997) was $71.6 million, compared with $36.3 million at October 31, 1995. This strong increase is due to improving aerospace markets as well as the addition of Mason. INSTRUMENTATION GROUP The Instrumentation Group consists of three subsidiaries of which Federal and Korry are the principal subsidiaries. In fiscal 1996 and 1995, the Group's net sales represented 26% and 28%, respectively, of the Company's net sales. Angus Electronics Co. ("Angus") is the other company in the Instrumentation Group. Federal Federal manufactures a broad line of high-precision analog and digital dimensional and surface measurement and inspection instruments as well as systems for a wide range of industrial quality control and scientific applications. Manufacturers use Federal equipment for direct shop-floor inspections to reduce costly rework at more advanced production stages. Federal's products include: dial indicators, air gauges, electronic gauges and other precision gauges where high-precision measurement is required; and custom-built and dedicated semi-automatic and automatic gauging systems. Distributed products manufactured by others include laser interferometer systems used primarily to check machine tool calibrations. Federal's equipment is used extensively in precision metal working. Its markets include the automotive, farm implement, construction equipment, aerospace, ordnance and bearing industries. In each of fiscal years 1996, 1995 and 1994, gauge products manufactured by Federal accounted for 12%, 12% and 13%, respectively, of the Company's consolidated net sales. Korry Korry is a market and technology leader in the manufacture of high-reliability electro-optical instrumentation components and systems, illuminated push button switches, indicators, panels and keyboards that act as human interfaces in a broad variety of control and display applications. Korry's products have been designed into many existing aircraft systems, and as a result, Korry enjoys a considerable spares and retrofit business. Korry's customers include original equipment manufacturers and the aftermarkets (equipment operators and spare parts distributors), primarily in the commercial aviation, airborne military, ground-based military equipment and shipboard military equipment markets. Korry's proprietary products provide its customers with a significant technological advantage in such areas as night vision -- a top defense priority -- and in the area of active matrix liquid crystal displays, a technology expected to have broad usage in commercial aerospace and military applications. Other Angus manufactures recording instruments together with other analytical, process and environmental monitoring instrumentation. These include analog strip chart and digital printout recorders as well as electronic and multi-channel microprocessor-based recording equipment. Customers of Angus include industrial equipment manufacturers, electric utilities, scientific laboratories, pharmaceutical manufacturers and process industries. Backlog At October 31, 1996, the backlog of the Instrumentation Group (of which $8.5 million is expected to be filled after fiscal 1997) was $36.4 million compared with $31.1 million at October 31, 1995. The Instrumentation Group's backlog is benefiting from the rising demands of customers in the aerospace markets. MARKETING AND DISTRIBUTION For most of the Company's products, the maintenance of a service capability is an integral part of the marketing function. Each of the Company's separate operating units maintains its own separate and distinct sales force, outside representatives or distributor relationships. In particular: Automation Group products manufactured by Excellon are marketed domestically principally through employees and in foreign markets through employees and independent distributors. Whitney products are sold principally through independent distributors and representatives. Aerospace and Defense Group products manufactured by Auxitrol are marketed through employees and independent representatives. Armtec's products are marketed domestically and abroad by employees and independent representatives. Instrumentation Group products manufactured by Federal and Korry are marketed domestically principally through employees and outside sales representatives and in foreign markets through both employees and independent representatives. RESEARCH AND DEVELOPMENT Currently, the Company's subsidiaries conduct product development and design programs with approximately 145 professional engineers, technicians and support personnel, supplemented by independent engineering and consulting firms when needed. In fiscal 1996, approximately $15.4 million was expended for research, development and engineering, compared with $16.6 million in 1995 and $13.7 million in 1994. FOREIGN OPERATIONS The Company's principal foreign operations consist of manufacturing facilities of Auxitrol located in France and Spain. In addition, other locations include a manufacturing facility of Tulon located in Mexico, sales and service operations of Excellon located in England, Germany and Japan, and sales offices of TA and Korry located in England and France, respectively. Whitney also has a small manufacturing and distribution facility in Italy. For further information regarding foreign operations, reference is made to Note 1 to the Consolidated Financial Statements on page 36, and Note 13 to the Consolidated Financial Statements on pages 44 and 45, of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1996, which is incorporated herein by reference. EMPLOYEES The Company and its subsidiaries had 3,137 employees at October 31, 1996. Less than 10% of these employees were members of an organized labor union. GOVERNMENT CONTRACTS AND SUBCONTRACTS As a contractor and subcontractor to the United States Government, the Company is subject to various laws and regulations that are more restrictive than those applicable to non-government contractors. Although only 2% of the Company's sales are made directly to the United States Government, the Company's subcontracting activities account for approximately 9% of additional sales. Therefore, approximately 11% of the Company's sales are governed by rules favoring the government's contractual position. As a consequence, such contracts may be subject to protest or challenge by unsuccessful bidders or to termination, reduction or modification in the event of changes in government requirements, reductions in federal spending, or other factors. The accuracy and appropriateness of certain costs and expenses used to substantiate direct and indirect costs of the Company for the United States Government under both cost-plus and fixed-price contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an arm of the United States Department of Defense. COMPETITION, PATENTS AND LEASES The Company's subsidiaries experience varying degrees of competition with respect to their products and services. The Company competes in most markets it serves with numerous other companies, many of which have far greater sales volume and financial resources. The principal competitive factors in the commercial markets in which the Company participates are product performance and service. Part of product performance requires expenditures in research and development that lead to product improvement on a rapid basis. The market for many of the Company's products may be affected by rapid and significant technological changes and new product introduction. Current competitors or new entrants could introduce new products with features that render the Company's products obsolete or less marketable. Excellon's principal competitors are Hitachi, Ltd. and Pluritec. Whitney's principal competitors are Cincinnati, Inc., Trumpf, Mazak and U.S. Amada. Auxitrol's principal competitors are Ametek and Rosemount. Federal's principal competitors are Starrett and Mitutoyo. Korry's principal competitors are Eaton-MSC and Ducommun Jay-El. The subsidiaries hold a number of patents but in general rely on technical superiority, exclusive features in their equipment and marketing and service to customers to meet competition. Licenses which help maintain a significant competitive advantage include a long-term license agreement under which Auxitrol manufactures and sells electrical penetration assemblies. SOURCES AND AVAILABILITY OF RAW MATERIALS AND COMPONENTS Due to the Company's diversification, the sources and availability of raw materials and components are not nearly as important as they would be for a company that manufactures a single product. However, certain components and supplies such as air bearing spindles purchased by Excellon and a few components purchased by Whitney and certain other raw materials and components purchased by other subsidiaries are purchased from a single source. In such instances, ongoing efforts are conducted to develop alternative sources or designs to help avoid the possibility of any business impairment. ENVIRONMENTAL MATTERS The Company is subject to federal, state, local and foreign laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous substances (together, "Environmental Laws"). The Company's various operations use certain substances and generate certain wastes that are regulated as or may be deemed hazardous under applicable Environmental Laws, or for which the Company has incurred cleanup obligations. While the Company endeavors at each of its facilities to assure compliance with Environmental Laws, from time to time operations of the Company have resulted or may result in certain noncompliance with applicable requirements under Environmental Laws for which the Company has incurred cleanup and related costs. However, the Company believes that any such noncompliance or cleanup liability under current Environmental Laws would not have a material adverse effect on the Company's results of operations and financial condition. The Company has been identified as a potentially responsible party ("PRP"), pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), and analogous state Environmental Laws, for the cleanup of contamination resulting from past disposals of hazardous wastes at certain sites to which the Company, among others, sent wastes in the past. CERCLA requires PRPs to pay for cleanup of sites from which there has been a release or threatened release of hazardous substances. Courts have interpreted CERCLA to impose strict, joint and several liability upon all persons liable for cleanup costs. As a practical matter, however, at sites where there are multiple PRPs, the costs of cleanup typically are allocated among the parties according to a volumetric or other standard. Although there can be no assurance, the Company believes, based on, among other things, a review of the data available to the Company regarding each such site, including the minor volumes of waste which the Company is alleged to have contributed, and a comparison of the Company's liability at each such site to settlements previously reached by the Company in similar cases, that it has adequately accrued for the estimated costs associated with such matters. Nonetheless, until the Company's proportionate share is finally determined at each such site, there can be no assurance that such matters, or any similar liabilities that arise in the future, will not have a material adverse effect on the Company's results of operations or financial condition. Liabilities have been accrued for environmental remediation costs expected to be incurred in the disposition of manufacturing facilities. No provision has been recorded for environmental remediation costs which could result from changes in laws or other circumstances currently not contemplated by the Company. (d) Financial Information About Foreign and Domestic Operations and Export Sales. See "Foreign Operations" above. ITEM 2. PROPERTIES The following table summarizes the principal properties (in excess of 50,000 square feet) owned or leased by the Company and its subsidiaries as of October 31, 1996: Approximate Type of Number of Owned Location Facility Square Feet or Leased -------- -------- ----------- --------- Rockford, IL Office and Plant (A) 257,000 Owned Providence, RI Office and Plant (I) 166,000 Owned Torrance, CA Office and Plant (A) 150,000 Leased Seattle, WA Office and Plant (I) 138,000 Leased Coachella, CA Office and Plant (D) 110,000 Owned Kent, WA Office and Plant (D) 93,000 Owned Joplin, MO Office and Plant (D) 92,000 Owned Bourges, France Plant (D) 69,000 Owned Indianapolis, IN Office and Plant (I) 63,000 Owned San Fernando, CA Office and Plant (D) 52,000 Leased The Company group (business segment) operating each facility described above is indicated by the letter following the description of the facility, as follows: (A)- Automation (D)- Aerospace and Defense (I)- Instrumentation In addition to the properties listed above, a 64,000 square foot facility in Nashua, New Hampshire was sold in December 1996. Liabilities have been accrued for environmental remediation costs which could be incurred in the disposition of the New Hampshire facility. ITEM 3. LEGAL PROCEEDINGS In October 1995, the Company identified irregularities in the allocation of certain labor charges at its Armtec Defense Products subsidiary and is participating in the Department of Defense Voluntary Disclosure Program. Management believes that the eventual outcome of this issue will not have a material adverse effect on the financial position or future operating results of the Company. In addition, the Company has various lawsuits and claims, both offensive and defensive, and contingent liabilities arising from the conduct of business, including those associated with Government contracting activities, none of which, in the opinion of management, is expected to have a material effect on the Company's financial position or results of operations. Liabilities have been accrued for environmental remediation costs expected to be incurred in the disposition of manufacturing facilities. No provision has been recorded for environmental remediation costs which could result from changes in laws or other circumstances currently not contemplated by the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended October 31, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following information which appears in the Company's Annual Report to Shareholders for fiscal 1996 is hereby incorporated by reference: (a) The high and low market sales prices of the Company's common stock for each quarterly period during the fiscal years ended October 31, 1996 and 1995, respectively (page 31 of the Annual Report to Shareholders). (b) Restrictions on the ability to pay future cash dividends (Note 6 to Consolidated Financial Statements, page 40 of the Annual Report to Shareholders). No cash dividends were paid during the fiscal years ended October 31, 1996 and 1995 as the Company continued its policy of retaining all internally generated funds to support the long-term growth of the Company and to retire debt obligations. On January 17, 1997, there were approximately 1,001 record holders of the Company's common stock. The principal market for the Company's common stock is the New York Stock Exchange. ITEM 6. SELECTED FINANCIAL DATA The Company hereby incorporates by reference the Selected Financial Data of the Company which appears on page 31 of the Company's Annual Report to Shareholders for fiscal 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company hereby incorporates by reference Management's Discussion and Analysis of Results of Operations and Financial Condition which is set forth on pages 26-30 of the Company's Annual Report to Shareholders for fiscal 1996. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company hereby incorporates by reference the Consolidated Financial Statements and the report thereon of Deloitte & Touche LLP, dated December 11, 1996, which appear on pages 32-47 of the Company's Annual Report to Shareholders for fiscal 1996. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors. The Company hereby incorporates by reference the information set forth under "Election of Directors" in the definitive form of the Company's Proxy Statement, relating to its Annual Meeting of Shareholders to be held on March 5, 1997, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 17, 1997. (b) Executive Officers. The names and ages of all executive officers of the Company and the positions and offices held by such persons as of January 17, 1997 are as follows: Name Position with the Company Age ------------------ ------------------------- --- Wendell P. Hurlbut Chairman, President and 65 Chief Executive Officer Robert W. Cremin Executive Vice President and 56 Chief Operating Officer Robert W. Stevenson Executive Vice President and 57 Chief Financial Officer, Secretary and Treasurer Larry A. Kring Group Vice President 56 Stephen R. Larson Group Vice President 52 Marcia J. M. Greenberg Vice President, Human Relations 44 Mr. Hurlbut has been Chairman, President and Chief Executive Officer since January 1993. From February 1989 through December 1992, he was President and Chief Executive Officer and a director. From June 1988 to February 1989, he was President and Chief Operating Officer. From November 1987 to June 1988, he was Executive Vice President, Operations. From October 1978 to September 1989, Mr. Hurlbut served in various capacities ranging from Group Vice President to President and Chief Executive Officer of Criton Technologies. From November 1972 to October 1978 he served as President of Heath Tecna Aerospace Company. Mr. Hurlbut has a B.S. degree in Engineering from the University of Washington. Mr. Hurlbut is also a member of the Board of Directors of the National Association of Manufacturers. Mr. Cremin has been Executive Vice President and Chief Operating Officer since October 1996. From January 1991 to October 1996, he was Senior Vice President and Group Executive. From October 1987 to December 1990, he was Group Vice President. From July 1976 to September 1989, Mr. Cremin served in various capacities ranging from Director, Program Analysis to Group Vice President of Criton Technologies. Mr. Cremin has a M.B.A. from the Harvard Business School and a B.S. degree in Metallurgical Engineering from Polytechnic Institute of Brooklyn. Mr. Stevenson has been Executive Vice President, Chief Financial Officer, Secretary and Treasurer since October 1987. From March 1968 to September 1989, Mr. Stevenson served in various capacities ranging from Assistant Controller to Executive Vice President, Chief Financial Officer and Secretary of Criton Technologies. Mr. Stevenson has a M.B.A. from the Wharton School of Business at the University of Pennsylvania and a B.A. degree from Stanford University. Mr. Kring has been Group Vice President since August 1993. From November 1978 to July 1993, he was President and Chief Executive Officer of Heath Tecna Aerospace Co., a unit of Ciba Composites Division, Anaheim, California. Mr. Kring has a M.B.A. from California State University at Northridge and a B.S. degree in Aeronautical Engineering from Purdue University. He is a director of Active Apparel Group, Inc. Mr. Larson has been Group Vice President since April 1991. From February 1978 to March 1991, he held various executive positions with Korry Electronics, a subsidiary of the Company, including President and Executive Vice President, Marketing. Mr. Larson has a M.B.A. degree from the University of Chicago and a B.S. degree in Electrical Engineering from Northwestern University. Ms. Greenberg has been Vice President, Human Resources since March 1993. From January 1992 to February 1993, she was a partner in the law firm of Bogle & Gates, Seattle, Washington. From August 1984 to December 1991, she was an associate attorney with Bogle & Gates. Ms. Greenberg has a J.D. degree from Northwestern University School of Law and a B.A. degree from Portland State University. ITEM 11. EXECUTIVE COMPENSATION The Company hereby incorporates by reference the information set forth under "Executive Compensation" in the definitive form of the Company's Proxy Statement, relating to its Annual Meeting of Shareholders to be held on March 5, 1997, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 17, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company hereby incorporates by reference the information with respect to stock ownership set forth under "Security Ownership of Certain Beneficial Owners and Management" in the definitive form of the Company's Proxy Statement, relating to its Annual Meeting of Shareholders to be held on March 5, 1997, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 17, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The following consolidated financial statements, together with the report thereon of Deloitte & Touche LLP, dated December 11, 1996, appearing on pages 32-47 of the Company's Annual Report to Shareholders for fiscal 1996, are hereby incorporated by reference: Annual Report Page Number ------------- Consolidated Statement of Operations Years ended October 31, 1996, 1995 and 1994 . . . . . . . 32 Consolidated Balance Sheet -- October 31, 1996 and 1995 33 Consolidated Statement of Cash Flows -- Years ended October 31, 1996, 1995 and 1994 . . . . . . . 34 Consolidated Statement of Shareholders' Equity -- Years ended October 31, 1996, 1995 and 1994 . 35 Notes to Consolidated Financial Statements . . . 36-46 Report of Independent Auditors . . . . . . . . . 47 (a)(2) Financial Statement Schedules. The following additional financial data should be read in conjunction with the consolidated financial statements in the Annual Report to Shareholders for the fiscal year ended October 31, 1996: Independent Auditors' Report Schedule VIII -- Valuation and Qualifying Accounts and Reserves, see page 21. (a)(3) Exhibits. Exhibit Number Exhibit ------- ------- 3.1 Composite Restated Certificate of Incorporation of the Company as amended by Certificate of Amendment dated March 14, 1990. (Incorporated by reference to Exhibit 19 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1990.) 3.2 By-laws of the Company, as amended and restated December 15, 1988. (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1988.) 4.2 Form of Rights Agreement, dated as of December 9, 1992, between the Company and Chemical Bank, which includes as Exhibit A thereto the form of Certificate of Designation, Preferences and Rights of Series A Serial Preferred Stock and as Exhibit B thereto the form of Rights Certificate (Incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A filed December 17, 1992.) 10.1 Amendment of Lease and Agreement, dated March 11, 1959, between the City of Torrance, California, and Longren Aircraft Company, Inc., as original lessee; Lease, dated July 1, 1959, between the City of Torrance and Aeronca Manufacturing Corporation, as original lessee; and Assignment of Ground Lease, dated September 26, 1985, from Robert G. Harris, as successor lessee under the foregoing leases, to Excellon Industries, Inc., relating to principal manufacturing facility of Excellon at 24751 Crenshaw Boulevard, Torrance, California. (Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1986.) 10.4 Industrial Lease dated July 17, 1984 between 901 Dexter Associates and Korry Electronics Co., First Amendment to Lease dated May 10, 1985, Second Amendment to Lease dated June 20, 1986, Third Amendment to Lease dated September 1, 1987, and Notification of Option Exercise dated January 7, 1991, relating to the manufacturing facility of Korry Electronics at 901 Dexter Avenue N., Seattle, Washington. (Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991.) 10.4a Fourth Amendment dated July 27, 1994 to Industrial Lease dated July 17, 1984 between Houg Family Partnership, as successor to 901 Dexter Associates, and Korry Electronics Co. (Incorporated by reference to Exhibit 10.4a to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994.) 10.5 Industrial Lease dated July 17, 1984 between 801 Dexter Associates and Korry Electronics Co., First Amendment to Lease dated May 10, 1985, Second Amendment to Lease dated June 20, 1986, Third Amendment to Lease dated September 1, 1987, and Notification of Option Exercise dated January 7, 1991, relating to the manufacturing facility of Korry Electronics at 801 Dexter Avenue N., Seattle Washington. (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991.) 10.5a Fourth Amendment dated March 28, 1994 to Industrial Lease dated July 17, 1984 between Michael Maloney and the Bancroft & Maloney general partnership, as successor to 801 Dexter Associates, and Korry Electronics Co. (Incorporated by reference to Exhibit 10.5a to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994.) 10.9 Note Agreement, dated as of July 15, 1992, among Esterline Technologies Corporation, certain of its subsidiaries, The Northwestern Mutual Life Insurance Company and New England Mutual Life Insurance Company relating to 8.75% Senior Notes due July 30, 2002 of Esterline Technologies Corporation and certain of its subsidiaries. (Incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1992.) 10.9a Amendment to Note Agreement, executed as of October 31, 1993, to that certain Note Agreement, dated and effective as of July 15, 1992 , among Esterline Technologies Corporation, certain of its subsidiaries, The Northwestern Mutual Life Insurance Company and New England Mutual Life Insurance Company relating to 8.75% Senior Notes due July 30, 2002 of Esterline Technologies Corporation and certain of its subsidiaries. (Incorporated by reference to Exhibit 10.9a to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993.) 10.10 Compensation of Directors. (Incorporated by reference to first paragraph under "Other Information as to Directors" in the definitive form of the Company's Proxy Statement, relating to its 1997 Annual Meeting of Shareholders to be held on March 5, 1997, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 17, 1997.) 10.21 Credit Agreement executed and effective as of October 31, 1996 among Esterline Technologies Corporation and certain of its subsidiaries, various financial institutions and Bank of America, National Trust and Savings Association, as Agent. 10.22 Real Property Lease and Sublease, dated June 28, 1996, between 810 Dexter L.L.C. and Korry Electronics Co. 11 Schedule setting forth computation of earnings per share for the five fiscal years ended October 31, 1996. 13 Portions of the Annual Report to Shareholders for the fiscal year ended October 31, 1996, incorporated by reference herein. 21 List of subsidiaries. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. Exhibit Management Contracts or Number Compensatory Plan Arrangements ------- ------------------------------ 10.13 Amended and Restated 1987 Stock Option Plan. (Incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1992.) 10.15 Esterline Corporation Supplemental Retirement Income Plan for Key Executives. (Incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1989.) 10.16c Esterline Corporation Long-Term Incentive Compensation Plan, Fiscal Years 1993 through 1996. (Incorporated by reference to Exhibit 10.16c to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993.) 10.16d Esterline Corporation Long-Term Incentive Compensation Plan, Fiscal Years 1994 through 1997. (Incorporated by reference to Exhibit 10.16d to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994.) 10.16e Esterline Technologies Corporation Long-Term Incentive Compensation Plan, Fiscal Years 1995 through 1998. 10.16f Esterline Technologies Corporation Long-Term Incentive Compensation Plan, Fiscal Years 1996 through 1999. 10.19 Executive Officer Termination Protection Agreement. (Incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992.) 10.20c Esterline Technologies Corporation Corporate Management Incentive Compensation Plan for Fiscal Year 1997. (b) Reports on Form 8-K. There were no Reports on Form 8-K filed during the fourth quarter of fiscal year 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ESTERLINE TECHNOLOGIES CORPORATION (Registrant) By /s/ Robert W. Stevenson ------------------------------------ Robert W. Stevenson Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) Dated: January 29, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Wendell P. Hurlbut Director, Chairman, President January 29, 1997 ---------------------- and Chief Executive Officer ---------------- (Wendell P. Hurlbut) (Principal Executive Officer) Date /s/ Robert W. Stevenson Executive Vice President, January 29, 1997 ---------------------- Chief Financial Officer, ---------------- (Robert W. Stevenson) Secretary and Treasurer Date (Principal Financial and Accounting Officer) /s/ Gilbert W. Anderson Director January 29, 1997 ----------------------- ---------------- (Gilbert W. Anderson) Date /s/ John F. Clearman Director January 29, 1997 ----------------------- ---------------- (John F. Clearman) Date /s/ Edwin I. Colodny Director January 29, 1997 ----------------------- ---------------- (Edwin I. Colodny) Date /s/ E. John Finn Director January 29, 1997 ---------------------- ---------------- (E. John Finn) Date /s/ Robert F. Goldhammer Director January 29, 1997 ---------------------- ---------------- (Robert F. Goldhammer) Date /s/ Jerome J. Meyer Director January 29, 1997 ---------------------- ---------------- (Jerome J. Meyer) Date /s/ Paul G. Schloemer Director January 29, 1997 --------------------- ---------------- (Paul G. Schloemer) Date /s/ Malcolm T. Stamper Director January 29, 1997 --------------------- ---------------- (Malcolm T. Stamper) Date REPORT OF INDEPENDENT AUDITORS To the Shareholders and the Board of Directors Esterline Technologies Corporation Bellevue, Washington We have audited the consolidated financial statements of Esterline Technologies Corporation as of October 31, 1996 and 1995, and for each of the three years in the period ended October 31, 1996, and have issued our report thereon dated December 11, 1996; such financial statements and report are included in your 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Esterline Technologies Corporation, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Seattle, Washington December 11, 1996 ESTERLINE TECHNOLOGIES CORPORATION AND SUBSIDIARIES SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands) For Years Ended October 31, 1996, 1995 and 1994 Deduction for Balance at Additions Purpose for Balance Beginning Charged which Reserve at End Description of Year to Income was Created of Year ----------- ---------- --------- ------------- ------- Reserve for doubtful accounts receivable Year Ended October 31 --------------------- 1996 $ 4,117 $ 782 $ (815) $ 4,084 ========= ========= ========= ========= 1995 $ 2,201 $ 2,095 $ (179) $ 4,117 ========= ========= ========= ========= 1994 $ 2,417 $ 117 $ (333) $ 2,201 ========= ========= ========= ========= Restructuring reserves related to accounts receivable and inventory Year Ended October 31 --------------------- 1996 $ 1,195 $ -- $ -- $ 1,195 1995 $ 3,546 $ -- $ (2,351) $ 1,195 1994 $ 3,890 $ -- $ (344) $ 3,546 ESTERLINE TECHNOLOGIES CORPORATION Form 10-K Report for Fiscal Year Ended October 31, 1996 INDEX TO EXHIBITS Exhibit Number Exhibit Page No. ------- ------- -------- 3.1 Composite Restated Certificate of Incorporation of the Company as amended by Certificate of Amendment dated March 14, 1990. (Incorporated by reference to Exhibit 19 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1990.) 3.2 By-laws of the Company, as amended and restated December 15, 1988. (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1988.) 4.2 Form of Rights Agreement, dated as of December 9, 1992, between the Company and Chemical Bank, which includes as Exhibit A thereto the form of Certificate of Designation, Preferences and Rights of Series A Serial Preferred Stock and as Exhibit B thereto the form of Rights Certificate (Incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A filed December 17, 1992.) 10.1 Amendment of Lease and Agreement, dated March 11, 1959, between the City of Torrance, California, and Longren Aircraft Company, Inc., as original lessee; Lease, dated July 1, 1959, between the City of Torrance and Aeronca Manufacturing Corporation, as original lessee; and Assignment of Ground Lease, dated September 26, 1985, from Robert G. Harris, as successor lessee under the foregoing leases, to Excellon Industries, Inc., relating to principal manufacturing facility of Excellon at 24751 Crenshaw Boulevard, Torrance, California. (Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1986.) 10.4 Industrial Lease dated July 17, 1984 between 901 Dexter Associates and Korry Electronics Co., First Amendment to Lease dated May 10, 1985, Second Amendment to Lease dated June 20, 1986, Third Amendment to Lease dated September 1, 1987, and Notification of Option Exercise dated January 7, 1991, relating to the manufacturing facility of Korry Electronics at 901 Dexter Avenue N., Seattle, Washington. (Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991.) Exhibit Number Exhibit Page No. 10.4a Fourth Amendment dated July 27, 1994 to Industrial Lease dated July 17, 1984 between Houg Family Partnership, as successor to 901 Dexter Associates, and Korry Electronics Co. (Incorporated by reference to Exhibit 10.4a to the Company's sAnnual Report on Form 10-K for the fiscal year ended October 31, 1994.) 10.5 Industrial Lease dated July 17, 1984 between 801 Dexter Associates and Korry Electronics Co., First Amendment to Lease dated May 10, 1985, Second Amendment to Lease dated June 20, 1986, Third Amendment to Lease dated September 1, 1987, and Notification of Option Exercise dated January 7, 1991, relating to the manufacturing facility of Korry Electronics at 801 Dexter Avenue N., Seattle, Washington. (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991.) 10.5a Fourth Amendment dated March 28, 1994 to Industrial Lease dated July 17, 1984 between Michael Maloney and the Bancroft & Maloney general partnership, as successor to 801 Dexter Associates, and Korry Electronics Co. (Incorporated by reference to Exhibit 10.5a to the Compan's Annual Report on Form 10-K for the fiscal year ended October 31, 1994.) 10.9 Note Agreement, dated as of July 15, 1992, among Esterline Technologies Corporation, certain of its subsidiaries, The Northwestern Mutual Life Insurance Company and New England Mutual Life Insurance Company relating to 8.75% Senior Notes due July 30, 2002 of Esterline Technologies Corporation and certain of its subsidiaries. (Incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1992.) 10.9a Amendment to Note Agreement, executed as of October 31, 1993, to that certain Note Agreement, dated and effective as of July 15, 1992 , among Esterline Technologies Corporation, certain of its subsidiaries, The Northwestern Mutual Life Insurance Company and New England Mutual Life Insurance Company relating to 8.75% Senior Notes due July 30, 2002 of Esterline Technologies Corporation and certain of its subsidiaries. (Incorporated by reference to Exhibit 10.9a to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993.) 10.10 Compensation of Directors. (Incorporated by reference to first paragraph under "Other Information as to Directors" in the definitive form of the Company's Proxy Statement, relating to its 1997 Annual Meeting of Shareholders to be held on March 5, 1997, filed with the Securities and Exchange Commission and the New York Stock Exchange on January 17, 1997.) 10.21 Credit Agreement executed and effective as of October 31, 1996 among Esterline Technologies Corporation and certain of its subsidiaries, various financial institutions and Bank of America, National Trust and Savings Association, as Agent. 26 10.22 Real Property Lease and Sublease, dated June 28, 1996, between 810 Dexter L.L.C. and Korry Electronics Co. 119 11 Schedule setting forth computation of earnings per share for the five fiscal years ended October 31, 1996. 141 13 Portions of the Annual Report to Shareholders for the fiscal year ended October 31, 1996, incorporated by reference herein. 143 21 List of subsidiaries. 165 23 Consent of Deloitte & Touche LLP. 166 27 Financial Data Schedule Exhibit Management Contracts or Number Compensatory Plan Arrangements ------- ------------------------------ 10.13 Amended and Restated 1987 Stock Option Plan. (Incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1992.) 10.15 Esterline Corporation Supplemental Retirement Income Plan for Key Executives. (Incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1989.) 10.16c Esterline Corporation Long-Term Incentive Compensation Plan, Fiscal Years 1993 through 1996. (Incorporated by reference to Exhibit 10.16c to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993.) 10.16d Esterline Corporation Long-Term Incentive Compensation Plan, Fiscal Years 1994 through 1997. (Incorporated by reference to Exhibit 10.16d to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994.) 10.16e Esterline Technologies Corporation Long-Term Incentive Compensation Plan, Fiscal Years 1995 through 1998. 167 10.16f Esterline Technologies Corporation Long-Term Incentive Compensation Plan, Fiscal Years 1996 through 1999. 173 10.19 Executive Officer Termination Protection Agreement. (Incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992.) 10.20c Esterline Technologies Corporation Corporate Management Incentive Compensation Plan for Fiscal Year 1997. 179 EX-10 2 EXHIBIT 10.21 - CREDIT AGREEMENT EXHIBIT 10.21 CREDIT AGREEMENT DATED AS OF OCTOBER 31, 1996 AMONG ESTERLINE TECHNOLOGIES CORPORATION AND CERTAIN OF ITS SUBSIDIARIES THAT ARE PARTY HERETO, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS AGENT, AND THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO ARRANGED BY BA SECURITIES, INC. SECTION PAGE TABLE OF CONTENTS ARTICLE I DEFINITIONS . . . . . . . . . . . . 1 1.01 Certain Defined Terms . . . . . . . . . . . . . . . . . . 1 1.02 Other Interpretive Provisions . . . . . . . . . . . . . 18 1.03 Accounting Principles . . . . . . . . . . . . . . . . . 19 ARTICLE II THE CREDITS . . . . . . . . . . . 20 2.01 The Revolving Credit . . . . . . . . . . . . . . . . . . 20 2.02 Loan Accounts . . . . . . . . . . . . . . . . . . . . . 20 2.03 Procedure for Borrowing . . . . . . . . . . . . . . . . 20 2.04 Conversion and Continuation Elections . . . . . . . . . 21 2.05 Voluntary Termination or Reduction of Commitments . . . 23 2.06 Optional Prepayments . . . . . . . . . . . . . . . . . . 23 2.07 Cash Collateralization; Mandatory Prepayments of Loans . 23 2.08 Repayment . . . . . . . . . . . . . . . . . . . . . . . 23 2.09 Interest . . . . . . . . . . . . . . . . . . . . . . . . 24 2.10 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (a) Agency Fees . . . . . . . . . . . . . . . . . . . . 24 (b) Commitment Fees . . . . . . . . . . . . . . . . . . 24 2.11 Computation of Fees and Interest . . . . . . . . . . . . 25 2.12 Payments by the Companies . . . . . . . . . . . . . . . 25 2.13 Payments by the Banks to the Agent . . . . . . . . . . . 26 2.14 Sharing of Payments, etc. . . . . . . . . . . . . . . . 26 ARTICLE III THE LETTERS OF CREDIT . . . . . . . . . 27 3.01 The Letter of Credit Subfacility . . . . . . . . . . . . 27 3.02 Issuance, Amendment and Renewal of Letters of Credit . . 28 3.03 Existing Letters of Credit; Risk Participations, Drawings and Reimbursements . . . . . . . . . . . . . 30 3.04 Repayment of Participations . . . . . . . . . . . . . . 31 3.05 Role of the Issuing Bank . . . . . . . . . . . . . . . . 32 3.06 Obligations Absolute . . . . . . . . . . . . . . . . . . 33 3.07 Cash Collateral Pledge . . . . . . . . . . . . . . . . . 34 3.08 Letter of Credit Fees . . . . . . . . . . . . . . . . . 34 3.09 Uniform Customs and Practice . . . . . . . . . . . . . . 35 ARTICLE IV TAXES, YIELD PROTECTION AND ILLEGALITY . . . . . 35 4.01 Taxes . . . . . . . . . . . . . . . . . . . . . . . 35 4.02 Illegality . . . . . . . . . . . . . . . . . . . . . 36 4.03 Increased Costs and Reduction of Return . . . . . . 36 4.04 Funding Losses . . . . . . . . . . . . . . . . . . . 37 4.05 Inability to Determine Rates . . . . . . . . . . . . 38 4.06 Reserves on Offshore Rate Loans . . . . . . . . . . 38 4.07 Certificates of Banks . . . . . . . . . . . . . . . 38 4.08 Survival . . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE V CONDITIONS PRECEDENT . . . . . . . . . 38 5.01 Conditions of Initial Credit Extension . . . . . . . 38 (a) Credit Agreement; Notes . . . . . . . . . . 39 (b) Resolutions; Incumbency . . . . . . . . . . 39 (c) Organization Documents; Good Standing . . . 39 (d) Legal Opinions . . . . . . . . . . . . . . . 39 (e) Certificate . . . . . . . . . . . . . . . . 39 (f) Termination of Existing Facility . . . . . . 40 (g) Other Documents . . . . . . . . . . . . . . 40 5.02 Conditions to All Credit Extensions . . . . . . . . 40 (a) Notice; Application . . . . . . . . . . . . 40 (b) Continuation of Representations and Warranties . . . . . . . . . . . . . . . . 40 (c) No Existing Default . . . . . . . . . . . . 40 ARTICLE VI REPRESENTATIONS AND WARRANTIES . . . . . . 41 6.01 Corporate Existence and Power . . . . . . . . . . . 41 6.02 Corporate Authorization; No Contravention . . . . . 41 6.03 Governmental Authorization . . . . . . . . . . . . . 41 6.04 Binding Effect . . . . . . . . . . . . . . . . . . . 41 6.05 Litigation . . . . . . . . . . . . . . . . . . . . . 42 6.06 No Default . . . . . . . . . . . . . . . . . . . . . 42 6.07 ERISA Compliance . . . . . . . . . . . . . . . . . . 42 6.08 Use of Proceeds; Margin Regulations . . . . . . . . 43 6.09 Title to Properties . . . . . . . . . . . . . . . . 43 6.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . 43 6.11 Financial Condition . . . . . . . . . . . . . . . . 43 6.12 Environmental Matters . . . . . . . . . . . . . . . 43 6.13 Regulated Entities . . . . . . . . . . . . . . . . . 44 6.14 No Burdensome Restrictions . . . . . . . . . . . . . 44 6.15 Copyrights, Patents, Trademarks and Licenses, etc. . 44 6.16 Subsidiaries . . . . . . . . . . . . . . . . . . . . 44 6.17 Insurance . . . . . . . . . . . . . . . . . . . . . 44 6.18 Swap Obligations . . . . . . . . . . . . . . . . . . 44 6.19 Full Disclosure . . . . . . . . . . . . . . . . . . 45 ARTICLE VII AFFIRMATIVE COVENANTS . . . . . . . . . . . 45 7.01 Financial Statements . . . . . . . . . . . . . . . . 45 7.02 Certificates; Other Information . . . . . . . . . . 46 7.03 Notices . . . . . . . . . . . . . . . . . . . . . . 46 7.04 Preservation of Corporate and Partnership Existence, etc. . . . . . . . . . . . 47 7.05 Maintenance of Property . . . . . . . . . . . . . . 48 7.06 Insurance . . . . . . . . . . . . . . . . . . . . . 48 7.07 Payment of Obligations . . . . . . . . . . . . . . . 48 7.08 Compliance with Laws . . . . . . . . . . . . . . . . 49 7.09 Inspection of Property and Books and Records . . . . 49 7.10 Environmental Laws . . . . . . . . . . . . . . . . . 49 7.11 Use of Proceeds . . . . . . . . . . . . . . . . . . 49 ARTICLE VIII NEGATIVE COVENANTS . . . . . . . . . 49 8.01 Limitation on Liens . . . . . . . . . . . . . . . . 49 8.02 Disposition of Assets . . . . . . . . . . . . . . . 51 8.03 Consolidations and Mergers . . . . . . . . . . . . . 52 8.04 Loans and Investments . . . . . . . . . . . . . . . 52 8.05 Limitation on Indebtedness . . . . . . . . . . . . . 53 8.06 Transactions with Affiliates . . . . . . . . . . . . 54 8.07 Use of Proceeds . . . . . . . . . . . . . . . . . . 54 8.08 Contingent Obligations . . . . . . . . . . . . . . . 55 8.09 [Intentionally omitted.] . . . . . . . . . . . . . . 55 8.10 Restricted Payments . . . . . . . . . . . . . . . . 55 8.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . 55 8.12 Change in Business . . . . . . . . . . . . . . . . . 56 8.13 Change in Fiscal Year . . . . . . . . . . . . . . . 56 8.14 [Intentionally omitted.] . . . . . . . . . . . . . . 56 8.15 Minimum Consolidated Net Worth . . . . . . . . . . . 56 8.16 Maximum Leverage Ratio . . . . . . . . . . . . . . . 56 8.17 Minimum Fixed Charge Coverage Ratio . . . . . . . . 56 ARTICLE IX EVENTS OF DEFAULT . . . . . . . . 57 9.01 Event of Default . . . . . . . . . . . . . . . . . . 57 (a) Non-Payment . . . . . . . . . . . . . . . . 57 (b) Representation or Warranty . . . . . . . . . 57 (c) Specific Defaults . . . . . . . . . . . . . 57 (d) Other Defaults . . . . . . . . . . . . . . . 57 (e) Cross-Default . . . . . . . . . . . . . . . 57 (f) Insolvency; Voluntary Proceedings . . . . . 58 (g) Involuntary Proceedings . . . . . . . . . . 58 (h) ERISA . . . . . . . . . . . . . . . . . . . 58 (i) Monetary Judgments . . . . . . . . . . . . . 58 (j) Non-Monetary Judgments . . . . . . . . . . . 59 (k) Change of Control . . . . . . . . . . . . . 59 (l) Loss of Licenses . . . . . . . . . . . . . . 59 (m) Adverse Change . . . . . . . . . . . . . . . 59 (n) Guarantor Defaults . . . . . . . . . . . . . 59 9.02 Remedies . . . . . . . . . . . . . . . . . . . . . . 59 9.03 Rights Not Exclusive . . . . . . . . . . . . . . . . 60 9.04 Certain Financial Covenant Defaults . . . . . . . . 60 ARTICLE X THE AGENT . . . . . . . . . . . . 60 10.01 Appointment and Authorization; "Agent" . . . . . . . 60 10.02 Delegation of Duties . . . . . . . . . . . . . . . . 61 10.03 Liability of Agent . . . . . . . . . . . . . . . . . 61 10.04 Reliance by Agent . . . . . . . . . . . . . . . . . 61 10.05 Notice of Default . . . . . . . . . . . . . . . . . 62 10.06 Credit Decision . . . . . . . . . . . . . . . . . . 62 10.07 Indemnification of Agent . . . . . . . . . . . . . . 63 10.08 Agent in Individual Capacity . . . . . . . . . . . . 63 10.09 Successor Agent . . . . . . . . . . . . . . . . . . 63 10.10 Withholding Tax . . . . . . . . . . . . . . . . . . 64 ARTICLE XI MISCELLANEOUS . . . . . . . . . . . 65 11.01 Amendments and Waivers . . . . . . . . . . . . . . . 65 11.02 Notices . . . . . . . . . . . . . . . . . . . . . . 66 11.03 No Waiver; Cumulative Remedies . . . . . . . . . . . 66 11.04 Costs and Expenses . . . . . . . . . . . . . . . . . 67 11.05 Indemnity . . . . . . . . . . . . . . . . . . . . . 67 (a) General Indemnity . . . . . . . . . . . . . 67 (b) Environmental Indemnity . . . . . . . . . . 68 (c) Survival; Defense . . . . . . . . . . . . . 68 (d) Existing Indemnification Rights . . . . . . 68 11.06 Payments Set Aside . . . . . . . . . . . . . . . . . 68 11.07 Successors and Assigns . . . . . . . . . . . . . . . 69 11.08 Assignments, Participations, etc. . . . . . . . . . 69 11.09 Confidentiality . . . . . . . . . . . . . . . . . . 70 11.10 Set-off. . . . . . . . . . . . . . . . . . . . . . . 71 11.11 [Intentionally Omitted] . . . . . . . . . . . . . . 71 11.12 Notification of Addresses, Lending Offices, etc. . . 71 11.13 Termination of the Facility A Commitment under Existing Facility . . . . . . . . . . . . . 71 11.14 Counterparts . . . . . . . . . . . . . . . . . . . . 72 11.15 Severability . . . . . . . . . . . . . . . . . . . . 72 11.16 No Third Parties Benefited . . . . . . . . . . . . . 72 11.17 Governing Law and Jurisdiction . . . . . . . . . . . 72 11.18 Waiver of Jury Trial . . . . . . . . . . . . . . . . 72 11.19 Guaranty . . . . . . . . . . . . . . . . . . . . . . 73 (a) Guaranty . . . . . . . . . . . . . . . . . . 73 (b) Separate Obligation . . . . . . . . . . . . 73 (c) Limitation of Guaranty . . . . . . . . . . . 74 (d) Liability of Guarantor . . . . . . . . . . . 74 (e) Consents of Guarantor . . . . . . . . . . . 75 (f) Guarantor's Waivers . . . . . . . . . . . . 76 (g) Financial Condition of Borrower . . . . . . 77 (h) Subrogation . . . . . . . . . . . . . . . . 77 (i) Subordination . . . . . . . . . . . . . . . 77 (j) Continuing Guaranty . . . . . . . . . . . . 78 (k) Reinstatement . . . . . . . . . . . . . . . 78 (l) Substantial Benefits . . . . . . . . . . . . 79 (m) Knowing and Explicit Waivers . . . . . . . . 79 11.20 Entire Agreement . . . . . . . . . . . . . . . . . . 80 SCHEDULES 2.01 Commitments 3.03 Existing Letters of Credit 6.05 Litigation 6.07 ERISA 6.11 Permitted Liabilities 6.12 Environmental Matters 6.16 Subsidiaries and Minority Interests 6.17 Insurance Matters 8.01(a) Permitted Liens 8.05(b) Permitted Indebtedness 8.08(c) Contingent Obligations 11.02 Lending Offices; Addresses for Notices EXHIBITS A Form of Notice of Borrowing B Form of Notice of Conversion/Continuation C Form of Compliance Certificate D Form of Legal Opinion of Companies Counsel E Form of Assignment and Acceptance F Form of Promissory Note CREDIT AGREEMENT ---------------- This CREDIT AGREEMENT is entered into as of October 31, 1996, by and among ESTERLINE TECHNOLOGIES CORPORATION, a Delaware corporation (hereinafter referred to as "Esterline"); the Subsidiaries of Esterline listed on the signature pages hereof (together with Esterline, collectively, the "Companies" and each individually, a "Company"); the several financial institutions party to this Agreement (collectively called the "Banks" and individually called a "Bank"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as the Issuing Bank (as defined below) and as agent for itself, the Banks and the Issuing Bank (in such capacity, the "Agent"). WHEREAS, each of the Companies (i) has requested the Banks to make available to it Loans (as hereinafter defined) on a committed revolving loan basis from time to time in an aggregate principal amount for all of the Companies not to exceed at any time outstanding the aggregate total of the Commitments (as hereinafter defined) as in effect from time to time, and (ii) has requested the Issuing Bank to issue Letters of Credit (as hereinafter defined) for its account in an aggregate amount for all of the Companies not to exceed at any time the L/C Commitment (as hereinafter defined). WHEREAS, the Banks have agreed severally to make available to the Companies a revolving credit facility and the Issuing Bank has agreed to issue the Letters of Credit, in each case upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS ----------- 1.01 Certain Defined Terms. The following terms have the following meanings: "Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests, membership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, (c) the power to elect, appoint, or cause the election or appointment of at least a majority of the members of the board of directors or similar governing body of such Person, or (d) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that any Company or its Subsidiary is the surviving entity. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, partnership interests, by contract, or otherwise. "Agent" means BofA in its capacity as agent for the Banks hereunder, and any successor agent arising under Section 10.09. "Agent-Related Persons" means BofA and any successor agent arising under Section 10.09, together with their respective Affiliates (including, in the case of BofA, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means the address for payments set forth on Schedule 11.02 or such other address as the Agent may from time to time specify. "Agreement" means this Credit Agreement. "Applicable Commitment Fee Percentage" means, on any date, the per annum percentage amount set forth below based on the ratio of Consolidated Funded Debt to EBITDA as set forth in Esterline's quarterly or annual financial statements most recently delivered to the Agent under Section 7.01: Consolidated Applicable Commitment Funded Debt to EBITDA Fee Percentage --------------------- --------------------- Greater than or equal to 0.3750% 2.50 to 1.00 Less than 2.50 to 1.00 but 0.2500% greater than or equal to 1.50 to 1.00 Less than 1.50 to 1.00 0.2000% The Applicable Commitment Fee Percentage will become effective two (2) Business Days after receipt by the Agent of the Compliance Certificate delivered pursuant to Section 7.02(a) in connection with the quarterly or annual financial statements most recently delivered to the Agent under Section 7.01. In the event that such Compliance Certificate is not timely delivered to the Agent when required under Section 7.02(a), the Applicable Commitment Fee Percentage will be 0.3750%, effective two (2) Business Days after the date such Compliance Certificate was due until two (2) Business Days after such Compliance Certificate is received by the Agent. The initial Applicable Commitment Fee Percentage, based upon Companies financial performance for the fiscal quarter ending April 30, 1996, is 0.2000%. "Applicable Margin" means, on any date: (i) with respect to each Base Rate Loan outstanding on such date, 0.00% per annum; and (ii) with respect to each Offshore Rate Loan outstanding on such date, the applicable margin (on a per annum basis) set forth below based on the ratio of Consolidated Funded Debt to EBITDA as set forth in Esterline's quarterly or annual financial statements most recently delivered to the Agent under Section 7.01: Consolidated Funded Debt to EBITDA Applicable Margin ---------------------------------- ----------------- Greater than or equal to 3.00 to 1.00 1.250% Less than 3.00 to 1.00 but greater than or 1.000% equal to 2.50 to 1.00 Less than 2.50 to 1.00 but greater than or 0.875% equal to 2.00 to 1.00 Less than 2.00 to 1.00 but greater than or 0.625% equal to 1.50 to 1.00 Less than 1.50 to 1.00 0.500% The Applicable Margin will become effective two (2) Business Days after receipt by the Agent of the Compliance Certificate delivered pursuant to Section 7.02(a) in connection with the quarterly or annual financial statements most recently delivered to the Agent under Section 7.01. In the event that such Compliance Certificate is not timely delivered to the Agent when required under Section 7.02(a), the Applicable Margin will be 1.250%, effective two (2) Business Days after the date such Compliance Certificate was due until two (2) Business Days after such Compliance Certificate is received by the Agent. The initial Applicable Margin with respect to Offshore Rate Loans, based upon Companies financial performance for the fiscal quarter ending April 30, 1996, is 0.500%. "Arranger" means BA Securities, Inc., a Delaware corporation. "Assignee" has the meaning specified in Section 11.08(a). "Attorney Costs" means and includes all fees and disbursements of any law firm or other external counsel, the allocated cost of internal legal services and all disbursements of internal counsel. "Bank" has the meaning specified in the introductory clause hereto. References to the "Banks" shall include the Issuing Bank in its capacity as such unless the context otherwise requires. For purposes of clarification only, to the extent that the Issuing Bank may have any rights or obligations in addition to those of the Banks due to its status as Issuing Bank, its status as such will be specifically referenced. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. SECTION101, et seq.). "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the most recently announced Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "BofA" means Bank of America National Trust and Savings Association, a national banking association. "Borrowing" means a borrowing hereunder consisting of Loans of the same Type made to any Company on the same day by the Banks under Article II, and may be a Borrowing or an L/C Borrowing and, other than in the case of Base Rate Loans and L/C Borrowings, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.03. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City or San Francisco are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Cash Collateralize" means to pledge and deposit with or deliver to the Agent, for the benefit of the Agent, the Issuing Bank and the Banks, as collateral for the L/C Obligations, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Agent and the Issuing Bank (which documents are hereby consented to by the Banks). Derivatives of such term shall have corresponding meaning. "Change of Control" means the occurrence of either of the following: (a) any "person" or "group" (as such terms are used in subsections 13(d) and 14(d) of the Exchange Act and the regulations thereunder), is or becomes the "beneficial owner" (as such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 30% or more of the then outstanding voting capital stock of Esterline, or (b) the Continuing Directors shall cease to constitute at least a majority of the directors constituting the board of directors of Esterline. "Closing Date" means the date on which all conditions precedent set forth in Section 5.01 are satisfied, made conditions subsequent or waived by all Banks. "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder. "Commitment," as to each Bank, has the meaning specified in Section 2.01. "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Consolidated Funded Debt" means all Funded Debt of Esterline and its Subsidiaries, determined on a consolidated basis eliminating intercompany items. "Consolidated Net Income" and "Consolidated Net Loss" mean, respectively, for any period, the aggregate net income or loss for such period of Esterline and its Subsidiaries on a consolidated basis. "Consolidated Net Worth" means, as of any date of determination, Consolidated Total Assets minus Consolidated Total Liabilities. "Consolidated Total Assets" means, as of any date of determination, the total assets of Esterline and its Subsidiaries on a consolidated basis. "Consolidated Total Liabilities" means, as of any date of determination, the total liabilities of Esterline and its Subsidiaries on a consolidated basis. "Contingent Obligation" means, as to any Person, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, (a) with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; (c) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (d) in respect of any Swap Contract. The amount of any Contingent Obligation shall, in the case of Guaranty Obligations, be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof, and in the case of other Contingent Obligations other than in respect of Swap Contracts, shall be equal to the maximum reasonably anticipated liability in respect thereof and, in the case of Contingent Obligations in respect of Swap Contracts, shall be equal to the Swap Termination Value. "Continuing Directors" means, as of any date, the collective reference to all members of the board of directors of Esterline who assumed office after such date and whose appointment or nomination for election by Esterline's shareholders was approved by a vote of at least 50% of the Continuing Directors in office immediately prior to such appointment or nomination. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Conversion/Continuation Date" means any date on which, under Section 2.04, any Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Credit Extension" means and includes (a) the making of any Loans hereunder, and (b) the Issuance of any Letters of Credit hereunder (including the Existing Letters of Credit). "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Dollars," "dollars" and "$" each mean lawful money of the United States. "EBIT" means, for any period, Consolidated Net Income or Consolidated Net Loss, as the case may be, for such period, plus the sum of (a) interest expense, and (b) income tax expense, which were deductible in determining Consolidated Net Income or Consolidated Net Loss of Esterline and its Subsidiaries on a consolidated basis for such period. "EBITAR" means, for any period, EBIT for such period, plus the sum of (a) amortization expense, and (b) Rental Expense, which were deductible in determining Consolidated Net Income or Consolidated Net Loss of Esterline and its Subsidiaries on a consolidated basis for such period. "EBITDA" means, for any period, EBIT for such period, plus the sum of (a) depreciation expense, (b) amortization expense and (c) noncash items, which were deductible in determining Consolidated Net Income or Consolidated Net Loss of Esterline and its Subsidiaries on a consolidated basis for such period. "Effective Amount" means (i) with respect to any Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any Borrowings and prepayments or repayments occurring on such date; and (ii) with respect to any outstanding L/C Obligations on any date, the amount of such L/C Obligations on such date after giving effect to any Issuances of Letters of Credit occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements of outstanding unpaid drawings under any Letters of Credit or any reductions in the maximum amount available for drawing under Letters of Credit taking effect on such date. "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000, (ii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States or the Cayman Islands; (iii) a Person that is primarily engaged in the business of commercial banking and that is (A) a Subsidiary of a Bank, (B) a Subsidiary of a Person of which a Bank is a Subsidiary, or (C) a Person of which a Bank is a Subsidiary. "Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility of any of the Companies or their Subsidiaries for violation of any Environmental Law, or for release or injury to the environment. "Environmental Laws" means all federal, state, local or foreign laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters. "ERISA" means the Employee Retirement Income Security Act of 1974, and regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with any Company within the meaning of subsection 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by any Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by any Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon any Company or any ERISA Affiliate. "Eurodollar Reserve Percentage" has the meaning specified in the definition of "Offshore Rate." "Event of Default" means any of the events or circumstances specified in Section 9.01. "Exchange Act" means the Securities Exchange Act of 1934, and regulations promulgated thereunder. "Existing Facility" means the Amended and Restated Credit Agreement dated and effective as of September 18, 1989 among Esterline and certain of its Subsidiaries, BofA as successor by merger to Continental Bank, N.A. as "agent" and the several financial institutions party thereto, as amended from time to time in accordance with its terms. "Existing Letters of Credit" means the letters of credit described in Schedule 3.03. "FDIC" means the Federal Deposit Insurance Corporation, and any Governmental Authority succeeding to any of its principal functions. "Federal Funds Rate" means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Fee Letter" has the meaning specified in Section 2.10(a). "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "Funded Debt" of any Person means, as of the end of each fiscal quarter of such Person, (a) all Indebtedness of such Person (including with respect to any Loans hereunder) for borrowed money; (b) all noncontingent reimbursement or payment obligations of such Person with respect to Surety Instruments; (c) all obligations with respect to capital leases; (d) the current portion of all obligations of such Person arising with respect to preferred stock that is mandatorily redeemable by such Person; (e) all indebtedness referred to in clauses (a) through (d) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (f) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (d). "Further Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges (including, without limitation, net income taxes and franchise taxes), and all liabilities with respect thereto, imposed by any jurisdiction on account of amounts payable or paid pursuant to Section 4.01. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances and consistently applied. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guarantor" means each of the Companies in its capacity as a "guarantor" under Section 11.19 of this Agreement or under any separate agreement executed by it pursuant to which it guarantees the Obligations. "Guaranteed Obligations" has the meaning specified in Section 11.19. "Guaranty Obligation" has the meaning specified in the definition of "Contingent Obligation." "Honor Date" has the meaning specified in Section 3.03(c). "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all noncontingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all obligations with respect to capital leases; (g) all indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (h) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above. For all purposes of this Agreement, the Indebtedness of any Person shall include all recourse Indebtedness of any partnership or joint venture or limited liability company in which such Person is a general partner or a joint venturer or a member. "Indemnified Liabilities" has the meaning specified in Section 11.05. "Indemnified Person" has the meaning specified in Section 11.05. "Independent Auditor" has the meaning specified in Section 7.01(a). "Insolvency Proceeding" means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; in either event undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Interest Payment Date" means, as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter and each date such Loan is converted into another Type of Loan, provided, however , that if any Interest Period for an Offshore Rate Loan exceeds three months, the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. "Interest Period" means, as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which a Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter as selected by a Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period pertaining to an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period for any Loan shall extend beyond October 31, 2000. "Investments" has the meaning specified in Section 8.04. "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. "Issuance Date" has the meaning specified in Section 3.01(a). "Issue" means, with respect to any Letter of Credit, to incorporate the Existing Letters of Credit into this Agreement, or to issue or to extend the expiry of, or to renew or increase the amount of, such Letter of Credit; and the terms "Issued," "Issuing" and "Issuance" have corresponding meanings. "Issuing Bank" means BofA in its capacity as issuer of one or more Letters of Credit hereunder, together with any replacement letter of credit issuer arising under Section 10.01(b) or Section 10.09, and any other Bank which, if required for legal or credit reasons, is willing to issue letters of credit hereunder. "Joint Venture" means a single-purpose corporation, partnership, limited liability company, joint venture or other similar legal arrangement (whether created by contract or conducted through a separate legal entity) now or hereafter formed by any Company or any of its Subsidiaries with another Person in order to conduct a common venture or enterprise with such Person. "L/C Advance" means each Bank's participation in any L/C Borrowing in accordance with its Pro Rata Share. "L/C Amendment Application" means an application form for amendment of outstanding standby or commercial documentary letters of credit as shall at any time be in use at the Issuing Bank, as the Issuing Bank shall request. "L/C Application" means an application form for issuances of standby or commercial documentary letters of credit as shall at any time be in use at the Issuing Bank, as the Issuing Bank shall request. "L/C Borrower" means any Company for whose account a Letter of Credit is Issued pursuant to Article III. "L/C Borrowing" means an extension of credit resulting from a drawing under any Letter of Credit which shall not have been reimbursed on the date when made nor converted into a Borrowing under Section 3.03(c). "L/C Commitment" means the commitment of the Issuing Bank to Issue, and the commitment of the Banks severally to participate in, Letters of Credit (including the Existing Letters of Credit) from time to time Issued or outstanding under Article III, in an aggregate amount not to exceed on any date the amount of the aggregate Commitments less the Effective Amount of all Loans outstanding on such date. The L/C Commitment is a part of the combined Commitments, rather than a separate, independent commitment. "L/C Obligations" means at any time the sum of (a) the aggregate undrawn amount of all Letters of Credit then outstanding, plus (b) the amount of all unreimbursed drawings under all Letters of Credit, including all outstanding L/C Borrowings. "L/C-Related Documents" means the Letters of Credit, the L/C Applications, the L/C Amendment Applications and any other document relating to any Letter of Credit, including any of the Issuing Bank's standard form documents for letter of credit issuances. "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office," as the case may be, on Schedule 11.02, or such other office or offices as such Bank may from time to time notify the Companies and the Agent. "Letters of Credit" means the Existing Letters of Credit and any letters of credit (whether standby letters of credit or commercial documentary letters of credit) Issued by the Issuing Bank pursuant to Article III. "Leverage Ratio" means, as of any date of determination, the ratio of (a) Consolidated Funded Debt to (b) the sum of Consolidated Funded Debt plus Consolidated Net Worth. "Lien" means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preferential arrangement of any kind or nature whatsoever in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the UCC or any comparable law) and any contingent or other agreement to provide any of the foregoing, but not including the interest of a lessor under an operating lease. "Loan" means an extension of credit by a Bank to any Company under Article II or Article III, and may be a Base Rate Loan, an Offshore Rate Loan or an L/C Advance (each, a " Type" of Loan). "Loan Documents" means this Agreement, any Notes, the Fee Letters, the L/C Related Documents and all other documents delivered to the Agent or any Bank in connection herewith. "Majority Banks" means at any time Banks then holding at least 66-2/3% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, Banks then having at least 66-2/3% of the Commitments. "Margin Stock" means "margin stock" as such term is defined in Regulation G, T, U or X of the FRB. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) of Esterline (considering all of its assets), or of the Companies and their Subsidiaries taken as a whole, which would be expected to result in a material impairment of the ability of Esterline (considering all of its assets), or of Esterline and the other Companies taken as a whole, to perform under any Loan Document and to avoid any Default or Event of Default; or (b) a material adverse effect upon the legality, validity, binding effect or enforceability against any Company or any Guarantor of any Loan Document. "Multiemployer Plan" means a "multiple employer plan" or a "multiemployer plan," within the meaning of Sections 4064(a) and 4001(a)(3) of ERISA, to which any Company or any ERISA Affiliate makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions. "Note" means a promissory note executed by the Companies in favor of a Bank pursuant to Section 2.02(b), in substantially the form of Exhibit F. "Notice of Borrowing" means a notice in substantially the form of Exhibit A. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B. "Obligations" means all advances, debts, liabilities, obligations, covenants and duties and other Indebtedness arising under any Loan Document owing by any Company to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "Offshore Rate" means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward to the next 1/16th of 1%) determined by the Agent as follows: Offshore Rate = IBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Reserve Percentage" means for any day for any Interest Period the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to any Bank) under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"); and "IBOR" means the rate of interest per annum determined by the Agent as the rate at which dollar deposits in the approximate amount of BofA's Offshore Rate Loan for such Interest Period would be offered by BofA's Grand Cayman Branch, Grand Cayman B.W.I. (or such other office as may be designated for such purpose by BofA), to major banks in the offshore dollar interbank market at their request at approximately 11:00 a.m. (New York City time) two Business Days prior to the commencement of such Interest Period. The Offshore Rate shall be adjusted automatically as to all Offshore Rate Loans then outstanding as of the effective date of any change in the Eurodollar Reserve Percentage. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation, and for any partnership, the partnership agreement, any other agreements or instruments relating to the rights or the partners of such partnership or limiting or authorizing the activities of such partnership, and all applicable resolutions of such partnership. "Other Taxes" means any present or future stamp, court or documentary taxes or any other excise or property taxes (except for the present excise tax imposed by the State of Washington know as the business and occupations tax to the extent that it is imposed upon the gross receipts of any Bank), charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, this Agreement or any other Loan Documents. "Participant" has the meaning specified in Section 11.08(d). "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which any Company or any ERISA Affiliate sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years. "Permitted Liens" has the meaning specified in Section 8.01. "Permitted Swap Obligations" means all obligations (contingent or otherwise) of any Company or any Subsidiary existing or arising under Swap Contracts, provided that each of the following criteria is satisfied: (a) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments or assets held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person in conjunction with a securities repurchase program not otherwise prohibited hereunder, and not for purposes of speculation or taking a "market view;" and (b) such Swap Contracts do not contain (i) any provision ("walk-away" provision) exonerating the nondefaulting party from its obligation to make payments on outstanding transactions to the defaulting party, or (ii) any provision creating or permitting the declaration of an event of default, termination event or similar event upon the occurrence of an Event of Default hereunder (other than an Event of Default under Section 9.01(a). "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which any Company sponsors or maintains or to which any Company makes, is making, or is obligated to make contributions and includes any Pension Plan. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Rental Expense" means, with respect to any Person, for any period, the aggregate amount of all rental and other obligations (other than rentals of automobiles or equipment of one month or less which are not renewed) required to be paid during such period by such Person as lessee under all leases of real or personal property, including all operating leases and capital leases, but excluding any amount required to be paid by the lessee (whether or not therein designated as rent or additional rent) on account of maintenance and repairs, insurance, taxes, assessments, water rates and similar charges, provided, that, if at the date of determination, any such rental or other obligations (or portion thereof) are contingent or not otherwise definitely determinable by the terms of the related lease, the amount of such obligations (i) shall be assumed to be equal to the amount of such obligations for the period of the 12 consecutive calendar months immediately preceding the date of determination or (ii) if the related lease was not in effect during such preceding 12-month period, shall be the amount estimated by a Responsible Officer on a reasonable basis and in good faith. "Reportable Event" means, any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means, with respect to any Company, the chief executive officer or the president of such Company, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer or the treasurer of such Company, or any other officer having substantially the same authority and responsibility. "Revolving Termination Date" means the earlier to occur of: (a) October 31, 2000; and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of a Company. "Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "Swap Contract" means any agreement, whether or not in writing, relating to any transaction that is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap or option, bond, note or bill option, interest rate option, forward foreign exchange transaction, cap, collar or floor transaction, currency swap, cross-currency rate swap, swaption, currency option or any other, similar transaction (including any option to enter into any of the foregoing) or any combination of the foregoing, and, unless the context otherwise clearly requires, any master agreement relating to or governing any or all of the foregoing. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a) the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include any Bank). "Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, respectively, taxes imposed on or measured by its net income or gross receipts by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent, as the case may be, is organized or maintains a lending office. "Type" has the meaning specified in the definition of "Loan." "Unfunded Pension Liability" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." each means the United States of America. "Wholly Owned Subsidiary" means any corporation in which (other than directors' qualifying shares required by law) 100% of the capital stock of each class having ordinary voting power, and 100% of the capital stock of every other class, in each case, at the time as of which any determination is being made, is owned, beneficially and of record, by any Company, or by one or more of the other Wholly Owned Subsidiaries, or both. 1.02 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof," "herein," "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding," and the word "through" means "to and including." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Unless otherwise expressly provided, any reference to any action of the Agent or the Banks by way of consent, approval or waiver shall be deemed modified by the phrase "in its/their sole discretion." (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Companies, the Banks, the Issuing Bank and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks, the Issuing Bank or the Agent merely because of the Agent's or Banks' or the Issuing Bank's involvement in their preparation. 1.03 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP; provided, that if any change in GAAP results in a change in the operation or calculation of any of Sections 8.15, 8.16, or 8.17 or any of the defined terms used therein, the Companies shall promptly notify the Agent thereof and, upon notice to Esterline by the Agent on behalf of the Majority Banks, compliance with any such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn upon instruction from the Majority Banks or such covenant is amended in a manner satisfactory to the Companies and the Majority Banks. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Companies. ARTICLE II THE CREDITS ----------- 2.01 The Revolving Credit. Each Bank severally agrees, on the terms and conditions set forth herein, to make loans to the Companies from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth on Schedule 2.01 (such amount as the same may be reduced under Section 2.05 or as a result of one or more assignments under Section 11.08, the Bank's "Commitment"); provided, however, that, after giving effect to any Credit Extension, the Effective Amount of all outstanding Loans and L/C Obligations together shall not at any time exceed the combined Commitments. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.01, prepay under Section 2.06 and reborrow under this Section 2.01. Each of the Companies understands and agrees that the commitments of the "Banks" under the Existing Facility to make advances under the Existing Facility terminate, without necessity of further act of the parties, upon execution of this Agreement by the Companies. Each of the Companies confirms and acknowledges its obligations to pay all amounts due under the Existing Facility, and each covenants and agrees that the proceeds of the initial borrowings under this Agreement shall be used to pay all principal and accrued interest (if any) and other amounts due under the Existing Facility. 2.02 Loan Accounts. (a) The Loans made by each Bank and the Letters of Credit Issued by the Issuing Bank shall be evidenced by one or more accounts or records maintained by such Bank or the Issuing Bank, as the case may be, in the ordinary course of business. The accounts or records maintained by the Agent, each Bank and the Issuing Bank, shall be conclusive absent manifest error of the amount of the Loans made by the Banks to any Company and the Letters of Credit Issued for the account of any Company, and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of any Company hereunder to pay any amount owing with respect to the Loans or any Letter of Credit. (b) Upon the request of any Bank made through the Agent, the Loans made by such Bank may be evidenced by one or more Notes, instead of or in addition to loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by any Company with respect thereto. Each such Bank is irrevocably authorized by the Companies to endorse its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of any Company hereunder or under any such Note to such Bank. 2.03 Procedure for Borrowing. (a) Each Borrowing shall be made upon any Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 9:00 a.m. (San Francisco time) (i) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans; and (ii) one Business Day prior to the requested Borrowing Date, in the case of Base Rate Loans, specifying: (A) the amount of the Borrowing, which shall be in an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising the Borrowing; and (D) with respect to Offshore Rate Loans, the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be three months. provided, however, that with respect to any Borrowing to be made on the Closing Date, the Notice of Borrowing shall be delivered to the Agent not later than 11:00 a.m. (San Francisco time) at least one Business Day before the Closing Date and such Borrowing will consist of Base Rate Loans only; and further provided that if so requested by the Agent, all Borrowings during the first 60 days following the Closing Date shall have the same Interest Period and shall be Base Rate Loans or Offshore Rate Loans for Interest Periods no longer than one month. (b) The Agent will promptly notify each Bank of its receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing. (c) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Companies at the Agent's Payment Office by 11:00 a.m. (San Francisco time) on the Borrowing Date requested by the Companies in funds immediately available to the Agent. The proceeds of all such Loans will then be made available to the Companies by the Agent at such office by crediting the account of the Company requesting such Borrowing on the books of BofA with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent, or if requested by such Company, by wire transfer in accordance with written instructions provided to the Agent by the Company of such funds as received by the Agent, less customary fees for such wire transfer. (d) After giving effect to any Borrowing, unless the Agent shall otherwise consent, there may not be more than five (5) different Interest Periods in effect. 2.04 Conversion and Continuation Elections. (a) Any Company may, upon irrevocable written notice to the Agent in accordance with Section 2.04(b): (i) elect to convert, as of any Business Day, any Base Rate Loans (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Offshore Rate Loans; (ii) elect to convert, as of the last day of the applicable Interest Period, any Offshore Rate Loans expiring on such day (or any part thereof in an amount not less than $1,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Base Rate Loans; or (iii) elect to continue, as of the last day of the applicable Interest Period, any Offshore Rate Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $5,000,000, such Offshore Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of any Company to continue such Loans as, and convert such Loans into, Offshore Rate Loans shall terminate. (b) The Company shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 9:00 a.m. (San Francisco time) at least (i) three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans; and (ii) one Business Day in advance of the Conversion/ Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or continued; (C) the Type of Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore Rate Loans, the Companies have failed to select timely a new Interest Period to be applicable to such Offshore Rate Loans, as the case may be, or if any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period, and all conditions to such conversion shall be deemed to have been satisfied. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by any Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Majority Banks otherwise consent, during the existence of a Default or Event of Default, no Company may elect to have a Loan converted into or continued as an Offshore Rate Loan. (f) After giving effect to any conversion or continuation of Loans, unless the Agent shall otherwise consent, there may not be more than five (5) different Interest Periods in effect. 2.05 Voluntary Termination or Reduction of Commitments. Any Company may, upon five Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then-outstanding principal amount of the Loans would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section 2.05, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Bank according to its Pro Rata Share. All accrued commitment fees to the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.06 Optional Prepayments. Subject to Section 4.04, any Company may, at any time or from time to time, upon irrevocable notice received by the Agent, in the case of Offshore Rate Loans, not less than three Business Days prior to the requested prepayment date, and, in the case of Base Rate Loans, not less than one Business Day prior to the requested prepayment date, ratably prepay Loans in whole or in part, in minimum amounts of $5,000,000 or any multiple of $1,000,000 in excess thereof. Such notice of prepayment shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid. The Agent will promptly notify each Bank of its receipt of any such notice, and of such Bank's Pro Rata Share of such prepayment. If such notice is given by any Company, such Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.04. 2.07 Cash Collateralization; Mandatory Prepayments of Loans. If on any date the Effective Amount of L/C Obligations exceeds the L/C Commitment, the Companies shall Cash Collateralize on such date the outstanding Letters of Credit in an amount equal to the excess of the maximum amount then available to be drawn under the Letters of Credit over the L/C Commitment. Subject to Section 4.04, if on any date after giving effect to any Cash Collateralization made on such date pursuant to the preceding sentence, the Effective Amount of all Loans and L/C Obligations together exceeds the combined Commitments, the Company shall immediately, and without notice or demand, prepay the outstanding principal amount of the Loans and L/C Advances by an amount equal to the applicable excess. 2.08 Repayment. The Companies shall repay to the Banks on the Revolving Termination Date the aggregate principal amount of all Loans outstanding on such date. 2.09 Interest. (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Offshore Rate or the Base Rate, as the case may be (and subject to a Company's right to convert to other Types of Loans under Section 2.04), plus the Applicable Margin. (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 2.06 or 2.07 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Majority Banks. (c) Notwithstanding subsection (a) of this Section, during the existence of any Event of Default under Section 9.01(a), or 9.01(e), 9.01(k), 9.01(m), or under 9.01(c) as a consequence of the failure of the any of the Companies to observe or perform or cause to be observed or performed any term, covenant or agreement contained in Section 7.11 or Article VIII, or after acceleration, the Company shall pay interest (after as well as before any entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Obligations, at a rate per annum which is determined by adding two and one-half percent (2.50%) per annum to the Applicable Margin then in effect for such Loans and, in the case of Obligations not subject to an Applicable Margin, at a rate per annum equal to the Base Rate plus two and one- half percent (2.50%); provided, however, that, on and after the expiration of any Interest Period applicable to any Offshore Rate Loan outstanding on the date of occurrence of such Event of Default or acceleration, the principal amount of such Loan shall, during the continuation of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Base Rate plus two and one-half percent (2.50%). All such interest shall be payable upon demand. (d) Anything herein to the contrary notwithstanding, the obligations of any Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Companies shall pay such Bank interest at the highest rate permitted by applicable law. 2.10 Fees. (a) Agency Fees. The Companies shall pay an agency fee to the Agent for the Agent's own account, as required by the letter agreement between the Companies and the Agent dated as of October 31, 1996 (the "Fee Letter"). (b) Commitment Fees. The Companies shall pay to the Agent for the account of each Bank a commitment fee on the average daily unused portion of such Bank's Commitment, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Agent, equal to such unused portion as so calculated multiplied by the Applicable Commitment Fee Percentage for such period. Such commitment fee shall accrue from the Closing Date to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each quarter commencing on October 31, 1996 through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.05, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The commitment fees provided in this Section shall accrue at all times after the Closing Date, including at any time during which one or more conditions in Article V are not met. 2.11 Computation of Fees and Interest. (a) All computations of interest for Base Rate Loans when the Base Rate is determined by BofA's "reference rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate by the Agent shall be conclusive and binding on the Companies and the Banks in the absence of manifest error. 2.12 Payments by the Companies. (a) All payments to be made by the Companies shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Companies shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and shall be made in dollars and in immediately available funds, no later than 11:00 a.m. (San Francisco time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than 11:00 a.m. (San Francisco time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Agent receives notice from a Company prior to the date on which any payment is due to the Banks that the Companies will not make such payment in full as and when required, the Agent may assume that the Companies have made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Companies have not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Bank until the date repaid. 2.13 Payments by the Banks to the Agent. (a) Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day prior to the date of such Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Companies shall pay such amount to the Agent for the 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 Loans comprising such Borrowing. (b) The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. 2.14 Sharing of Payments, etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans or L/C Advances made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Pro Rata Share (or other share contemplated hereunder), such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Loans or L/C Advances made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. Each Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 11.10) with respect to such participation as fully as if such Bank were the direct creditor of each Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. ARTICLE III THE LETTERS OF CREDIT --------------------- 3.01 The Letter of Credit Subfacility. (a) On the terms and conditions set forth herein (i) the Issuing Bank agrees, (A) from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date to issue Letters of Credit for the account of an L/C Borrower, and to amend or renew Letters of Credit previously issued by it, in accordance with Sections 3.02(c) and 3.02(d), and (B) to honor drafts under the Letters of Credit; and (ii) the Banks severally agree to participate in Letters of Credit Issued for the account of each L/C Borrower; provided, that the Issuing Bank shall not be obligated to Issue, and no Bank shall be obligated to participate in, any Letter of Credit if as of the date of and after giving effect to the Issuance of such Letter of Credit (the "Issuance Date") (1) the Effective Amount of all L/C Obligations and Loans together exceeds (or would exceed) the combined Commitments, or (2) the participation of any Bank in the Effective Amount of all L/C Obligations plus the Effective Amount of the Loans of such Bank exceeds (or would exceed) such Bank's Commitment. Within the foregoing limits, and subject to the other terms and conditions hereof, the L/C Borrowers' ability to obtain Letters of Credit shall be fully revolving, and, accordingly, each L/C Borrower may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit which have expired or which have been drawn upon and reimbursed. (b) The Issuing Bank is under no obligation to Issue any Letter of Credit if: (i) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the Issuing Bank from Issuing such Letter of Credit, or any Requirement of Law applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Bank shall prohibit, or request that the Issuing Bank refrain from, the Issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Bank with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Bank is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon the Issuing Bank any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which the Issuing Bank in good faith deems material to it; (ii) the Issuing Bank has received written notice from any Bank, the Agent or any Company, on or prior to the Business Day prior to the requested date of Issuance of such Letter of Credit, that one or more of the applicable conditions contained in Article V is not then satisfied; (iii) the expiry date of any requested Letter of Credit is (A) more than 360 days after the date of Issuance, or (B) after the Revolving Termination Date, unless all of the Banks have approved such expiry date in writing; (iv) the expiry date of any requested Letter of Credit is prior to the maturity date of any financial obligation to be supported by the requested Letter of Credit; (v) any requested Letter of Credit does not provide for drafts, or is not otherwise in form and substance acceptable to the Issuing Bank, or the Issuance of a Letter of Credit shall violate any applicable policies of the Issuing Bank; (vi) any standby Letter of Credit is for the purpose of supporting the issuance of any letter of credit by any other Person; (vii) such Letter of Credit is in a face amount less than $50,000 (other than the Existing Letters of Credit that are in a face amount less than $50,000 and any renewals thereof) or to be denominated in a currency other than Dollars; or (viii) the Issuing Bank is also the Agent and the Agent shall have for any reason ceased to be the Agent pursuant to Section 11.09, in which case any other Bank may, upon the request or with the consent of Esterline, act as Issuing Bank. 3.02 Issuance, Amendment and Renewal of Letters of Credit. (a) Each Letter of Credit shall be issued upon the irrevocable written request of the L/C Borrower received by the Issuing Bank (with a copy sent by the L/C Borrower to the Agent) at least four days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of issuance. Each such request for issuance of a Letter of Credit shall be by facsimile, confirmed immediately in an original writing, in the form of an L/C Application, and shall specify in form and detail satisfactory to the Issuing Bank: (i) the proposed date of issuance of the Letter of Credit (which shall be a Business Day); (ii) the face amount of the Letter of Credit; (iii) the expiry date of the Letter of Credit; (iv) the name and address of the beneficiary thereof; (v) the documents to be presented by the beneficiary of the Letter of Credit in case of any drawing thereunder; (vi) the full text of any certificate to be presented by the beneficiary in case of any drawing thereunder; and (vii) such other matters as the Issuing Bank may require. (b) At least two Business Days prior to the Issuance of any Letter of Credit, the Issuing Bank will confirm with the Agent (by telephone or in writing) that the Agent has received a copy of the L/C Application or L/C Amendment Application from an L/C Borrower and, if not, the Issuing Bank will provide the Agent with a copy thereof. Unless the Issuing Bank has received notice on or before the Business Day immediately preceding the date the Issuing Bank is to issue a requested Letter of Credit from the Agent (A) directing the Issuing Bank not to issue such Letter of Credit because such issuance is not then permitted under Section 3.01(a) as a result of the limitations set forth in clauses (1) through (3) thereof or Section 3.01(b)(ii); or (B) that one or more conditions specified in Article V are not then satisfied; then, subject to the terms and conditions hereof, the Issuing Bank shall, on the requested date, issue a Letter of Credit for the account of such L/C Borrower in accordance with the Issuing Bank's usual and customary business practices. (c) From time to time while a Letter of Credit is outstanding and prior to the Revolving Termination Date, the Issuing Bank will, upon the written request of an L/C Borrower received by the Issuing Bank (with a copy sent by an L/C Borrower to the Agent) at least four (4) days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of amendment, amend any Letter of Credit issued by it. Each such request for amendment of a Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, made in the form of an L/C Amendment Application and shall specify in form and detail satisfactory to the Issuing Bank: (i) the Letter of Credit to be amended; (ii) the proposed date of amendment of the Letter of Credit (which shall be a Business Day); (iii) the nature of the proposed amendment; and (iv) such other matters as the Issuing Bank may require. The Issuing Bank shall be under no obligation to amend any Letter of Credit if: (A) the Issuing Bank would have no obligation at such time to issue such Letter of Credit in its amended form under the terms of this Agreement; or (B) the beneficiary of any such Letter of Credit does not accept the proposed amendment to the Letter of Credit. The Agent will promptly notify the Banks of the receipt by it of any L/C Application or L/C Amendment Application. (d) The Issuing Bank and the Banks agree that, while a Letter of Credit is outstanding and prior to the Revolving Termination Date, at the option of an L/C Borrower and upon the written request of an L/C Borrower received by the Issuing Bank (with a copy sent by an L/C Borrower to the Agent) at least five days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of notification of renewal, the Issuing Bank shall be entitled to authorize the automatic renewal of any Letter of Credit issued by it. Each such request for renewal of a Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, in the form of an L/C Amendment Application, and shall specify in form and detail satisfactory to the Issuing Bank: (i) the Letter of Credit to be renewed; (ii) the proposed date of notification of renewal of the Letter of Credit (which shall be a Business Day); (iii) the revised expiry date of the Letter of Credit; and (iv) such other matters as the Issuing Bank may require. The Issuing Bank shall be under no obligation to renew any Letter of Credit if: (A) the Issuing Bank would have no obligation at such time to issue or amend such Letter of Credit in its renewed form under the terms of this Agreement; or (B) the beneficiary of any such Letter of Credit does not accept the proposed renewal of the Letter of Credit. If any outstanding Letter of Credit shall provide that it shall be automatically renewed unless the beneficiary thereof receives notice from the Issuing Bank that such Letter of Credit shall not be renewed, and if at the time of renewal the Issuing Bank would be entitled to authorize the automatic renewal of such Letter of Credit in accordance with this Section 3.02(d) upon the request of an L/C Borrower but the Issuing Bank shall not have received any L/C Amendment Application from such L/C Borrower with respect to such renewal or other written direction by such L/C Borrower with respect thereto, the Issuing Bank shall nonetheless be permitted to allow such Letter of Credit to renew, and the Companies and the Banks hereby authorize such renewal, and, accordingly, the Issuing Bank shall be deemed to have received an L/C Amendment Application from such L/C Borrower requesting such renewal. (e) The Issuing Bank may, at its election (or as required by the Agent at the direction of the Majority Banks), deliver any notices of termination or other communications to any Letter of Credit beneficiary or transferee, and take any other action as necessary or appropriate, at any time and from time to time, in order to cause the expiry date of such Letter of Credit to be a date not later than the Revolving Termination Date. (f) This Agreement shall control in the event of any conflict with any L/C-Related Document (other than any Letter of Credit). (g) The Issuing Bank will also deliver to the Agent, concurrently or promptly following its delivery of a Letter of Credit, or amendment to or renewal of a Letter of Credit, to an advising bank or a beneficiary, a true and complete copy of each such Letter of Credit or amendment to or renewal of a Letter of Credit. 3.03 Existing Letters of Credit; Risk Participations, Drawings and Reimbursements. (a) On and after the Closing Date, the Existing Letters of Credit shall be deemed for all purposes, including for purposes of the fees to be collected pursuant to Sections 3.08(a) and 3.08(c), and reimbursement of costs and expenses to the extent provided herein, Letters of Credit outstanding under this Agreement and entitled to the benefits of this Agreement and the other Loan Documents, and shall be governed by the applications and agreements pertaining thereto and by this Agreement. Each Bank acknowledges and agrees that the Existing Letters of Credit constitute Letters of Credit outstanding under this Agreement on and as of the Closing Date. Each Bank shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Issuing Bank on the Closing Date a participation in each such Letter of Credit and each drawing thereunder in an amount equal to the product of (i) such Bank's Pro Rata Share times (ii) the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. For purposes of Section 2.01 and Section 2.10(b), the Existing Letters of Credit shall be deemed to utilize pro rata the Commitment of each Bank. (b) Immediately upon the Issuance of each Letter of Credit in addition to those described in Section 3.03(a), each Bank shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Issuing Bank a participation in such Letter of Credit and each drawing thereunder in an amount equal to the product of (i) the Pro Rata Share of such Bank, times (ii) the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. For purposes of Section 2.01, each Issuance of a Letter of Credit shall be deemed to utilize the Commitment of each Bank by an amount equal to the amount of such participation. (c) In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, the Issuing Bank will promptly notify the Company. The Company shall reimburse the Issuing Bank prior to 10:00 a.m. (San Francisco time), on each date that any amount is paid by the Issuing Bank under any Letter of Credit (each such date, an "Honor Date"), in an amount equal to the amount so paid by the Issuing Bank. In the event any Company fails to reimburse the Issuing Bank for the full amount of any drawing under any Letter of Credit by 10:00 a.m. (San Francisco time) on the Honor Date, the Issuing Bank will promptly notify the Agent and the Agent will promptly notify each Bank thereof, and the Companies shall be deemed to have requested that Base Rate Loans be made by each of the Banks to be disbursed on the Honor Date under such Letter of Credit, subject to the amount of the unutilized portion of the aggregate Commitments and subject to the conditions set forth in Section 5.02. Any notice given by the Issuing Bank or the Agent pursuant to this subsection 3.03(c) may be oral if immediately confirmed in writing (including by facsimile); provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (d) Each Bank shall upon any notice pursuant to Section 3.03(c) make available to the Agent for the account of the Issuing Bank an amount in Dollars and in immediately available funds equal to its Pro Rata Share of the amount of the drawing, whereupon the participating Banks shall (subject to Section 3.03(e)) each be deemed to have made a Loan consisting of a Base Rate Loan to the Companies in that amount. If any Bank so notified fails to make available to the Agent for the account of the Issuing Bank the amount of such Bank's Pro Rata Share of the amount of the drawing by no later than 2:00 p.m. (San Francisco time) on the Honor Date, then interest shall accrue on such Bank's obligation to make such payment, from the Honor Date to the date such Bank makes such payment, at a rate per annum equal to the Federal Funds Rate in effect from time to time during such period. The Agent will promptly give notice of the occurrence of the Honor Date, but failure of the Agent to give any such notice on the Honor Date or in sufficient time to enable any Bank to effect such payment on such date shall not relieve such Bank from its obligations under this Section 3.03. (e) With respect to any unreimbursed drawing that is not converted into Loans consisting of Base Rate Loans to the Companies in whole or in part, because of the Company's failure to satisfy the conditions set forth in Section 5.02 or for any other reason, the Companies shall be deemed to have incurred from the Issuing Bank an L/C Borrowing in the amount of such drawing, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at a rate per annum equal to the Base Rate plus two and one-half percent (2.50%), and each Bank's payment to the Issuing Bank pursuant to Section 3.03(d) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Bank in satisfaction of its participation obligation under this Section 3.03. (f) Each Bank's obligation in accordance with this Agreement to make the Loans or L/C Advances, as contemplated by this Section 3.03, as a result of a drawing under a Letter of Credit, shall be absolute and unconditional and without recourse to the Issuing Bank and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against the Issuing Bank, any Company, any guarantor or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default, an Event of Default or a Material Adverse Effect; or (iii) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided, however, that without limiting any Bank's obligation to make L/C Advances hereunder, each Bank's obligation to make Loans under this Section 3.03 is subject to the conditions set forth in Section 5.02. 3.04 Repayment of Participations. (a) Upon (and only upon) receipt by the Agent for the account of the Issuing Bank of immediately available funds from any Company (i) in reimbursement of any payment made by the Issuing Bank under the Letter of Credit with respect to which any Bank has paid the Agent for the account of the Issuing Bank for such Bank's participation in the Letter of Credit pursuant to Section 3.03 or (ii) in payment of interest thereon, the Agent will pay to each Bank, in like funds as those received by the Agent for the account of the Issuing Bank, the amount of such Bank's Pro Rata Share of such funds, and the Issuing Bank shall receive and retain the amount of the Pro Rata Share of such funds of any Bank that did not so pay the Agent for the account of the Issuing Bank. (b) If the Agent or the Issuing Bank is required at any time to return to any Company, or to a trustee, receiver, liquidator, custodian, or any official in any Insolvency Proceeding, any portion of the payments made by any Company (or any other Person) to the Agent for the account of the Issuing Bank pursuant to Section 3.04(a) in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Bank shall, on demand of the Agent, forthwith return to the Agent or the Issuing Bank the amount of its Pro Rata Share of any amounts so returned by the Agent or the Issuing Bank plus interest thereon from the date such demand is made to the date such amounts are returned by such Bank to the Agent or the Issuing Bank, at a rate per annum equal to the Federal Funds Rate in effect from time to time. 3.05 Role of the Issuing Bank. (a) Each Bank and each L/C Borrower agree that, in paying any drawing under a Letter of Credit, the Issuing Bank shall not have any responsibility to obtain any document (other than any sight draft and certificates expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. (b) No Agent-Related Person nor any of the respective correspondents, participants or assignees of the Issuing Bank shall be liable to any Bank for: (i) any action taken or omitted in connection herewith at the request or with the approval of the Banks (including the Majority Banks, as applicable); (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any L/C-Related Document. (c) Each L/C Borrower jointly and severally hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude any L/C Borrower's pursuit of such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. No Agent- Related Person, nor any of the respective correspondents, participants or assignees of the Issuing Bank, shall be liable or responsible for any of the matters described in clauses (i) through (vii) of Section 3.06; provided, however, anything in such clauses to the contrary notwithstanding, that an L/C Borrower may have a claim against the Issuing Bank, and the Issuing Bank may be liable to an L/C Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by such L/C Borrower which such L/C Borrower proves were caused by the Issuing Bank's willful misconduct or gross negligence or the Issuing Bank's willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In furtherance and not in limitation of the foregoing: (i) the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary; and (ii) the Issuing Bank shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. 3.06 Obligations Absolute. The obligations of each L/C Borrower under this Agreement and any L/C-Related Document to reimburse the Issuing Bank for a drawing under a Letter of Credit, and to repay any L/C Borrowing and any drawing under a Letter of Credit converted into Loans, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement and each such other L/C-Related Document under all circumstances, including the following: (i) any lack of validity or enforceability of this Agreement, any L/C-Related Document or other Loan Document; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of an L/C Borrower in respect of any Letter of Credit or any other amendment or waiver of or any consent to departure from all or any of the L/C-Related Documents; (iii) the existence of any claim, set-off, defense or other right that an L/C Borrower may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the L/C-Related Documents or any unrelated transaction; (iv) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit; (v) any payment by the Issuing Bank under any Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of any Letter of Credit; or any payment made by the Issuing Bank under any Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of any Letter of Credit, including any arising in connection with any Insolvency Proceeding; (vi) any exchange, release or non perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the obligations of any L/C Borrower in respect of any Letter of Credit; (vii) any misapplication by the beneficiary of any Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, any L/C Borrower. 3.07 Cash Collateral Pledge. Upon (a) the request of the Agent, (i) if the Issuing Bank has honored any full or partial drawing request on any Letter of Credit and such drawing has resulted in an L/C Borrowing hereunder, or (ii) if, as of the Revolving Termination Date, any Letters of Credit may for any reason remain outstanding and partially or wholly undrawn, or (b) the occurrence of the circumstances described in Section 2.07 requiring any L/C Borrower to Cash Collateralize Letters of Credit, then, such L/C Borrower shall immediately Cash Collateralize or cause to be Cash Collateralized the L/C Obligations in an amount equal to such L/C Obligations. Such amount, when received by the Agent, shall be held by the Agent and maintained in blocked deposit accounts at BofA as Cash Collateral for reimbursement obligations of any and all of the L/C Borrowers in respect of the L/C Obligations and for the other Obligations. Each of the Companies and each of the L/C Borrowers hereby grant to the Agent, for the benefit of the Agent, the Issuing Bank and the Banks, a security interest in all such cash, deposit accounts and deposit account balances. After payment in full of all L/C Obligations and the expiry of all Letters of Credit, the proceeds of any Cash Collateral shall be used to satisfy any other Obligations then outstanding. Each of the L/C Borrowers shall executed and cause to be executed such further agreements, documents and instruments and shall take and cause to be taken such further actions in connection with such Cash Collateralization as the Agent may reasonably request. 3.08 Letter of Credit Fees. (a) The Companies shall pay to the Agent for the account of each of the Banks a letter of credit fee based on the average daily maximum amount available to be drawn on outstanding Letters of Credit at a rate equal to the Applicable Margin for Offshore Rate Loans, adjusted as provided in the definition of "Applicable Margin," which fee shall be computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon Letters of Credit outstanding for that quarter as calculated by the Agent. Such letter of credit fees shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter during which Letters of Credit are outstanding, commencing on the first such quarterly date to occur after the Closing Date, through the Revolving Termination Date (or such later date upon which the outstanding Letters of Credit shall expire), with the final payment to be made on the Revolving Termination Date (or such later expiration date, if any). (b) The Companies shall pay to the Issuing Bank a letter of credit fronting fee for each Letter of Credit Issued by the Issuing Bank equal to 0.125% per annum of the face amount (or increased face amount, as the case may be) of such Letter of Credit. Such Letter of Credit fronting fee shall be due and payable on each date of Issuance of a Letter of Credit. (c) Each L/C Borrower shall pay to the Issuing Bank from time to time on demand the normal issuance, presentation, amendment and other processing fees, and other standard costs and charges, of the Issuing Bank relating to letters of credit as from time to time in effect. 3.09 Uniform Customs and Practice. The Uniform Customs and Practice for Documentary Credits as published by the International Chamber of Commerce most recently at the time of issuance of any Letter of Credit shall (unless otherwise expressly provided in the Letters of Credit) apply to the Letters of Credit. ARTICLE IV TAXES, YIELD PROTECTION AND ILLEGALITY -------------------------------------- 4.01 Taxes. (a) Any and all payments by any Company to each Bank or the Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Companies shall pay all Other Taxes. (b) If any Company shall be required by law to deduct or withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section), such Bank or the Agent, as the case may be, receives and retains an amount equal to the sum it would have received and retained had no such deductions or withholdings been made; (ii) the Companies shall make such deductions and withholdings; (iii) the Companies shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) the Companies shall also pay to each Bank or the Agent for the account of such Bank, at the time interest is paid, Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed. (c) The Companies agree to indemnify and hold harmless each Bank and the Agent for the full amount of i) Taxes, ii) Other Taxes, and iii) Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed, and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank or the Agent makes written demand therefor. (d) Within 30 days after the date of any payment by any Company of Taxes, Other Taxes or Further Taxes, the Companies shall furnish to each Bank or the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Bank or the Agent. (e) If any Company is required to pay any amount to any Bank or the Agent pursuant to subsection (b) or (c) of this Section, then such Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Companies which may thereafter accrue, if such change in the sole and absolute judgment of such Bank is not otherwise disadvantageous to such Bank. 4.02 Illegality. (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans, then, on notice thereof by the Bank to the Companies through the Agent, any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Companies that the circumstances giving rise to such determination no longer exist. (b) If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the Companies shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 4.04, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If any Company is required to so prepay any Offshore Rate Loan, then concurrently with such prepayment, the Companies shall borrow from the affected Bank, in the amount of such repayment, a Base Rate Loan. (c) If the obligation of any Bank to make or maintain Offshore Rate Loans has been so terminated or suspended, the Companies may elect, by giving notice to the Bank through the Agent that all Loans which would otherwise be made by the Bank as Offshore Rate Loans shall be instead Base Rate Loans. 4.03 Increased Costs and Reduction of Return. (a) If any Bank determines that, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Loans or participating in Letters of Credit, or, in the case of the Issuing Bank, any increase in the cost to the Issuing Bank of agreeing to Issue, Issuing or maintaining any Letter of Credit or of agreeing to make or making, funding or maintaining any unpaid drawing under any Letter of Credit, then the Companies shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank or the Issuing Bank, additional amounts as are sufficient to compensate such Bank or such Issuing Bank for such increased costs. (b) If any Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Bank to the Companies through the Agent, the Companies shall immediately pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank for such increase. 4.04 Funding Losses. The Companies shall reimburse each Bank and hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of any Company to make on a timely basis any payment of principal of any Offshore Rate Loan (including after any acceleration thereof); (b) the failure of any Company to borrow, continue or convert a Loan after such Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/Continuation; (c) the failure of any Company to make any prepayment in accordance with any notice delivered under Section 2.06; (d) the prepayment (including pursuant to Section 2.07) or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the conversion of any Offshore Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans hereunder or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Companies to the Banks under this Section and under Section 4.03(a), each Offshore Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the IBOR used in determining the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. 4.05 Inability to Determine Rates. If the Agent determines that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or that the Offshore Rate applicable pursuant to Section 2.09(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to the Banks of funding such Loan, the Agent will promptly so notify the Companies and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans hereunder shall be suspended until the Agent upon the instruction of the Majority Banks revokes such notice in writing. Upon receipt of such notice, the Companies may revoke any Notice of Borrowing or Notice of Conversion/ Continuation then submitted by it. If the Companies do not revoke such Notice, the Banks shall make, convert or continue the Loans, as proposed by the Companies, in the amount specified in the applicable notice submitted by the Companies, but such Loans shall be made, converted or continued as Base Rate Loans instead of Offshore Rate Loans. 4.06 Reserves on Offshore Rate Loans. The Companies shall pay to each Bank, as long as such Bank shall be required under regulations of the FRB to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency funds or deposits (currently known as "Eurocurrency liabilities"), additional costs on the unpaid principal amount of each Offshore Rate Loan equal to the actual costs of such reserves allocated to such Loan by the Bank (as determined by the Bank in good faith, which determination shall be conclusive), payable on each date on which interest is payable on such Loan, provided the Companies shall have received at least 15 days' prior written notice (with a copy to the Agent) of such additional costs from the Bank. If a Bank fails to give notice 15 days prior to the relevant Interest Payment Date, such additional interest shall be payable 15 days from receipt of such notice. 4.07 Certificates of Banks. Any Bank claiming reimbursement or compensation under this Article IV shall deliver to the Companies (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and such certificate shall be conclusive and binding on the Companies in the absence of manifest error. 4.08 Survival. The agreements and obligations of the Companies in this Article IV shall survive the payment of all other Obligations. ARTICLE V CONDITIONS PRECEDENT -------------------- 5.01 Conditions of Initial Credit Extension. The obligation of each Bank (including the Issuing Bank) to make its initial Credit Extension hereunder is subject to the condition that the Agent shall have received on or before the Closing Date all of the following, in form and substance satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) Credit Agreement; Notes. This Agreement and, if requested by any Bank, the Notes, each executed by each party thereto; (b) Resolutions; Incumbency. (i) Copies of the resolutions of the respective boards of directors of the Companies authorizing the transactions contemplated hereby, certified as of the Closing Date by the each Company's Secretary or an Assistant Secretary, respectively; and (ii) A certificate of the Secretary or Assistant Secretary of each of the Companies, certifying the names and true signatures of the officers of each such Company authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by it hereunder; (c) Organization Documents; Good Standing. Each of the following documents: (i) the articles or certificate of incorporation and the bylaws of each of the Companies or, if applicable, the partnership agreement, each as in effect on the Closing Date, certified by the Secretary or Assistant Secretary or general partner of each such Company as of the Closing Date; and (ii) a good standing certificate from the Secretary of State (or similar, applicable Governmental Authority) as of a recent date, and, if requested by the Agent or any Bank, a bring-down certificate by facsimile dated on or about the Closing Date and tax good standing certificate, (A) for Esterline, of its state of incorporation and the State of Washington, and (B) for each Company other than Esterline, of its state of incorporation; (d) Legal Opinions. An opinion of Bogle & Gate LLC, counsel to the Companies and the Guarantors and addressed to the Agent and the Banks, substantially in the form of Exhibit D; (e) Certificate. A certificate signed by a Responsible Officer of each Company, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article VI are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the initial Credit Extension; and (iii) there has occurred since October 31, 1995, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect; and (f) Termination of Existing Facility. Evidence satisfactory to the Agent confirming that if any principal, interest, fees, costs or other amounts are outstanding under the Existing Facility, all such amounts have been paid in full by the Closing Date or that the Loans borrowed by the Companies on the Closing Date will be used to repay such outstanding amounts, and that the Existing Facility and the commitments of the "Banks" thereunder shall thereby terminate on the Closing Date, together with evidence satisfactory to BofA, as agent under the Existing Facility, of satisfaction or waiver by such Banks of any prior notice of such termination as required under the Existing Facility; and (g) Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Bank may reasonably request. 5.02 Conditions to All Credit Extensions. The obligation of each Bank to make any Loan to be made by it (including its initial Loan) or to continue or convert any Loan under Section 2.04 (other than pursuant to Section 2.04(c)) and the obligation of the Issuing Bank to Issue any Letter of Credit (including the initial Letter of Credit) is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date, Conversion/Continuation Date or Issuance Date: (a) Notice; Application. In the case of any Borrowing of Continuation/ Conversion (other than pursuant to Section 2.04(b)), the Agent shall have received (with, in the case of the initial Loan only, a copy for each Bank) a Notice of Borrowing or a Notice of Conversion/Continuation, as applicable, and in the case of any Issuance of any Letter of Credit, the Issuing Bank and the Agent shall have received an L/C Application or L/C Amendment Application, as required under Section 3.02; (b) Continuation of Representations and Warranties. The representations and warranties in Article VI shall be true and correct on and as of such Borrowing Date, Conversion/ Continuation Date or Issuance Date with the same effect as if made on and as of such Borrowing Date, Conversion/Continuation Date or Issuance Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date); and (c) No Existing Default. No Default or Event of Default shall exist or shall result from such Credit Extension or continuation or conversion. Each Notice of Borrowing, Notice of Conversion/Continuation and L/C Application or L/C Amendment Application submitted by any Company hereunder shall constitute a representation and warranty by each of the Companies hereunder, as of the date of each such notice and as of each Borrowing Date, Conversion/Continuation Date or Issuance Date, as applicable, that the conditions in this Section 4.02 are satisfied. ARTICLE VI REPRESENTATIONS AND WARRANTIES ------------------------------ Each Company represents and warrants to the Agent and each Bank that: 6.01 Corporate Existence and Power. Each Company and each of its Subsidiaries: (a) is a corporation or partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation; (b) has the power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents; (c) is duly qualified as a foreign corporation or partnership and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect; and (d) is in compliance with all Requirements of Law except to the extent to which the failure to comply would not reasonably be expected to have a Material Adverse Effect. 6.02 Corporate Authorization; No Contravention. The execution, delivery and performance by each Company of this Agreement and each other Loan Document to which each Company is party, have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any of such Company's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which any Company is a party or any order, injunction, writ or decree of any Governmental Authority to which any Company or its property is subject; or (c) violate any Requirement of Law. 6.03 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, any Company or any of its Subsidiaries of the Agreement or any other Loan Document. 6.04 Binding Effect. This Agreement and each other Loan Document to which any of the Companies is a party constitute the legal, valid and binding obligations of such Company, enforceable against such Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 6.05 Litigation. Except as specifically disclosed in Schedule 6.05, there are no actions, suits, proceedings, claims or disputes pending, or to the best knowledge of the Companies, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Companies, or its Subsidiaries or any of their respective properties which: (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or (b) if determined adversely to any Company or its Subsidiaries, would reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 6.06 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by any Company. As of the Closing Date, none of the Companies nor any Subsidiary is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Closing Date, create an Event of Default under Section 9.01(e). 6.07 ERISA Compliance. (a) As of the Closing Date, each Plan is in compliance with the applicable provisions of ERISA, the Code and other federal or state law except to the extent to which the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Each Plan which is intended to qualify under subsection 401(a) of the Code has received a favorable determination letter from the IRS and to the best knowledge of each Company, nothing has occurred which would cause the loss of such qualification. As of the Closing Date, each Company and each ERISA Affiliate has made all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) As of the Closing Date, there are no pending or, to the best knowledge of each Company, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. As of the Closing Date, there has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. (c) As of the Closing Date, (i) no ERISA Event has occurred or is reasonably expected to occur; and (ii) no event or circumstance has occurred or exists that, if such event or circumstance had occurred or arisen after the Closing Date, would create an Event of Default under Section 9.01(h). 6.08 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section 7.12 and Section 8.07. None of the Companies nor any Subsidiary is generally engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock. 6.09 Title to Properties. Each Company and each Subsidiary have good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of their respective businesses, except for such defects in title as could not, individually or in the aggregate, have a Material Adverse Effect. As of the Closing Date, the property of the Companies and their respective Subsidiaries is subject to no Liens, other than Permitted Liens. 6.10 Taxes. The Companies and their respective Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against any Company or any Subsidiary that would, if made, have a Material Adverse Effect. 6.11 Financial Condition. (a) The audited consolidated financial statements of Esterline and its Subsidiaries dated October 31, 1995, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal year ended on that date: (i) were prepared in accordance with GAAP; (ii) fairly present the financial condition of Esterline and its Subsidiaries as of the date thereof and results of operations for the period covered thereby; and (iii) except as specifically disclosed in Schedule 6.11, show all material indebtedness and other liabilities, direct or contingent, of Esterline and its consolidated Subsidiaries as of the date hereof, including liabilities for taxes, material commitments and Contingent Obligations required to be disclosed in accordance with GAAP. (b) Since October 31, 1995, (assuming that this Agreement were in effect on such date and thereafter) there has been no Material Adverse Effect. 6.12 Environmental Matters. Each Company conducts in the ordinary course of business a review of the effect of existing Environmental Laws and existing Environmental Claims on its business, operations and properties, and as a result thereof each Company has reasonably concluded that, except as specifically disclosed in Schedule 6.12, such Environmental Laws and Environmental Claims could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.13 Regulated Entities. No Company, nor any Person controlling any Company, nor any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. No Company is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 6.14 No Burdensome Restrictions. None of the Companies nor any Subsidiary is a party to or bound by any Contractual Obligation, or subject to any restriction in any Organization Document, or any Requirement of Law, which could reasonably be expected to have a Material Adverse Effect. 6.15 Copyrights, Patents, Trademarks and Licenses, etc. To the best of each Company's knowledge, each Company or its Subsidiaries own or are licensed or otherwise have the right to use all of the patents, trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and other rights that are reasonably necessary for the operation of their respective businesses, without conflict with the rights of any other Person. To the best knowledge of each Company, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by any Company or any Subsidiary infringes upon any rights held by any other Person. Except as specifically disclosed in Schedule 6.05, no claim or litigation regarding any of the foregoing is pending or threatened, and no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the knowledge of each Company, proposed, which, in either case, could reasonably be expected to have a Material Adverse Effect. 6.16 Subsidiaries. As of the Closing Date, no Company has any Subsidiaries other than those specifically disclosed in part (a) of Schedule 6.16 hereto, which shows the form of organization and ownership of each such Corporation, and has no equity investments in any other corporation or entity other than those specifically disclosed in part (b) of Schedule 6.16. Each Company other than Esterline is a Wholly Owned Subsidiary of Esterline. 6.17 Insurance. Except as specifically disclosed in Schedule 6.17, the properties of the Companies and their respective Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of any Company, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where any Company or such Subsidiary operates. 6.18 Swap Obligations. None of the Companies nor any of its Subsidiaries has incurred any outstanding obligations under any Swap Contracts, other than Permitted Swap Obligations. Each Company has voluntarily entered into each Swap Contract to which it is a party based upon its own independent assessment of its consolidated assets, liabilities and commitments, in each case as an appropriate means of mitigating and managing risks associated with such matters, and has not relied on any swap counterparty or any Affiliate of any swap counterparty in determining whether to enter into any Swap Contract. 6.19 Full Disclosure. To the best knowledge after due inquiry of any Responsible Officer of any of the Companies, none of the representations or warranties made by any Company or any Subsidiary in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of any Company or any Subsidiary in connection with the Loan Documents (including the offering and disclosure materials delivered by or on behalf of any Company to the Banks prior to the Closing Date), contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered. ARTICLE VII AFFIRMATIVE COVENANTS --------------------- So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks waive compliance in writing: 7.01 Financial Statements. The Companies shall deliver to the Agent, in form and detail satisfactory to the Agent and the Majority Banks, with sufficient copies for each Bank: (a) as soon as available, but not later than March 1 of each year, a copy of the audited consolidated balance sheet of Esterline and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of Deloitte & Touche or another nationally recognized independent public accounting firm ("Independent Auditor") which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years, and together with SEC Form 10K's for each Company required to file such form with the SEC. The Independent Auditor's opinion shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of any Company's or any Subsidiary's records; (b) as soon as available, but not later than March 31, June 30, September 30 and December 31 of each year, a copy for the immediately preceding fiscal quarter of the unaudited consolidated and consolidating balance sheets of Esterline and its Subsidiaries as of the end of such quarter and the related consolidated and consolidating statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments), the financial position and the results of operations of each Company and the Subsidiaries, together with SEC Form 10Q's for each Company required to file such form with the SEC; and (c) as soon as available, but not later than March 1 of each year, a copy of an unaudited consolidating balance sheet of Esterline and its Subsidiaries as at the end of such year and the related consolidating statement of income, shareholders' equity and cash flows for such year, certified by a Responsible Officer as having been developed and used in connection with the preparation of the financial statements referred to in Section 7.01(a). 7.02 Certificates; Other Information. The Companies shall furnish to the Agent, with sufficient copies for each Bank: (a) concurrently with the delivery of the financial statements referred to in Sections 7.01(a) and (b), a Compliance Certificate executed by a Responsible Officer; (b) except for SEC Forms 10K and 10Q to be delivered pursuant to Sections 7.01(a) and (c), promptly, and in any event no later than 10 days after the same is made available to any Company's shareholders or is filed with the SEC, copies of all financial statements and reports that each Company sends to its shareholders, and copies of all financial statements and regular, periodical or special reports that each Company or any Subsidiary may make to, or file with, the SEC; (c) as soon as available, but in any event no later than the first to occur of (i) March 1 of each year or (ii) the date on which Esterline delivers the financial statements required to be delivered pursuant to Section 7.01(a), a copy of an annual business plan and cash budget for Esterline, together with an annual business forecast for the succeeding twelve month period, presented on a quarterly basis, in such form and in such detail as the Agent or the Majority Banks may require. (d) upon the request from time to time of the Agent, the Swap Termination Values, together with a description of the method by which such values were determined, relating to any then-outstanding Swap Contracts to which any Company or any of its Subsidiaries is party; and (e) promptly, such additional information regarding the business, financial or corporate affairs of each Company or any Subsidiary as the Agent, at the request of any Bank, may from time to time reasonably request. 7.03 Notices. The Companies shall promptly notify the Agent and each Bank of: (a) the occurrence of any Default or Event of Default, and of the occurrence or existence of any event or circumstance that foreseeably will become a Default or Event of Default; (b) any matter that has resulted or could reasonably result in a Material Adverse Effect, including: (i) breach or non-performance of, or any default under, a Contractual Obligation of any Company or any Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between any Company or any Subsidiary and any Governmental Authority; (iii) the commencement of, or any material development in, any litigation or proceeding affecting any Company or any Subsidiary; including pursuant to any applicable Environmental Laws; or (iv) the imposition of any fine or penalty by any Governmental Authority against or with respect to any facility or plants of any Company or any Subsidiary; (c) the occurrence of any of the following events affecting any Company or any ERISA Affiliate (but in no event more than 10 days after such event), and deliver to the Agent and each Bank a copy of any notice with respect to such event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to any Company or any ERISA Affiliate with respect to such event: (i) an ERISA Event; (ii) an increase in the Unfunded Pension Liability of any Pension Plan, including as a result of the adoption of any amendment to a Plan subject to Section 412 of the Code, that could reasonably be likely to cause or result in an Event of Default under Section 9.01(h); or (iii) the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by any Company or any ERISA Affiliate other than any such Plan in effect and receiving contributions as of the Closing Date. (d) any Acquisition, or incurring any Contractual Obligations with respect to any Acquisition, by any Company or any Subsidiary of any Company, if the aggregate cash and noncash consideration (including assumption of liabilities and including all Contingent Obligations) in connection with such Acquisition is (or could reasonably be expected to become) $10,000,000 or more; and (e) any Change in Control or any event or circumstance that is reasonably likely to result in any Change in Control; and Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action any Company or any affected Subsidiary proposes to take with respect thereto and at what time. Each notice under Section 7.03(a) shall describe with particularity any and all clauses or provisions of this Agreement or other Loan Document that have been (or foreseeably will be) breached or violated. 7.04 Preservation of Corporate and Partnership Existence, etc. Each Company shall, and shall cause each Subsidiary to: (a) (i) preserve and maintain in full force and effect (A) its corporate or partnership existence, as the case may be, and good standing under the laws of its state or jurisdiction of incorporation or organization, and (B) all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business; and (ii) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill; provided, however, that the foregoing shall not prevent any transaction permitted by Section 8.02 or 8.03, or the termination of the existence of any Subsidiary (other than a Company) if, in the opinion of the Board of Directors of Esterline, such termination is in the best interest of Esterline and is not otherwise prohibited by this Agreement; and (b) preserve or renew and maintain all of its registered patents, trademarks, trade names and service marks and other intellectual property assets, the nonpreservation or nonmaintenance of which could reasonably be expected to have a Material Adverse Effect. 7.05 Maintenance of Property. The Companies shall maintain, and shall cause each Subsidiary to maintain, and preserve all its property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted and make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. Each Company and each Subsidiary shall use the standard of care typical in the industry in the operation and maintenance of its facilities. 7.06 Insurance. The Companies shall maintain, and shall cause each Subsidiary to maintain, with financially sound and reputable independent insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons. 7.07 Payment of Obligations. Each Company shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable, all their respective material obligations and liabilities, including: (a) all material tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by each Company or such Subsidiary; (b) all lawful material claims which, if unpaid, would by law become a Lien upon its property; and (c) all Indebtedness, as and when due and payable (but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness), unless contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by each Company or such Subsidiary, except to the extent that the nonpayment thereof would not result in or reasonable be expected to result in a Material Adverse Effect. 7.08 Compliance with Laws. The Companies shall comply, and shall cause each Subsidiary to comply, in all respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business or properties (including the Federal Fair Labor Standards Act), unless such noncompliance is being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by each Company or such Subsidiary with respect thereto, except to the extent any such noncompliance, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 7.09 Inspection of Property and Books and Records. The Companies shall maintain and shall cause each Subsidiary to maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP shall be made of all financial transactions and matters involving the assets and business of each Company and such Subsidiary. The Companies shall permit, and shall cause each Subsidiary to permit, representatives and independent contractors of the Agent or any Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Companies; provided, however, when an Event of Default exists the Agent or any Bank may do any of the foregoing at the expense of the Companies at any time during normal business hours and without advance notice. 7.10 Environmental Laws. Each Company shall, and shall cause each Subsidiary to, conduct its operations and keep and maintain its property in compliance with all Environmental Laws, if any noncompliance, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 7.11 Use of Proceeds. The Companies shall use the proceeds of the Loans for working capital, other general corporate purposes and for nonhostile Acquisitions, in each case not in contravention of any Requirement of Law or of any Loan Document; provided, however, that no Company shall directly or indirectly use the proceeds of the Loans for any Acquisition of any Person if such Acquisition has not been approved by the board of directors (or other body exercising similar authority) of such Person. ARTICLE VIII NEGATIVE COVENANTS ------------------ So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks waive compliance in writing: 8.01 Limitation on Liens. The Companies shall not, and shall not suffer or permit any Subsidiary to, directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its property, whether now owned or hereafter acquired, other than the following ("Permitted Liens"): (a) any Lien existing on property of any of the Companies or any of their respective Subsidiaries on the Closing Date securing Indebtedness outstanding on the Closing Date; provided, however, that if all such Indebtedness so secured by such Liens exceeds $1,000,000 in the aggregate on the Closing Date, then no such Liens shall be permitted under this Section 8.01(a) except for those disclosed in Schedule 8.01(a); (b) any Lien created under any Loan Document; (c) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 7.07(a), provided that no notice of lien has been filed or recorded under the Code; (d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; (e) Liens (other than any Lien imposed by ERISA) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation; (f) Liens on the property of any Company or its Subsidiaries securing (i) the nondelinquent performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other nondelinquent obligations of a like nature; in each case, incurred in the ordinary course of business; (g) Liens consisting of judgment or judicial attachment liens, provided that the enforcement of such Liens is effectively stayed and all such liens in the aggregate at any time outstanding for the Companies and their respective Subsidiaries do not exceed $2,500,000; (h) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Companies and their respective Subsidiaries; (i) Liens on assets of corporations which become Subsidiaries after the date of this Agreement, provided, however, that such Liens existed at the time the respective corporations became Subsidiaries and were not created in anticipation thereof; (j) purchase money security interests on any property acquired or held by any of the Companies or their respective Subsidiaries in the ordinary course of business, securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such property; provided that (i) any such Lien attaches to such property concurrently with or within 20 days after the acquisition thereof, (ii) such Lien attaches solely to the property so acquired in such transaction, (iii) the principal amount of the debt secured thereby does not exceed 100% of the cost of such property, and (iv) the principal amount of the Indebtedness secured by any and all such purchase money security interests shall not at any time exceed, together with Indebtedness permitted under Section 8.05(c), $10,000,000; (k) Liens securing obligations in respect of capital leases on assets subject to such leases, provided that such capital leases are otherwise permitted hereunder; (l) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by any of the Companies in excess of those set forth by regulations promulgated by the FRB, and (ii) such deposit account is not intended by any of the Companies or any of their respective Subsidiaries to provide collateral to the depository institution; and (m) Liens arising pursuant to Section 412(n) of the Code or Section 4069(a) of ERISA if (i) the delinquent payments to which the Lien relates are made within ten (10) days after the Company or any Subsidiary learns of the failure to make payment or (ii) the obligation to make such payments is being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Companies, in accordance with GAAP. 8.02 Disposition of Assets. The Companies shall not, and shall not suffer or permit any Subsidiary to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one or a series of transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except: (a) dispositions of inventory, or used, worn-out or surplus equipment, all in the ordinary course of business; (b) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment; and (c) dispositions not otherwise permitted hereunder which are made for fair market value; provided, that (i) at the time of any disposition, no Default or Event of Default shall exist or shall result from such disposition, (ii) the aggregate sales price from such disposition shall be paid in cash, and (iii) the aggregate value of all assets so sold by the Companies and their respective Subsidiaries, together, shall not exceed in any 12-month period ten percent (10%) of Consolidated Total Assets as of the end of the immediately preceding fiscal year. 8.03 Consolidations and Mergers. The Companies shall not, and shall not suffer or permit any Subsidiary to, merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except: (a) any Subsidiary (other than a Company) may merge with any of the Companies, provided that the Companies shall be the continuing or surviving corporation, or with any one or more Subsidiaries, provided that if any transaction shall be between a Subsidiary and a Wholly Owned Subsidiary, the Wholly Owned Subsidiary shall be the continuing or surviving corporation; (b) any Subsidiary (other than a Company) may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to any of the Companies; and (c) any Subsidiary (other than a Company) may merge with any other Person, whether or not such Subsidiary shall be the surviving corporation, if the aggregate value of the assets of all such Subsidiaries involved in the transaction or transactions, together, does not exceed in any 12-month period ten percent (10%) of Consolidated Total Assets as of the end of the immediately preceding fiscal year. 8.04 Loans and Investments. The Companies shall not purchase or acquire, or suffer or permit any Subsidiary to purchase or acquire, or make any commitment therefor, any capital stock, equity interest, or any obligations or other securities of, or any interest in, any Person, or make or commit to make any Acquisitions, or make or commit to make any advance, loan, extension of credit or capital contribution to or any other investment in, or joint venture with, any Person including any Affiliate of any of the Companies (together, "Investments"), except for: (a) Investments held by any of the Companies or their respective Subsidiaries in the form of cash equivalents or short term marketable securities; (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business of the Companies and their Subsidiaries; (c) Investments not otherwise prohibited by this Agreement or any of the other Loan Documents by any Company in any other Company; (d) extensions of credit by any of the Companies to any of their respective Wholly Owned Subsidiaries that are not Companies, or by any of such Wholly Owned Subsidiaries to another such Wholly Owned Subsidiary, in an aggregate principal amount at any time outstanding for all such extensions of credit to such Persons not in excess of 25% of Consolidated Net Worth; (e) Investments not otherwise permitted pursuant to subsections (a), (b), (c) or (d) of this Section in, or Acquisitions of, Persons engaged in general industrial manufacturing or other lines of business substantially similar to the lines of business of Esterline or its Subsidiaries, provided that all of the following are true at the time of any such Investment or Acquisition and at the time that any of the Companies or any Subsidiary incurs any Contractual Obligation with respect to any such Investment or Acquisition: (i) the amount of all Investments permitted pursuant to this Section 8.04(e), including all Indebtedness incurred or assumed in connection with any such Investment, does not exceed in the aggregate $150,000,000; (ii) no Default or Event of Default shall have occurred and be continuing or result therefrom; and (iii) with respect to Acquisitions of any Person with annual sales revenue for the immediately preceding consecutive 12 months in excess of five percent (5%) of Esterline's consolidated sales revenue for its immediately preceding fiscal year (or, at the discretion of the Majority Banks, the immediately preceding four fiscal quarters) Esterline has presented to the Agent and the Banks pro forma financial projections, using the most recent audited historical results of the Person subject to such Acquisition and using the most recent historical results of the of the Companies and their Subsidiaries delivered to the Agent and the Banks pursuant to Section 7.01 hereof, which demonstrate to the satisfaction of the Agent and the Majority Banks that for the 12-month period following the consummation of such Acquisition, the Companies will remain in compliance with Sections 8.15, 8.16 and 8.17 of this Agreement; and (f) Investments constituting Permitted Swap Obligations or payments or advances under Swap Contracts relating to Permitted Swap Obligations. 8.05 Limitation on Indebtedness. The Companies shall not, and shall not suffer or permit any Subsidiary to, create, incur, assume, suffer to exist, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: (a) Indebtedness incurred pursuant to this Agreement; (b) Indebtedness existing on the Closing Date and set forth in Schedule 8.05(b) and any extensions and renewals of such Indebtedness on terms otherwise permitted pursuant to this Agreement, so long as the principal amount is not increased, additional collateral is not given and unsecured Indebtedness is not made secured Indebtedness; (c) Indebtedness secured by Liens permitted by Section 8.01(j) in an aggregate amount outstanding not to exceed $10,000,000; (d) Indebtedness owing by any Company to any other Company that is not otherwise prohibited by this Agreement or any of the other Loan Documents; (e) Indebtedness arising as a consequence of Investments permitted pursuant to Section 8.04(d); and (f) Indebtedness owing by a Subsidiary of Esterline that is not a Company to a Person other than Esterline or any Subsidiary of Esterline provided that the aggregate amount of all such Indebtedness outstanding at any time does not exceed 25% of Consolidated Net Worth as set forth in Esterline's quarterly or annual consolidated financial statements most recently delivered to the Agent pursuant to Section 7.01. (g) Indebtedness not otherwise permitted pursuant to subsection (a) through (f) of this Section, if (i) such Indebtedness is incurred or arises with respect to a transaction not otherwise prohibited by this Agreement and (ii) immediately upon becoming obligated with respect to such Indebtedness, the Leverage Ratio would not exceed 0.60 to 1.00. 8.06 Transactions with Affiliates. The Companies shall not, and shall not suffer or permit any Subsidiary to, enter into any transaction with any Affiliate of the Companies, except upon fair and reasonable terms no less favorable to such Company or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Companies or such Subsidiary. 8.07 Use of Proceeds. (a) The Companies shall not, and shall not suffer or permit any Subsidiary to, use any portion of the Loan proceeds, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Companies or others incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act. (b) The Companies shall not, directly or indirectly, use any portion of the Loan proceeds (i) knowingly to purchase Ineligible Securities from the Arranger during any period in which the Arranger makes a market in such Ineligible Securities, (ii) knowingly to purchase during the underwriting or placement period Ineligible Securities being underwritten or privately placed by the Arranger, or (iii) to make payments of principal or interest on Ineligible Securities underwritten or privately placed by the Arranger and issued by or for the benefit of any of the Companies or any Affiliate of the Companies. The Arranger is a registered broker-dealer and permitted to underwrite and deal in certain Ineligible Securities; and "Ineligible Securities" means securities which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. SECTION24, Seventh), as amended. 8.08 Contingent Obligations. The Companies shall not, and shall not suffer or permit any Subsidiary to, create, incur, assume or suffer to exist any Contingent Obligations except: (a) endorsements for collection or deposit in the ordinary course of business; (b) Permitted Swap Obligations; (c) Contingent Obligations of the Companies and their respective Subsidiaries existing as of the Closing Date and listed in Schedule 8.08(c); and (d) Contingent Obligations with respect to Surety Instruments incurred in the ordinary course of business and which otherwise constitute Indebtedness permitted pursuant to Section 8.05. (e) Guaranty Obligations incurred in the ordinary course of business which otherwise constitute Indebtedness permitted pursuant to Section 8.05 and which in the aggregate do not exceed 25% of Consolidated Net Worth. 8.09 [Intentionally omitted.] 8.10 Restricted Payments. The Companies shall not, and shall not suffer or permit any Subsidiary to, declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of its capital stock, or purchase, redeem or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire such shares, now or hereafter outstanding; except that any of the Companies may: (a) declare and make dividend payments or other distributions payable solely in its common stock; (b) purchase, redeem or otherwise acquire shares of its common stock or warrants or options to acquire any such shares with the proceeds received from the substantially concurrent issue of new shares of its common stock; and (c) declare or pay cash dividends to its stockholders and purchase, redeem or otherwise acquire shares of its capital stock or warrants, rights or options to acquire any such shares for cash solely out of 50% of net income of such Company and its Subsidiaries in any fiscal year and computed on a cumulative consolidated basis, provided, that, immediately after giving effect to such proposed action, no Default or Event of Default would exist. 8.11 ERISA. The Companies shall not, and shall not suffer or permit any of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan; (b) cause or permit any Plan which is qualified under subsection 401(a) of the Code to lose such qualification; or (c) fail to make all required contributions to any Plan subject to subsection 412 of the Code; but only to the extent that any such act or failure to act, separately or together with all other such acts or failures to act, in any of the foregoing clauses (a), (b) or (c) has resulted or could reasonably expected to result in liability of the Companies in an aggregate amount in excess of $1,000,000; or (d) engage in a transaction that could be subject to Section 4069 or 4212(c) of ERISA 8.12 Change in Business. Except as permitted pursuant to Section 8.04, the Companies shall not, and shall not suffer or permit any Subsidiary to, engage in any material line of business substantially different from those lines of business carried on by the Companies and their respective Subsidiaries on the date hereof, including as a consequence of any Acquisition. 8.13 Change in Fiscal Year. Esterline shall not change its fiscal year or the fiscal year of any of its consolidated Subsidiaries. 8.14 [Intentionally omitted.] 8.15 Minimum Consolidated Net Worth. The Companies shall not permit, as of the last day of any fiscal quarter, Consolidated Net Worth to be less than the sum of: (a) $98,000,000, plus (b) 50% of Consolidated Net Income from January 31, 1996 through the end of each fiscal quarter thereafter, determined quarterly on a consolidated basis and not reduced by any Consolidated Net Loss, plus (c) 75% of the Net Securities Proceeds arising on or after the Closing Date to the date of determination. As used herein, "Net Securities Proceeds" means, with respect to any sale or issuance of equity securities (whether common or preferred, options, warrant or capital appreciation rights, but excluding any sales or issuances of stock pursuant to employee stock purchase plans, employee stock option plans or other employee benefit plans), the excess of (A) the gross cash and, to the extent acceptable to the Agent and the Majority Banks, noncash proceeds received or receivable by Esterline or any Subsidiary from such disposition minus (B) the sum of (i) all reasonable Attorney Costs and underwriting and accounting fees and disbursements and government fees actually paid (or reasonably expected to be paid during the fiscal year in which such sale or issuance occurs) in connection with such sale or issuance which are not payable to Esterline or to any Affiliate of Esterline or any Subsidiary; (ii) all taxes actually paid in connection with such sale or issuance; and (iii) the value of such acceptable noncash proceeds. 8.16 Maximum Leverage Ratio. The Companies shall not permit, as of the last day of any fiscal quarter, the Leverage Ratio to exceed 0.60 to 1.00. 8.17 Minimum Fixed Charge Coverage Ratio. The Companies shall not permit, as of the last day of any fiscal quarter, the ratio of (a) EBITAR, measured for the period consisting of the four consecutive fiscal quarters ending on such day, to (b) the sum of interest expense plus Rental Expense, measured for the period consisting of the four consecutive fiscal quarters ending on such day, which were deductible in determining Consolidated Net Income or Consolidated Net Loss for such period, to be less than 2.00 to 1.00. For purposes of calculating compliance with this Section 8.17, amounts that would be included in either EBITAR or interest expense and Rental Expense on account of any Acquisitions made by any of the Companies or their Subsidiaries after January 31, 1996 will be excluded unless the Agent and the Banks have been provided with independent verification of such historical results. ARTICLE IX EVENTS OF DEFAULT ----------------- 9.01 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. Any Company fails to pay, (i) when and as required to be paid herein, any amount of principal of any Loan, or (ii) within five (5) days after the same becomes due, any interest, fee or any other amount payable hereunder or under any other Loan Document; or (b) Representation or Warranty. Any representation or warranty by any of the Companies or any of their respective Subsidiaries made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by any of the Companies, any of their respective Subsidiaries, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. The of the Companies fails to perform or observe any term, covenant or agreement contained in Article VII (other than any of Sections 7.06, 7.07, 7.08 or 7.10) or in Article VIII; or (d) Other Defaults. Any of the Companies fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of 20 days after the earlier of (i) the date upon which a Responsible Officer knew or reasonably should have known of such failure or (ii) the date upon which written notice thereof is given to such Company by the Agent or any Bank; or (e) Cross-Default. (i) Any Company or any Subsidiary (A) fails to make any payment in respect of any Indebtedness or Contingent Obligation (other than in respect of Swap Contracts), having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $2,500,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise); or (B) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation, and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; or (ii) there occurs under any Swap Contract an Early Termination Date (as defined in such Swap Contract) resulting from (A) any event of default under such Swap Contract as to which any Company or any Subsidiary is the Defaulting Party (as defined in such Swap Contract) or (2) any Termination Event (as so defined) as to which any Company or any Subsidiary is an Affected Party (as so defined), and, in either event, the Swap Termination Value owed by such Company or such Subsidiary as a result thereof is greater than $250,000; or (f) Insolvency; Voluntary Proceedings. Any Company or any Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against any Company or any Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of any Company's or any Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) any Company or any Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) any Company or any Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (h) ERISA. (i) An ERISA Event shall occur with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Companies under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC; (ii) any Unfunded Pension Liability with respect to any or all Pension Plans shall exist; or (iii) the Companies or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan; but only to the extent that any of the foregoing, separately or in the aggregate, has or could reasonably be expected to have a Material Adverse Effect; or (i) Monetary Judgments. One or more noninterlocutory judgments, noninterlocutory orders, decrees or arbitration awards is entered against any of the Companies or any of their respective Subsidiaries involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $1,000,000 or more, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 10 days after the entry thereof; or (j) Non-Monetary Judgments. Any non-monetary judgment, order or decree is entered against any of the Companies or any of their respective Subsidiaries which does or would reasonably be expected to have a Material Adverse Effect, and there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (k) Change of Control. There occurs any Change of Control; or (l) Loss of Licenses. Any Governmental Authority revokes or fails to renew any material license, permit or franchise any of the Companies or any of their Subsidiaries, or any of the Companies or any of their respective Subsidiaries for any reason loses any material license, permit or franchise, or any of the Companies or any of their Subsidiaries suffers the imposition of any restraining order, escrow, suspension or impound of funds in connection with any proceeding (judicial or administrative) with respect to any material license, permit or franchise; or (m) Adverse Change. There occurs a Material Adverse Effect; or (n) Guarantor Defaults. Any Guarantor fails in any material respect to perform or observe any term, covenant or agreement as a guarantor of the Obligations pursuant to Section 11.19, or the guaranty set forth therein is for any reason partially (including with respect to future advances) or wholly revoked or invalidated, or otherwise ceases to be in full force and effect, or any Company as a guarantor (or any other Person) contests in any manner the validity or enforceability thereof or denies that it has any further liability or obligation thereunder; or any event described at subsections (f) or (g) of this Section occurs with respect to any Guarantor. 9.02 Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Majority Banks, (a) declare the commitment of each Bank to make Loans to be terminated, whereupon such commitments shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by each of the Companies; and (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (f) or (g) of Section 9.01 (in the case of clause (i) of subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of each Bank to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. 9.03 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. 9.04 Certain Financial Covenant Defaults. In the event that, after taking into account any extraordinary charge to earnings taken or to be taken as of the end of any fiscal period of any Company (a "Charge"), and if solely by virtue of such Charge, there would exist an Event of Default due to the breach of any of Sections 8.15, 8.16 or 8.17 as of such fiscal period end date, such Event of Default shall be deemed to arise upon the earlier of (a) the date after such fiscal period end date on which such Company announces publicly it will take, is taking or has taken such Charge (including an announcement in the form of a statement in a report filed with the SEC) or, if such announcement is made prior to such fiscal period end date, the date that is such fiscal period end date, and (b) the date such Company delivers to the Agent its audited annual or unaudited quarterly financial statements in respect of such fiscal period reflecting such Charge as taken. ARTICLE X THE AGENT --------- 10.01 Appointment and Authorization; "Agent. (a) Each Bank hereby irrevocably (subject to Section 10.09) appoints, designates and authorizes the Agent to take such 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 it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, 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 the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. (b) The Issuing Bank shall act on behalf of the Banks with respect to any Letters of Credit Issued by it and the documents associated therewith until such time and except for so long as the Agent may agree at the request of the Majority Banks to act for such Issuing Bank with respect thereto; provided, however, that the Issuing Bank shall have all of the benefits and immunities (i) provided to the Agent in this Article X with respect to any acts taken or omissions suffered by the Issuing Bank in connection with Letters of Credit Issued by it (including the Existing Letters of Credit) or proposed to be Issued by it and the application and agreements for letters of credit pertaining to the Letters of Credit as fully as if the term "Agent," as used in this Article X, included the Issuing Bank with respect to such acts or omissions, and (ii) as additionally provided in this Agreement with respect to the Issuing Bank. (c) Without limiting the generality of the foregoing subsections, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. (d) The provisions of this Article X shall survive the payment of all Obligations hereunder and inure to the benefit of BofA, including after its resignation or replacement as the Agent, as to any actions taken or omitted to be taken by BofA while it was the Agent. 10.02 Delegation of Duties. The 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. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 10.03 Liability of Agent. None of the Agent-Related Persons shall (i) 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 (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by any of the Companies or any Subsidiary or Affiliate of the Companies, or any officer 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 the 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 the Companies 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 Bank 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 properties, books or records of the Companies or any of their Subsidiaries or Affiliates. 10.04 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, 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 the Companies), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The 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 Majority Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. (b) For purposes of determining compliance with the conditions specified in Section 4.01, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. 10.05 Notice of Default. The 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 and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or a Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Majority Banks in accordance with Article IX; provided, however, that unless and until the Agent has received any such request, the 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 or in the best interest of the Banks. 10.06 Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Companies and their respective Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the 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 credit worthiness of the Companies and their respective Subsidiaries, 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 the Companies hereunder. Each Bank 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 credit worthiness of the Companies and their respective Subsidiaries. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or credit worthiness of the Companies which may come into the possession of any of the Agent-Related Persons. 10.07 Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Companies and without limiting the obligation of the Companies to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the 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, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Companies. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 10.08 Agent in Individual Capacity. BofA 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 the Companies and their respective Subsidiaries and Affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding any of the Companies or their Affiliates (including information that may be subject to confidentiality obligations in favor of such Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, BofA shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include BofA in its individual capacity. 10.09 Successor Agent. The Agent may, and at the request of the Majority Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Majority Banks shall appoint from among the Banks a successor agent for the Banks. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Companies, a successor agent from among the Banks. 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 Article X and Sections 11.04 and 11.05 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 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Majority Banks appoint a successor agent as provided for above. 10.10 Withholding Tax. (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to the Agent: (i) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, two properly completed and executed copies of IRS Form 1001 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Companies to such Bank, such Bank agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Companies to such Bank. To the extent of such percentage amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid. (c) If any Bank claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Companies to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. However, if the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or was not properly executed, or because such Bank failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. ARTICLE XI MISCELLANEOUS ------------- 11.01 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Companies or any applicable Subsidiary therefrom, shall be effective unless the same shall be in writing and signed by the Majority Banks (or by the Agent at the written request of the Majority Banks) and the Companies and acknowledged by the Agent, and then any such waiver or consent shall be effective 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 the Banks and Companies and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Bank (or reinstate any Commitment terminated pursuant to Section 9.02); (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 to the Banks (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; or (e) amend this Section, or Section 2.14, or any provision herein providing for consent or other action by all Banks; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Majority Banks or all the Banks, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and (ii) the Fee Letters may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 11.02 Notices. (a) All notices, requests, consents, approvals, waivers and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Companies by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 11.02, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 11.02; or, as directed to the Companies or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Companies and the Agent. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or X to the Agent shall not be effective until actually received by the Agent. (c) Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Companies. The Agent and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by any of the Companies to give such notice and the Agent and the Banks shall not have any liability to any of the Companies or other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Companies to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 11.03 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 11.04 Costs and Expenses. The Companies shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse BofA (including in its capacity as Agent) and the Arranger within five Business Days after demand for all costs and expenses incurred by BofA (including in its capacity as Agent) or the Arranger in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by BofA (including in its capacity as Agent) with respect thereto; and (b) pay or reimburse the Agent, the Arranger and each Bank within five Business Days after demand for all costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). 11.05 Indemnity. (a) General Indemnity. Whether or not the transactions contemplated hereby are consummated, the Companies shall indemnify, defend and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Companies shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. (b) Environmental Indemnity. (i) The Companies hereby agree to indemnify, defend and hold harmless each Indemnified Person, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses or disbursements (including Attorney Costs and the allocated cost of internal environmental audit or review services), which may be incurred by or asserted against such Indemnified Person in connection with or arising out of any pending or threatened investigation, litigation or proceeding, or any action taken by any Person, with respect to any Environmental Claim arising out of or related to any Property of any of the Companies or any of their respective Subsidiaries. No action taken by legal counsel chosen by the Agent or any Bank in defending against any such investigation, litigation or proceeding or requested remedial, removal or response action shall vitiate or any way impair the Companies' obligation and duty hereunder to indemnify and hold harmless the Agent and each Bank. (ii) In no event shall any site visit, observation, or testing by the Agent or any Bank be deemed a representation or warranty that Hazardous Materials are or are not present in, on, or under the site, or that there has been or shall be compliance with any Environmental Law. Neither the Companies nor any other Person is entitled to rely on any site visit, observation, or testing by the Agent or any Bank. Neither the Agent nor any Bank owes any duty of care to protect the Companies or any other Person against, or to inform the Companies or any other party of, any Hazardous Materials or any other adverse condition affecting any site or Property. Neither the Agent nor any Bank shall be obligated to disclose to the Companies or any other Person any report or findings made as a result of, or in connection with, any site visit, observation, or testing by the Agent or any Bank. (c) Survival; Defense. The obligations in this Section 11.05 shall survive payment of all other Obligations. At the election of any Indemnified Person, each of the Companies shall defend such Indemnified Person using legal counsel satisfactory to such Indemnified Person in such Person's sole discretion, at the sole cost and expense of the Companies. (d) Existing Indemnification Rights. All rights of the Agent and the Banks in respect of any indemnification and otherwise for reimbursement or payment of any losses, costs, charges, expenses or disbursements (including Attorney Costs) under or in respect of the Existing Facility shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. 11.06 Payments Set Aside. To the extent that any of the Companies makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 11.07 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that none of the Companies may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Bank. 11.08 Assignments, Participations, etc. (a) Any Bank may, with the written consent of the Agent and with the written consent of Esterline at all times other than during the existence of an Event of Default, which consent of Esterline, if required, shall not be unreasonably withheld, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of Esterline or the Agent shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitments and the other rights and obligations of such Bank hereunder, in a minimum amount of $3,000,000; provided, however, that the Companies and the Agent may continue to deal solely and directly with such Bank 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, shall have been given to Esterline and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee shall have delivered to Esterline and the Agent an Assignment and Acceptance in the form of Exhibit E ("Assignment and Acceptance") together with any Note or Notes subject to such assignment and (iii) the assignor Bank or Assignee has paid to the Agent a processing fee in the amount of $3,500. If the consent of the Agent and of Esterline shall be required for any such assignment, the Bank proposing to make such assignment shall give the Agent and Esterline no less than 20 calendar days notice of such requested consent. (b) From and after the date that the Agent notifies the assignor Bank that it has received (and provided its consent with respect to) an executed Assignment and Acceptance and payment of the above- referenced processing fee, (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 Bank under the Loan Documents, and (ii) the assignor Bank 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 and be released from its obligations under the Loan Documents. (c) Within five Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee and requesting new Notes (and provided that it consents to such assignment in accordance with Section 11.08(a)), the Companies shall execute and deliver to the Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and, if the assignor Bank has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Loans retained by the assignor Bank (such Notes to be in exchange for, but not in payment of, the Notes held by such Bank). Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, 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 Bank pro tanto. (d) Any Bank may, with the written consent of Esterline at all times other than during the existence of an Event of Default, which consent of Esterline, if required, shall not be unreasonably withheld, at any time sell to one or more commercial banks or other Persons not Affiliates of the Companies (a "Participant") participating interests in any Loans, the Commitment of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Loan Documents; provided, however, that (i) the originating Bank's obligations under this Agreement shall remain unchanged, (ii) the originating Bank shall remain solely responsible for the performance of such obligations, (iii) the Companies and the Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Banks as pursuant to subsections (a), (b) or (c) of the first proviso to Section 11.01, in which event such Participant shall (if agreed by the originating Bank) be entitled to vote with respect to such amendment, consent or waiver. In the case of any such participation, the Participant shall be entitled to the benefit of Sections 4.01, 4.03 and 11.05 as though it were also a Bank hereunder, and 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 Bank under this Agreement. If the consent of the Esterline shall be required for any such participation, the Bank proposing to make such participation shall give the Agent and Esterline no less than 20 calendar days notice of such requested consent. (e) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR SECTION203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 11.09 Confidentiality. Each Bank agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" or "secret" by the Companies and provided to it by any of the Companies or any of their respective Subsidiaries, or by the Agent on such Company's or such Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with any of the Companies or any of their respective Subsidiaries; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by the Bank, or (ii) was or becomes available on a nonconfidential basis from a source other than the Companies, provided that such source is not bound by a confidentiality agreement with the Companies known to the Bank; provided, however, that any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Agent, any Bank or their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Bank's independent auditors and other professional advisors; (G) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (H) as to any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which any of the Companies or any of their respective Subsidiaries is party to or is deemed party to with such Bank or such Affiliate; and (I) to its Affiliates. 11.10 Set-off In addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at any time and from time to time, without prior notice to the Companies, any such notice being waived by the Companies to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank to or for the credit or the account of the Companies against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Companies and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 11.11 [Intentionally Omitted] 11.12 Notification of Addresses, Lending Offices, etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 11.13 Termination of the Facility A Commitment under Existing Facility. Pursuant to Section 6.3 of the Existing Facility, the Companies hereby terminate the Facility A Commitment (as that term is defined in the Existing Facility) as of the Closing Date, and the Banks that are "Banks" under the Existing Facility hereby waive the prior notice requirement in Section 6.3 for such termination. The Company agrees to pay, on the date hereof, all accrued commitment fees under the Existing Facility to the Closing Date. 11.14 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 11.15 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 11.16 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Companies, the Banks, the Agent and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 11.17 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANIES, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANIES, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANIES, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW. 11.18 Waiver of Jury Trial. THE COMPANIES, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT- RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANIES, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 11.19 Guaranty. (a) Guaranty. Each of the Companies, in its capacity as a Guarantor, unconditionally and irrevocably guarantees to the Agent, the Issuing Bank and the Banks, and their respective successors, endorsees, transferees and assigns, the full and prompt payment when due (whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise) and performance of the Obligations of each Company (other than such Guarantor) to the Agent, the Issuing Bank and the Banks (the "Guaranteed Obligations"). The Guaranteed Obligations do not include any of the direct obligations or indebtedness of the Guarantor as a borrower (or an L/C Borrower) under the Credit Agreement to the Issuing Bank, any of the Banks or the Agent. The Guaranteed Obligations include interest which, but for an Insolvency Proceeding, would have accrued on such Guaranteed Obligations, whether or not a claim is allowed against any Company for such interest in any such Insolvency Proceeding. (b) Separate Obligation. Each Guarantor acknowledges and agrees (i) that the Guaranteed Obligations are separate and distinct from any indebtedness, obligations or liabilities arising under or in connection with any other agreement, instrument or guaranty, including under any provision of this Agreement other than this Section 11.19, executed at any time by the Guarantor in favor of the Agent, the Issuing Bank or any of the Banks, and (ii) the Guarantor shall pay and perform all of the Guaranteed Obligations as required under this Section 11.19, and the Agent, the Issuing Bank and the Banks may enforce any and all of their rights and remedies hereunder, without regard to any other agreement, instrument or guaranty, including any provision of this Agreement other than this Section 11.19, at any time executed by the Guarantor in favor of the Agent, the Issuing Bank or any of the Banks, regardless of whether or not any such other agreement, instrument or guaranty, or any provision thereof or hereof, shall for any reason become unenforceable or any of the indebtedness, obligations or liabilities thereunder shall have been discharged, whether by performance, avoidance or otherwise. Each Guarantor acknowledges that in providing benefits to the Companies and the Guarantor, the Agent, the Issuing Bank and the Banks are relying upon the enforceability of this Section 11.19 and the Guaranteed Obligations as separate and distinct indebtedness, obligations and liabilities of the Guarantor, and each Guarantor agrees that the Agent, the Issuing Bank and the Banks would be denied the full benefit of their bargain if at any time this Section 11.19 or the Guaranteed Obligations were treated any differently. The fact that the guaranty is set forth in this Agreement rather than in a separate guaranty document is for the convenience of the Companies and the Guarantors and shall in no way impair or adversely affect the rights or benefits of the Banks, the L/C Bank or the Agent under this Section 11.19. Each Guarantor agrees to execute and deliver a separate agreement, immediately upon request at any time of the Agent or any Bank, evidencing the Guarantor's obligations under this Section 11.19. Upon the occurrence of any Event of Default, a separate action or actions may be brought against the Guarantor, whether or not any other Company or any other guarantor or Person is joined therein or a separate action or actions are brought against any Company or any such other guarantor or Person. (c) Limitation of Guaranty. To the extent that any court of competent jurisdiction shall impose by final judgment under applicable law (including the California Uniform Fraudulent Transfer Act and Sections 544 and 548 of the Bankruptcy Code) any limitations on the amount of the Guarantor's liability with respect to the Guaranteed Obligations which the Agent, the Issuing Bank or the Banks can enforce under this Section 11.19, the Agent, the Issuing Bank and the Banks by their acceptance hereof accept such limitation on the amount of the Guarantor's liability hereunder to the extent needed to make this Section 11.19 fully enforceable and nonavoidable. (d) Liability of Guarantor. The liability of the Guarantor under this Section 11.19 shall be irrevocable, absolute, independent and unconditional, and shall not be affected by any circumstance which might constitute a discharge of a surety or guarantor other than the indefeasible payment and performance in full of all Guaranteed Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Guarantor agrees as follows: (i) each Guarantor's liability hereunder shall be the immediate, direct, and primary obligation of the Guarantor and shall not be contingent upon the Agent's, the Issuing Bank's or any Bank's exercise or enforcement of any remedy it may have against any of the other Companies or any other Person, or against any collateral or other security for any Guaranteed Obligations; (ii) this Guaranty is a guaranty of payment when due and not merely of collectibility; (iii) the Agent, the Issuing Bank and the Banks may enforce this Section 11.19 upon the occurrence of an Event of Default notwithstanding the existence of any dispute among the Agent, the Issuing Bank and the Banks and any Company with respect to the existence of such Event of Default; (iv) the Guarantor's payment of a portion, but not all, of the Guaranteed Obligations shall in no way limit, affect, modify or abridge the Guarantor's liability for any portion of the Guaranteed Obligations remaining unsatisfied; and (v) the Guarantor's liability with respect to the Guaranteed Obligations shall remain in full force and effect without regard to, and shall not be impaired or affected by, nor shall the Guarantor be exonerated or discharged by, any of the following events: (A) any Insolvency Proceeding; (B) any limitation, discharge, or cessation of the liability of the any Company or any other guarantor or Person for any Guaranteed Obligations due to any statute, regulation or rule of law, or any invalidity or unenforceability in whole or in part of any of the Guaranteed Obligations or the Loan Documents; (C) any merger, acquisition, consolidation or change in structure of any Company or any other guarantor or Person, or any sale, lease, transfer or other disposition of any or all of the assets or shares of any Company or any other guarantor or other Person; (D) any assignment or other transfer, in whole or in part, of the Agent's, the Issuing Bank's or any Bank's interests in and rights under this Guaranty or the other Loan Documents; (E) any claim, defense, counterclaim or setoff, other than that of prior performance, that any Company, the Guarantor, any other guarantor or other Person may have or assert, including any defense of incapacity or lack of corporate or other authority to execute any of the Loan Documents; (F) the Agent's, the Issuing Bank's or any Bank's amendment, modification, renewal, extension, cancellation or surrender of any Loan Document or any Guaranteed Obligations; (G) the Agent's, the Issuing Bank's or any Bank's exercise or nonexercise of any power, right or remedy with respect to any Guaranteed Obligations or any collateral; (H) the Agent's, the Issuing Bank's or any Bank's vote, claim, distribution, election, acceptance, action or inaction in any Insolvency Proceeding; (I) any other guaranty, whether by the Guarantor or any other Person, of all or any part of the Guaranteed Obligations or any other indebtedness, obligations or liabilities of any Company to the Agent or the Banks. (e) Consents of Guarantor. Each Guarantor hereby unconditionally consents and agrees that, without notice to or further assent from the Guarantor: (i) the principal amount of the Guaranteed Obligations may be increased or decreased and additional indebtedness or obligations of any Company under the Loan Documents may be incurred and the time, manner, place or terms of any payment under any Loan Document may be extended or changed, by one or more amendments, modifications, renewals or extensions of any Loan Document or otherwise; (ii) the time for any Company's (or any other Person's) performance of or compliance with any term, covenant or agreement on its part to be performed or observed under any Loan Document may be extended, or such performance or compliance waived, or failure in or departure from such performance or compliance consented to, all in such manner and upon such terms as the Agent, the Issuing Bank and the Banks may deem proper; (iii) the Agent, the Issuing Bank and the Banks may request and accept other guaranties and may take and hold other security as collateral for the Guaranteed Obligations, and may, from time to time, in whole or in part, exchange, sell, surrender, release, subordinate, modify, waive, rescind, compromise or extend such other guaranties or security and may permit or consent to any such action or the result of any such action, and may apply such security and direct the order or manner of sale thereof; (iv) the Agent, the Issuing Bank and the Banks may exercise, or waive or otherwise refrain from exercising, any other right, remedy, power or privilege even if the exercise thereof affects or eliminates any right of subrogation or any other right of the Guarantor against any Company; (f) Guarantor's Waivers. Each Guarantor waives and agrees not to assert: (i) any right to require the Agent, the Issuing Bank or any Bank to proceed against any Company, any other guarantor or any other Person, or to pursue any other right, remedy, power or privilege of the Agent, the Issuing Bank or any Bank whatsoever; (ii) the defense of the statute of limitations in any action hereunder or for the collection or performance of the Guaranteed Obligations; (iii) any defense arising by reason of any lack of corporate or other authority or any other defense of any Company, the Guarantor or any other Person; (iv) any defense based upon the Agent's, the Issuing Bank's or any Bank's errors or omissions in the administration of the Guaranteed Obligations; (v) any rights to set-offs and counterclaims; (vi) without limiting the generality of the foregoing, to the fullest extent permitted by law, any defenses or benefits that may be derived from or afforded by applicable law limiting the liability of or exonerating guarantors or sureties, or which may conflict with the terms of this Section 11.19, including any and all benefits that otherwise might be available to the Guarantor under California Civil Code SECTIONS 1432, 2809, 2810, 2815, 2819, 2839, 2845, 2848, 2849, 2850, 2899 and 3433 and California Code of Civil Procedure SECTIONS 580a, 580b, 580d and 726; and (vii) any and all notice of the acceptance of this guaranty, and any and all notice of the creation, renewal, modification, extension or accrual of the Guaranteed Obligations, or the reliance by the Agent, the Issuing Bank and the Banks upon this guaranty, or the exercise of any right, power or privilege hereunder. The Guaranteed Obligations shall conclusively be deemed to have been created, contracted, incurred and permitted to exist in reliance upon this guaranty. Each Guarantor waives promptness, diligence, presentment, protest, demand for payment, notice of default, dishonor or nonpayment and all other notices to or upon any Company, each Guarantor or any other Person with respect to the Guaranteed Obligations. (g) Financial Condition of Borrower. No Guarantor shall have any right to require the Agent, the Issuing Bank or the Banks to obtain or disclose any information with respect to: the financial condition or character of any Company or the ability of any Company to pay and perform the Guaranteed Obligations; the Guaranteed Obligations; any collateral or other security for any or all of the Guaranteed Obligations; the existence or nonexistence of any other guarantees of all or any part of the Guaranteed Obligations; any action or inaction on the part of the Agent, the Issuing Bank or the Banks or any other Person; or any other matter, fact or occurrence whatsoever. Each Guarantor hereby acknowledges that it has undertaken its own independent investigation of the financial condition of any Company and all other matters pertaining to this guaranty and further acknowledges that it is not relying in any manner upon any representation or statement of the Agent, the Issuing Bank or any Bank with respect thereto. (h) Subrogation. Until the Guaranteed Obligations shall be satisfied in full and the Commitments shall be terminated, the Guarantor shall not have, and shall not directly or indirectly exercise, (i) any rights that it may acquire by way of subrogation under this Section 11.19, by any payment hereunder or otherwise, (ii) any rights of contribution, indemnification, reimbursement or similar suretyship claims arising out of this Section 11.19 or (iii) any other right which it might otherwise have or acquire (in any way whatsoever) which could entitle it at any time to share or participate in any right, remedy or security of the Banks, the Issuing Bank or the Agent as against any Company or other guarantors, whether in connection with this Section 11.19, any of the other Loan Documents or otherwise. If any amount shall be paid to the Guarantor on account of the foregoing rights at any time when all the Guaranteed Obligations shall not have been paid in full, such amount shall be held in trust for the benefit of the Agent, the Issuing Bank and the Banks and shall forthwith be paid to the Agent to be credited and applied to the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms of the Loan Documents. (i) Subordination. All payments on account of all indebtedness, liabilities and other obligations of any of the Companies to the Guarantor, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined (the "Subordinated Debt") shall be subject, subordinate and junior in right of payment and exercise of remedies, to the extent and in the manner set forth herein, to the prior payment in full in cash or cash equivalents of the Guaranteed Obligations. As long as any of the Guaranteed Obligations shall remain outstanding and unpaid, the Guarantor shall not accept or receive any payment or distribution by or on behalf of any Company, directly or indirectly, or assets of any Company, of any kind or character, whether in cash, property or securities, including on account of the purchase, redemption or other acquisition of Subordinated Debt, as a result of any collection, sale or other disposition of collateral, or by setoff, exchange or in any other manner, for or on account of the Subordinated Debt ("Subordinated Debt Payments"), except that prior to the occurrence of any Default, the Guarantor shall be entitled to accept and receive regularly scheduled payments on the Subordinated Debt, in accordance with past business practices of the Guarantor and the Companies and not in contravention of the terms of the Loan Documents. In the event that any Subordinated Debt Payments shall be received in contravention of this Section, such Subordinated Debt Payments shall be held in trust for the benefit of the Agent, the Issuing Bank and the Banks and shall be paid over or delivered to the Agent for application to the payment in full in cash or cash equivalents of all Guaranteed Obligations remaining unpaid to the extent necessary to give effect to this Section after giving effect to any concurrent payments or distributions to the Agent, the Issuing Bank and the Banks in respect of the Guaranteed Obligations. (j) Continuing Guaranty. This Guaranty is a continuing guaranty and agreement of subordination and shall continue in effect and be binding upon each Guarantor until termination of the Commitments and payment and performance in full of the Guaranteed Obligations, including Guaranteed Obligations which may exist continuously or which may arise from time to time under successive transactions, and each Guarantor expressly acknowledges that this Guaranty shall remain in full force and effect notwithstanding that there may be periods in which no Guaranteed Obligations exist. This Guaranty shall continue in effect and be binding upon each Guarantor until actual receipt by the Agent of written notice from such Guarantor of its intention to discontinue this Guaranty as to future transactions (which notice shall not be effective until noon on the day five Business Days following such receipt); provided that no revocation or termination of this Guaranty shall affect in any way any rights of the Agent, the Issuing Bank and the Banks hereunder with respect to any Guaranteed Obligations arising or outstanding on the date of receipt of such notice, including any subsequent continuation, extension, or renewal thereof, or change in the terms or conditions thereof, or any Guaranteed Obligations made or created after such date to the extent made or created pursuant to a legally binding commitment of any of the Issuing Bank or the Banks in existence as of the date of such revocation (collectively, "Existing Guaranteed Obligations"), and the sole effect of such notice shall be to exclude from this Guaranty Guaranteed Obligations thereafter arising which are unconnected to any Existing Guaranteed Obligations. (k) Reinstatement. This Guaranty shall continue to be effective or shall be reinstated and revived, as the case may be, if, for any reason, any payment of the Guaranteed Obligations by or on behalf of any Company (or receipt of any proceeds of collateral) shall be rescinded, invalidated, declared to be fraudulent or preferential, set aside, voided or otherwise required to be repaid to any Company, its estate, trustee, receiver or any other Person (including under the Bankruptcy Code or other state or federal law), or must otherwise be restored by the Agent, the Issuing Bank or any Bank, whether as a result of Insolvency Proceedings or otherwise. All losses, damages, costs and expenses that the Agent, the Issuing Bank or the Banks may suffer or incur as a result of any voided or otherwise set aside payments shall be specifically covered by the indemnity in favor of the Banks, the Issuing Bank and the Agent contained in Section 11.05. (l) Substantial Benefits. The funds that have been borrowed from the Banks by the Companies, and the Issuance of any Letter of Credit by the Issuing Bank, have been and are to be contemporaneously used for the benefit of the Companies and the Guarantor. It is the position, intent and expectation of the parties that the Companies and the Guarantor have derived and will derive significant and substantial benefits from the accommodations that have been made by the Banks and the Issuing Bank under the Loan Documents. The Guarantor has received at least "reasonably equivalent value" (as such phrase is used in Section 548 of the Bankruptcy Code, in Section 3439.04 of the California Uniform Fraudulent Transfer Act and in comparable provisions of other applicable law) and more than sufficient consideration to support its obligations hereunder in respect of the Guaranteed Obligations and under any of the Loan Documents to which it is a party. Immediately prior to and after and giving effect to the incurrence of the Guarantor's obligations under this Guaranty the Guarantor will be solvent. (m) Knowing and Explicit Waivers. EACH GUARANTOR ACKNOWLEDGES THAT IT EITHER HAS OBTAINED THE ADVICE OF LEGAL COUNSEL OR HAS HAD THE OPPORTUNITY TO OBTAIN SUCH ADVICE IN CONNECTION WITH THE TERMS AND PROVISIONS OF THIS SECTION 11.19. EACH GUARANTOR ACKNOWLEDGES AND AGREES THAT EACH OF THE WAIVERS AND CONSENTS SET FORTH HEREIN, ARE MADE WITH FULL KNOWLEDGE OF THEIR SIGNIFICANCE AND CONSEQUENCES, AND THAT ALL SUCH WAIVERS AND CONSENTS HEREIN ARE EXPLICIT AND KNOWING WHICH EACH GUARANTOR EXPECTS TO BE FULLY ENFORCEABLE. If, while any Subordinated Debt is outstanding, any Insolvency Proceeding is commenced by or against any Company or its property, the Agent, when so instructed by the Issuing Bank and the Majority Banks, is hereby irrevocably authorized and empowered (in the name of the Issuing Bank and the Banks or in the name of the Guarantor or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution in respect of the Subordinated Debt and give acquittance therefor and to file claims and proofs of claim and take such other action (including voting the Subordinated Debt) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of the Agent the Issuing Bank and the Banks; and each Guarantor shall promptly take such action as the Agent (on instruction from the Issuing Bank and the Majority Banks) may reasonably request (A) to collect the Subordinated Debt for the account of the Issuing Bank and the Banks and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (B) to execute and deliver to the Agent, such powers of attorney, assignments and other instruments as it may request to enable it to enforce any and all claims with respect to the Subordinated Debt, and (C) to collect and receive any and all Subordinated Debt Payments. 11.20 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Companies, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in San Francisco, California by their proper and duly authorized officers as of the day and year first above written. ESTERLINE TECHNOLOGIES CORPORATION KORRY ELECTRONICS CO. By /s/ R. W. Stevenson By /s/ R. W. Stevenson -------------------------------- ------------------------------ Title E.V. P. & C.F.O. Title V. P. --------------------------- --------------------------- ARMTEC DEFENSE PRODUCTS CO. MIDCON CABLES CO. By /s/ R. W. Stevenson -------------------------------- By /s/ R. W. Stevenson Title V. P. ------------------------------ --------------------------- Title V. P. --------------------------- EQUIPMENT SALES CO. TA MFG. CO. By /s/ R. W. Stevenson By /s/ R. W. Stevenson ------------------------------ ----------------------------- Title V. P. Title V. P. --------------------------- -------------------------- ANGUS ELECTRONICS CO. TULON CO. By /s/ R. W. Stevenson By /s/ R. W. Stevenson ------------------------------ ----------------------------- Title V. P. Title V. P. --------------------------- -------------------------- EXCELLON AUTOMATION CO. W.A. WHITNEY CO. By /s/ R. W. Stevenson By /s/ R. W. Stevenson ------------------------------ ----------------------------- Title V. P. Title V. P. --------------------------- -------------------------- FEDERAL PRODUCTS CO. MASON ELECTRIC CO. By /s/ R. W. Stevenson By /s/ R. W. Stevenson ------------------------------ ----------------------------- Title V. P. Title V. P. --------------------------- -------------------------- HYTEK FINISHES CO. By /s/ R. W. Stevenson ------------------------------ Title V. P. --------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By /s/ Maria Vickroy-Peralta ------------------------------ Title Vice President --------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Issuing Bank By /s/ Maria Vickroy-Peralta ------------------------------ Title Vice President --------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By /s/ Maria Vickroy-Peralta ------------------------------ Title Vice President --------------------------- THE BANK OF TOKYO-MITSUBISHI, LTD., SEATTLE BRANCH By /s/ David Purcell ------------------------------ Title Vice President --------------------------- BANK OF AMERICA NW, N.A., DBA SEAFIRST BANK By /s/ Paul R. Rollins ----------------------------- Title Senior Vice President -------------------------- U.S. BANK OF WASHINGTON, N.A. By /s/ Peter Bentley ----------------------------- Title Senior Vice President -------------------------- WELLS FARGO BANK, N.A. By /s/ Donald H. Ralston ------------------------------ Title Vice President -------------------------- EX-10 3 EXHIBIT 10.22 EXHIBIT 10.22 REAL PROPERTY LEASE AND SUBLEASE THIS REAL PROPERTY LEASE AND SUBLEASE (this "Lease"), dated for reference purposes the 28th day of June, 1996, is by and between 810 DEXTER L.L.C., a Washington limited liability company (the "Landlord"), and KORRY ELECTRONICS CO., a Delaware corporation (the "Tenant"). Landlord and Tenant agree as follows: 1. PREMISES. Landlord hereby leases to Tenant and Tenant leases from Landlord, upon the terms and subject to the conditions set forth in this Lease, that certain real property and improvements thereon, commonly known as 810 Dexter Avenue North, Seattle, Washington, along with the Adjoining Parking Lot (defined hereafter), all as legally described on Exhibit A attached hereto and incorporated herein by this reference (the "Real Property"). The leased premises (the "Premises") shall contain the entire building (the "Building"), which is approximately 93,000 square feet, and the Adjoining Parking Lot. Tenant may not use, occupy or penetrate the roof of the Premises without Landlord's consent. 2. PARKING. The Premises leased by Tenant hereunder shall include without additional cost or charge the Adjoining Parking Lot (the "Adjoining Parking Lot") adjacent to the Building subject to Landlord's sublease of all but thirty two (32) unreserved parking spaces. At the commencement of the Fourth Lease Year (defined hereinafter) Landlord shall sublease only one-third of the Adjoining Parking Lot and at the commencement of the Sixth Lease Year (defined hereinafter) Landlord shall cease subleasing any of the Adjoining Parking Lot. Landlord hereby grants to Tenant a first right of refusal on all parking spaces Landlord is subleasing from Tenant which may become available and which are not needed by other tenants from time to time, at a price of $50 per space per month. Landlord recognizes that Tenant may need additional parking and accordingly Landlord agrees to discuss in good faith with Tenant, at Tenant's request, Landlord's construction of a parking garage for Tenant on property in the present parking lot. So long as Landlord fulfills its obligation to discuss construction of the parking garage in good faith, it shall not be obligated to build same. In addition, Landlord reserves the right to construct at its sole cost and expense and at no cost to Tenant a parking garage structure on the Adjoining Parking Lot. Landlord shall provide Tenant with at least four (4) months prior written notice of commencement of construction. In either event, upon completion Tenant shall have the same number of spaces in the garage that are provided above at no additional cost, and during construction of the garage, to the extent Tenant is not able to use the portion of the Adjoining Parking Lot which Landlord is not then subleasing, Landlord shall provide Tenant at Landlord's expense with substitute parking within two (2) blocks of the Adjoining Parking Lot. During construction Landlord shall not unreasonably disrupt Tenant's use of the remainder of the Premises. 3. TERM. 3.1 Initial Term. The initial term (the "Initial Term") of this Lease shall be for a period, commencing on the Commencement Date (defined hereinafter) and ending July 31, 2011, unless sooner terminated pursuant to any provision hereof. For purposes of this Lease, the term "Lease Year" shall be the one year period beginning on an anniversary of the Commencement Date and continuing through the day before the next anniversary of the Commencement Date (except the final Lease Year ending July 31, 2011 may be less than twelve (12) months). 3.2 Commencement Date. This Lease shall be effective when signed by Landlord and Tenant. The Initial Term shall commence (the "Commencement Date") on the earlier of Tenant's occupancy of the Premises to conduct business or the issuance of a "Certificate of Occupancy" after completion of Tenant's Work (defined in Section 9.2 hereafter), whichever occurs first, but in no event later than December 1, 1996; provided, however, that if Tenant has not been issued a "Certificate of Occupancy" for the Premises by December 1, 1996, Tenant shall have the right to terminate this Lease on notice to Landlord so long as Tenant completes Tenant's Work (for which Landlord must reimburse Tenant up to $150,000 within ten (10) days of completion), and all Tenant's Work shall become property of Landlord. Tenant shall use all reasonable efforts to complete Tenant's Work by December 1, 1996. 3.3 Extensions. If Tenant is not in default under this Lease beyond the applicable cure period either at the time of option exercise or at any time until commencement of an Extension Term, Tenant shall have the right and option ("Option to Renew") of extending the term of this Lease for two (2) additional successive terms (each an "Extension Term") of five (5) years each, upon the terms and conditions provided herein. If Tenant elects to exercise such option, it shall do so by giving notice in writing to Landlord of such election at least one hundred eighty (180) days prior to the expiration of the Initial Term or as such Initial Term may be extended. 3.4 Tenant's Early Termination Rights. Tenant shall have the right to terminate this Lease by providing Landlord two (2) years irrevocable advance notice of its intent to terminate. If Tenant so terminates this Lease, Landlord shall reimburse Tenant for the unamortized portion of Tenant's costs (as specified by Tenant) to obtain all permits and approvals for its work on the Premises, costs of complying with energy codes and costs of installed heating and air-conditioning systems ("Reimbursable Costs"). The Reimbursable Costs shall be amortized on a straight line basis over fifteen (15) years, and the amount owed by Landlord shall not exceed $300,000 for the top floor, $100,000 for the middle floor, and $100,000 for the bottom floor. For example, if Tenant terminates at the end of the Third Lease Year, Tenant will be entitled to receive 12/15th's of the first $300,000 of its top floor Reimbursable Costs. Tenant shall also have the right to terminate this Lease at any time in the event soil or groundwater contamination is discovered on, under or near the Premises and a local, state or federal agency requires investigations, testing or cleanup that materially interfere with Tenant's use of the Premises; provided, if such contamination is confined to the Adjoining Parking Lot Landlord may defeat Tenant's termination by notifying Tenant in writing within fifteen (15) days of receipt of Tenant's notice that Landlord will eliminate the contaminated area from the Premises and supply Tenant with replacement parking within two (2) blocks of the Premises, for all spaces eliminated from the Premises. Landlord and Tenant shall enter into an amendment to this Lease to evidence such elimination. If the Lease is terminated pursuant to this paragraph Reimbursable Costs shall be capped at $150,000. 4. MONTHLY AND ADDITIONAL RENT. 4.1 Minimum Monthly Rent - Initial Term. Subject to reduction pursuant to Section 10 and Section 43, but otherwise without offset or deduction except as expressly set forth herein, Tenant shall pay to Landlord, without notice or demand, on or before the first day of each calendar month, at the address specified below Landlord's signature hereon or at such other place as Landlord shall designate, minimum monthly rent during the Initial Term for the Premises as follows: (a) For the first lease year, the ("First Lease Year") which begins on the Commencement Date and continues through the day before the first anniversary of the Commencement Date, minimum monthly rent shall be $36,000 per month (prorated for partial months); (b) For the second lease year the ("Second Lease Year"), which begins on the first anniversary of the Commencement Date and continues through the day before the second anniversary of the Commencement Date, minimum monthly rent shall be $38,000 per month; (c) For the third lease year (the "Third Lease Year"), which begins on the second anniversary of the Commencement Date and continues through the day before the third anniversary of the Commencement Date, minimum monthly rent shall be $40,000 per month; (d) For the fourth lease year (the "Fourth Lease Year"), which begins on the third anniversary of the Commencement Date and continues through the day before the fourth anniversary of the Commencement Date, and for each successive lease year thereafter continuing until the last month of the Initial Term, minimum monthly rent shall be $40,000 per month; provided that beginning with the first month of the Fourth Lease Year and continuing on the first day of every other succeeding Lease Year, the minimum monthly rent shall be increased by a percentage equal to the percentage increase in the Index (defined below) during the prior two-year period, up to a maximum percentage increase of two and one-half percent (2-1/2%) in any one year, for a maximum of five percent (5%) increase for each two-year period. (e) As used herein, the term "Index" shall mean the Consumer Price Index for all Urban Consumers - All Items, West Cities A Average, as published by the U.S. Department of Labor's Bureau of Labor Statistics. (f) In addition to the rental adjustments described above, and not in lieu thereof, a rent adjustment shall be made on August 1, 2001, which shall be an amount equal to one-half of the sum of Monthly Excess Amounts (defined below) computed at the end of each of the following two- year periods: 8/1/97 through 7/31/99, and 8/1/99 through 7/31/01. (g) As used herein, the term "Monthly Excess Amount" means the difference between (a) the monthly increase that would have been made for the upcoming two-year period if the two and one-half percent annual limit were not in effect, and (b) the monthly rent increase actually payable (i.e., with the two and one-half percent annual limit in effect). (h) In addition to the rental adjustments described above, and not in lieu thereof, a rent adjustment shall be made on August 1, 2005, which shall be an amount equal to one-half of the sum of the Monthly Excess Amounts computed at the end of each of these two-year periods: 8/1/01 through 7/31/03 and 8/1/03 through 7/31/05. (i) If the Index is discontinued, the parties shall substitute a comparable index of consumer prices. 4.2 Minimum Monthly Rent - Extension Terms. (a) Subject to reduction pursuant to Section 10 and Section 43, but otherwise without offset or deduction except as specifically set forth herein, Tenant shall pay to Landlord, without notice or demand, on or before the first day of each calendar month, at the address specified below Landlord's signature hereon or at such other place as Landlord shall designate, minimum monthly rent for: (i) the first Lease Year of each Extension Term shall be determined pursuant to Section (b) below, and (ii) the final four (4) Lease Years of each Extension Term shall be an amount equal to the minimum monthly rent applicable during the first year of such Extension Term, increased by a percentage increase equal to the percentage increase in the Index over the prior two (2) Lease Years; provided the increase shall not be less than two and one-half percent (2-1/2%) or more than five percent (5%) for any two (2) year period. In no event will minimum monthly rent decrease. (b) Following Tenant's exercise of an Option to Renew, and at least one hundred fifty (150) days prior to the commencement of each Extension Term, Landlord and Tenant shall attempt in good faith to agree on minimum monthly rent for the first Lease Year of the Extension Term. If Landlord and Tenant fail to agree, rent for said Lease Year shall be equal to the prevailing market rent as determined by appraisal (the "Prevailing Market Rent"). Landlord and Tenant shall each designate an appraiser to determine the Prevailing Market Rent. If the two (2) appraisers so selected are unable to agree upon the Prevailing Market Rent within twenty (20) days of their appointment, they shall jointly designate a third appraiser. If the three (3) appraisers do not agree, the closest two (2) shall be averaged, to determine rent. The appraisers shall complete their determination of the Prevailing Market Rent on or before Ninety (90) days prior to the commencement of such Extension Term. All appraisers designated for the foregoing purpose shall be duly licensed and members of the American Institute of Real Estate Appraisers or any comparable successor certifying organization if such institute is not then in existence. The determination of rent hereunder shall be conclusive and binding on Landlord and Tenant. (c) The Prevailing Market Rent shall be determined by taking into account the size and location of the Premises, its usage and which party paid for the various improvements. 5. USE. The Premises may be used by Tenant for any purpose in accordance with law. Tenant shall not do or permit to be done in or about Premises anything which is illegal or unlawful, or which would constitute a nuisance. 6. UTILITIES. Tenant hereby covenants and agrees to pay all charges (including, without limitation, all taxes by governmental units billed with or on utilities) for water, sewer, garbage removal, heat, light, and for all other utilities which shall be used in or charged against the Premises during the Initial Term of this Lease and as it may be extended. In the event any such utilities are not separately metered for the Premises, Tenant shall pay its share ("Tenant's Share") of such utilities, as reasonably determined by Landlord based on increases over usage in the Building immediately prior to the Commencement Date and reflecting the usage by all Building occupants. Tenant's Share shall be rebuttably presumed to be a reasonable determination, unless Tenant within thirty (30) days of such notice provides Landlord with a professional opinion of a qualified consultant which concludes that a different allocation is more accurate. Landlord shall not be liable in any manner whatsoever should the furnishing of any of these services be delayed, interrupted or prevented unless caused by the negligence or wilful misconduct of Landlord. If, at the commencement of the Initial Term, any extension thereof, or any time thereafter, Landlord or Tenant shall elect to separately meter any utilities to the Premises, Tenant shall timely and directly pay all such separately metered utilities relating to Tenant's use of the Premises. Utilities payments required by Tenant shall be additional rent. Landlord may pay Tenant's Share of said utilities if and to the extent Tenant does not pay after receipt of notice of default and expiration of the applicable cure period. 7. REPAIR AND CARE OF PREMISES. The Premises have been inspected and are accepted by Tenant in their present condition, AS IS, and Tenant will at all times keep the Premises neat, clean and in a sanitary condition. Tenant will at all times preserve the Premises in as good repair as they now are or may hereafter be put to, ordinary wear and tear excepted. Tenant will commit no waste, damage or injury to the Premises, Building or Real Property. All repairs and maintenance shall be at Tenant's sole cost and expense, except that (i) at all times Landlord shall be responsible for structural repairs to the Building, and for repair of damage caused by sink holes in the Adjoining Parking Lot and (ii) from the Commencement Date through the end of the Third Lease Year, Landlord shall be responsible for maintenance, repair and replacement of the asphaltic portions of the roof of the Building. Should either party fail to make any repairs required of it hereunder within a reasonable time (which, except in the event of an emergency, shall mean within thirty (30) days after prior written notice from the non-repairing party or longer if necessary if the repair is commenced within such thirty (30) day period and diligently prosecuted to completion), or fail to make any payments of any kind required of it by any provisions of this Lease, the other party may, at its option, make the same, and the amount or cost thereof shall immediately become due and payable by the other. Regardless of the allocation of responsibility of care of the Premises, Landlord and Tenant shall be responsible for damage caused by themselves, their agents, tenants, employees or contractors. 8. Intentionally deleted. 9. IMPROVEMENTS. 9.1 Landlord's Work. Landlord shall provide for the benefit of the Premises, at its sole cost and expense, each of the following ("Landlord's Work"): (a) Proper removal from the Premises of all asbestos and other hazardous materials from the Premises as of the Commencement Date; provided Tenant is responsible for all lead based paint, for all asbestos removed by Tenant without prior notice to Landlord, and for any removal or other remediation of hazardous materials which are discovered as a result of Tenant's penetration of the Real Property. (b) Resurface the floor of the top floor at a cost not to exceed $100,000, as necessary to receive Tenant's floor covering per Tenant's specifications. (c) Remove (and not permit replacements of) any sign on the exterior of the Premises except for those floor(s) subleased by Landlord. Where signs may be retained, Landlord may retain only existing signs or their comparable replacements. 9.2 Tenant's Work. Tenant shall construct those initial Tenant improvements specified on Exhibit B attached hereto ("Tenant's Work"). Tenant's Work shall include sealing or other repairs to the roof, including the vents and skylights, to prevent leakage. Such roof work shall be done prior to the end of the Third Lease Year in a manner reasonably approved by Landlord and Tenant. Any and all unused portion of the $100,000 floor allowance from Landlord specified in Section 9.1(b) above shall be applied to Tenant's roof repair work set forth above, to the extent of the cost of such work. After completion of Tenant's Work and upon notice by Tenant to Landlord, Tenant shall have the right during the term of this Lease to make such interior alterations, changes and improvements to the Premises, as Tenant desires. Any alterations, changes or improvements which adversely affect the structural members of the Building or involve penetration of the surface of the Real Property or modify the exterior of the Building, or impair any street access to the Real Property, require Landlord's advance written approval, which may be granted or withheld in Landlord's sole discretion. With respect to Tenant's Work and any other alterations, changes or improvements to the Premises by Tenant, Tenant shall comply with the following: (a) Compliance with Laws. All work shall be performed in conformity with all permits, rules, orders, regulations, ordinances, laws and other requirements of all governmental authorities having jurisdiction over such work. (b) Disputes. Tenant shall have sole responsibility to resolve any and all disputes relating to any construction it undertakes under this Lease, and shall pay all fees, costs, expenses, judgments, awards and liabilities incurred in connection therewith. (c) No Liens. At no time during or after the completion of any such work shall Tenant or any contractor of Tenant create or suffer there to be any lien or encumbrance upon the Premises including, without limit construction liens or other claims for lien made by parties claiming to have provided labor or material (collectively, "Construction Liens"). Notwithstanding the foregoing prohibition against Construction Liens, Tenant may in good faith and with due diligence contest the validity or amount of any Construction Lien and defer payment and discharge thereof during the pendency of such contest provided that: (i) such contest shall have the effect of preventing the sale or forfeiture of the Real Property, Building or any part thereof; (ii) within ten (10) days after Tenant has been notified of the filing of such Construction Lien, Tenant shall have notified Landlord in writing of Tenant's intention to contest such Construction Lien, and (iii) Tenant shall have deposited or caused to be deposited with Landlord a sum of money which shall be sufficient to pay in full such Construction Lien and all interest which might become due thereon, and shall keep on deposit an amount so sufficient at all times, increasing such amount to cover additions to the amount of such Construction Lien or additional interest. Such deposits are to be held without any allowance of interest. Landlord may apply such deposit as necessary to discharge the Construction Lien in dispute following the entry of a judgment and shall return any unused funds to Tenant. (d) Damage to Building or Property. Tenant agrees that at no time will Tenant (i) destroy, damage or impair the Building or any portion thereof including, without limitation, any systems or structural components thereof, (ii) impair the access to or from the Building or the Real Property except as reasonably necessary in connection with work consented to or approved by Landlord, or (iii) eliminate any access to a public street. (e) Disruption of Other Tenants. Tenant will take all reasonable measures to minimize all sounds, vibrations, debris, activities, impairment of access to or egress from, interruption or disruption of utility services or mechanical or other Building services, and other conditions that disrupt or impair the use and enjoyment of the Building or the Real Property by any other tenant. Tenant shall give such tenants reasonable notice of when disruptions or interruptions to access, utilities or building services shall occur and will take reasonable steps to minimize their duration and their impact on other tenants. To the extent practicable, Tenant shall schedule any disruptions or interruptions to access, utilities or Building services to occur on weekends or during evening hours. (f) Ownership of Improvements. All alterations, additions and improvements made or constructed by Tenant shall be and remain the property of Tenant during the Term of this Lease and shall become the property of Landlord as of the date of termination of this Lease or upon earlier vacating of the Premises and shall be delivered up to the Landlord with the Premises, normal wear and tear and damage by casualty and condemnation excepted. All trade fixtures installed by Tenant may be removed by Tenant upon the termination of this Lease if Tenant so elects, and shall be removed by the date of termination of this Lease or upon earlier vacating of the Premises if required by Landlord. Upon any such removal Tenant shall repair any damage to the Premises caused by such removal. In all projects other than Tenant's Work for which Tenant's construction costs are budgeted to exceed $750,000, Tenant shall in addition comply with the following terms and conditions: (a) Compliance with Plans and Specifications. All work shall be performed in accordance with all plans and specifications reasonably approved by Landlord and Tenant. (b) Approval of Contractors. All general contractors or other contractors directly engaged by Tenant shall be subject to Landlord's advance reasonable approval. All contracts entered into directly by Tenant shall name Landlord as a third-party beneficiary. Copies of all such agreements shall be delivered to Landlord promptly upon execution thereof. All construction and consultants' reports delivered to Tenant relating to any construction matters shall also be delivered and addressed to Landlord. (c) Bonding. Landlord may condition its approval of any work exceeding a cost of $750,000 upon a requirement that the contractor provide payment and performance bonds in adequate amounts to assure the full completion of the work undertaken. (d) Security for Tenant's Performance. Tenant shall grant to Landlord a security interest in all of the construction plans, specifications, purchase orders, agreements, work orders, permits and other rights and interests necessary to enable Landlord to complete any such work in the event Tenant defaults in any of its construction obligations. Landlord's lien shall be junior to the liens of Tenant's construction lender(s), if any. Tenant shall not otherwise pledge, encumber or transfer any such assets or rights. (e) Insurance. In addition to the other insurance to be purchased hereunder, Tenant shall purchase, at its expense, appropriate casualty and liability insurance to fully protect to commercially reasonable standards Tenant's and Landlord's respective interests. Tenant agrees that all general or other contractors it hires will carry general liability and builder's risk insurance on commercially reasonable terms. 10. SEISMIC UPGRADES. 10.1 If seismic upgrades are required by the City of Seattle or any other governmental entity as a result of a change in laws that affects all improvements and not as the sole result of Tenant's Work, Tenant shall perform such work and shall share in the cost of seismic upgrades in an amount equal to 50% of the portion of the Premises leased by Tenant (but not subleased to Landlord), e.g. 1/3 space occupied X 50% = 17%. 10.2 Except as described in Section 10.1, if any work by Tenant on the Premises results in a requirement by the City of Seattle that certain seismic upgrades be made to the Building, then the parties agree that: (a) Tenant shall pay all amounts up to $400,000 of the required seismic upgrades; (b) Landlord shall be responsible for all amounts in excess of $400,000 up to $600,000; (c) Tenant will finance Landlord's portion of the seismic upgrades referred to in Subsection 10.2(b), which shall be payable by Landlord to Tenant through a fifty percent (50%) rent reduction, plus interest at a rate of eight percent (8%) per year, commencing as funds are expended. (d) Tenant and Landlord will share the additional cost of seismic upgrades which exceed $600,000, on a 50/50 basis, with Tenant's portion determined by multiplying fifty percent (50) times the percentage of space leased (but not subleased by Landlord) (e.g. 50% x 2/3 Building = 34%). 11. INSURANCE AND TAXES. 11.1 Liability Insurance. Tenant shall, at all times during the term hereof and at Tenant's cost and expense, maintain in effect primary commercial general public liability insurance, naming Landlord as an additional insured in an amount of not less than $2,000,000 per person per occurrence and not less than $l,000,000 for damage to property in connection with the use, operation or condition of the Premises. In no event shall the limits of said policies be considered as limiting the liability of Tenant under this Lease, nor shall Tenant's duty to carry insurance create any legal responsibility of Tenant for any insured casualty. The insurance shall be issued prior to commencement of Tenant's Work by an insurance company or companies currently used by Tenant, in a commercially reasonable form, and a copy of each policy or certificate of insurance shall be delivered to Landlord before the commencement of Tenant's Work and before the expiration of each policy. If Tenant does not timely pay the premium for the insurance required hereunder Tenant shall so notify Landlord and Landlord may immediately upon notice to Tenant, pay such premium or provide a replacement policy. 11.2 Casualty Insurance. Tenant shall obtain and keep in full force and effect such policy or policies of fire and all-risk extended coverage insurance (including earthquake coverage at Tenant's option), and including coverage for vandalism and malicious mischief, on the Building and Premises, including any improvements thereon, insuring the Building for its full replacement cost. Such policies shall be primary, and the proceeds of any such insurance shall first be used to rebuild or repair the Premises if and as required hereunder. Landlord shall be named as an additional insured. Any such proceeds not required for such rebuilding or repairing shall be paid to and belong to Landlord. Tenant may also at its option obtain boiler insurance, rental loss insurance, and plate glass insurance, and such other coverages (including for the fire and all-risk extended coverage policies) as shall be commercially reasonable from time to time. If Tenant does not timely pay the premium for the insurance required hereunder Tenant shall so notify Landlord and Landlord may immediately upon notice to Tenant, pay such premium or provide a replacement policy. 11.3 Taxes And Assessments. In addition to the rent to be paid by Tenant as above provided, during the term of this Lease, Tenant shall timely pay directly to the taxing authority all real estate taxes and assessments levied on the Real Property. Landlord shall supply Tenant with the real estate tax statements at least two (2) months before taxes are due. Tenant shall have the right to, at its expense, appeal the real estate tax assessment for the Real Property. Such taxes and obligations shall be apportioned during the Initial Term and any extension thereof if applicable, so that Tenant shall pay only that proportion thereof as shall accrue during said term. Landlord shall elect to pay assessments over the maximum period possible. 11.4 Alternative Method Of Taxation. If at any time during the Term, the present method of taxation shall be changed so that in lieu of the whole or any part of any taxes, assessments, fees or charges levied, assessed or imposed on the Premises, there shall be levied, assessed or imposed on Landlord a capital levy or other tax directly on the rents received therefrom and/or a franchise tax, assessment, levy charge measured by or based, in whole or in part upon such rents, then all such taxes, assessments, fees or charges (except income taxes), or the part thereof so measured or based, shall be deemed to be included within the term "rent" for the purposes hereof. Tenant shall be liable for all taxes levied against personal property placed by Tenant in the Premises. If any such taxes are levied against Landlord or Landlord's property and if Landlord elects to pay the same or if the assessed value of Landlord's property is increased by inclusion of personal property placed by Tenant in the Premises and Landlord elects to pay the taxes based on such increase, Tenant shall pay as additional rent to Landlord upon demand that part of such taxes for which Tenant is liable hereunder. 12. DAMAGE OR DESTRUCTION. 12.1 Repair and Restoration. All casualty insurance payments for damage to the Building shall be used for the sole purpose of repairing, rebuilding and/or restoring the Building. From the date hereof and throughout the Initial Term, as it may be extended, if the Building is damaged or destroyed by fire or other casualty Tenant shall promptly rebuild and restore the Building to the extent of insurance proceeds and any deductible to its condition existing immediately prior to such fire or other casualty, provided that if Tenant reasonably estimates that it will take more than one hundred eighty (180) days from the date of damage to restore the Premises, or if the Building is damaged by an uninsured casualty Tenant, may elect to terminate this Lease upon thirty (30) days written notice to Landlord, given within thirty (30) days after such damage. Any such proceeds not required for such rebuilding or repairing shall be paid to and belong to Landlord. If the Lease is not so terminated, the Building shall be repaired in the manner and subject to the conditions provided for above and elsewhere in this Lease. If the conditions set forth above which enable Tenant to terminate this Lease occur during the last Lease Year, Landlord shall also have the right to terminate this Lease, unless Tenant, within twenty (20) days of receipt of Landlord's notice of termination, exercises the next remaining Option to Renew, if any. 12.2 Rental Abatement. In the event of damage or destruction to the Building which substantially affects Tenant's ability to operate its business, minimum monthly rent (but no other charges under this Lease) shall be abated in the same proportion that the area of the Premises used by Tenant after such casualty bears to the total area of the Premises, until the Building is repaired or restored, or the Lease expires or is sooner terminated under the other terms of this Lease, but in no event shall minimum monthly rent be abated for more than six (6) months. 13. INDEMNITY. 13.1 Indemnification by Tenant. Subject to the conditions and provisions of this Paragraph 13.1 and commencing upon execution of this Lease Tenant agrees to indemnify, defend and hold harmless Landlord and Landlord's assigns, affiliates, owners, beneficiaries, trustees, employees, representatives, officers, directors and agents ("Indemnitees") from and against any and all demands, claims, complaints, actions or causes of action, suits, proceedings, investigations, arbitrations, assessments, liens, losses, damages, liabilities, costs and expenses, including, but not limited to, interest, penalties and reasonable attorneys' fees and disbursements, asserted against, imposed upon or incurred by any Indemnitee, directly or indirectly, by reason of or resulting from any liability, obligation or claim (whether absolute, accrued, contingent or otherwise and whether a contractual, tax or any other type of liability, obligation or claim) arising out of, relating to or resulting from (a) any misrepresentation or breach of the representations, warranties, covenants or agreements of Tenant contained in or made pursuant to this Lease; (b) any failure to timely perform or comply in all material respects with any material covenant, agreement or undertaking of Tenant contained in or made pursuant to this Lease; (c) any violation or alleged violation by Tenant or any assignee or sublessee of Tenant of any permits, rules, orders, regulations, ordinances, laws and other requirements of any governmental authorities; (d) Tenant, Tenant's employees acting in the course of their employment, Tenant's business or operations, any assignee or sublessee of Tenant, their employees acting in the course of their employment or their business or operations; (e) any accident, injury or damage, howsoever and by whomsoever caused, to any person or property, occurring on the Premises unless caused by Landlord, its agents or other tenants of Landlord pursuant to the Sublease; (f) any injury to persons, damage to property or other liability caused by or resulting from Tenant's construction, improvement or maintenance in any part of the Building or Real Property; and (g) any damage to property or injury to the employees, business invitees or guests of Tenant or any assignee or sublessee of Tenant occurring in or about any other portion of the Project except if caused by Landlord or its agents. 13.2 Indemnification by Landlord. Subject to the conditions and provisions of this Paragraph 13.2, and commencing upon execution of this Lease, Landlord agrees to indemnify, defend and hold harmless Tenant and Tenant's assigns, affiliates, owners, beneficiaries, trustees, employees, representatives, officers, directors and agents ("Indemnitees") from and against any and all demands, claims, complaints, actions or causes of action, suits, proceedings, investigations, arbitrations, assessments, liens, losses, damages, liabilities, costs and expenses, including, but not limited to, interest, penalties and reasonable attorneys' fees and disbursements, asserted against, imposed upon or incurred by any Indemnitee, directly or indirectly, by reason of or resulting from any liability, obligation or claim (whether absolute, accrued, contingent or otherwise and whether a contractual, tax or any other type of liability, obligation or claim) arising out of, relating to or resulting from (a) any misrepresentation or breach of the representations, warranties, covenants or agreements of Landlord contained in or made pursuant to this Lease (which includes the sublease); (b) any failure to timely perform or comply in all material respects with any material covenant, agreement or undertaking of Landlord contained in or made pursuant to this Lease; (c) any violation or alleged violation by Landlord or any assignee or sublessee of Landlord of any permits, rules, orders, regulations, ordinances, laws and other requirements of any governmental authorities; (d) Landlord, Landlord's employees acting in the course of their employment, Landlord's business or operations, any assignee or sublessee of Landlord, their employees acting in the course of their employment or their business or operations; (e) any accident, injury or damage, howsoever and by whomsoever caused, to any person or property, occurring on the Premises caused by Landlord, its agents, contractors or employees; (f) any injury to persons, damage to property or other liability caused by or resulting from Landlord's construction, improvement or maintenance in any part of the Building or Real Property; and (g) any damage to property or injury to the employees, business invitees or guests of Landlord or any assignee or sublessee of Landlord occurring in or about any other portion of the Project except if caused by Tenant or its agents. 14. INSOLVENCY. In the event Tenant becomes insolvent, voluntarily or involuntarily bankrupt, or if a receiver, assignee or other liquidating officer is appointed for the business of Tenant, then Landlord may cancel this Lease at Landlord's option, effective thirty (30) days after giving Tenant and Guarantor notice of cancellation and opportunity to cure. 15. DEFAULT AND RE-ENTRY. Tenant shall be in default if it fails to pay any installment of rent when due after Landlord gives Tenant and Guarantor ten (10) days prior written notice of such failure to pay and opportunity to cure within such ten (10) days. Tenant shall also be in default if it fails to perform any other obligation under this Lease after Landlord gives Tenant and Guarantor thirty (30) days prior written notice and opportunity to cure; provided if Tenant commences to cure within the thirty (30) day period, but is unable to complete the cure within the thirty (30) day period, and if Tenant continues to proceed diligently to effect the cure, the thirty (30) day period shall be extended for such time as is necessary to reasonably allow Tenant to complete its cure of the default. 16. LANDLORD'S REMEDIES. 16.1 Remedies - General. If Tenant is in default, then Landlord shall have all rights available to it under Washington law including, without limit, the following rights and remedies, which are not exclusive: (i) to declare the Term hereof ended and to reenter the Premises and take possession thereof and remove all persons therefrom, and Tenant shall have no further claim thereon or hereunder; (ii) to cure such default on Tenant's behalf and at Tenant's sole expenses and charge Tenant for all costs and expenses incurred by Landlord in effecting such cure as additional rent with interest on such amounts at the rate specified in this Lease until paid; (iii) without declaring this Lease terminated, to reenter the Premises and occupy the whole or any part thereof for and on account of Tenant and to collect any unpaid Rent which has become payable, or which may thereafter become payable; or (iv) even though it may have reentered the Premises, at any time thereafter elect to terminate this Lease and all of the rights of Tenant in or to the Premises. 16.2 Reentry. If Landlord reenters the Premises, Landlord shall not be deemed to have terminated this Lease or the liability of Tenant to pay any Rent thereafter accruing as it becomes due, or to have terminated Tenant's liability for damages under any of the provisions hereof, by any such reentry or by any action, in unlawful detainer or otherwise, to obtain possession of the Premises, unless Landlord shall have notified Tenant in writing that it has so elected to terminate this Lease, and Tenant shall be liable for and reimburse Landlord upon demand for all costs and expenses of every kind and nature incurred in retaking possession of the Premises and all other losses suffered by Landlord as a consequence of Tenant's default. In the event of any entry or taking possession of the Premises, Landlord shall have the right, but not the obligation, to remove therefrom all or any part of the personal property located therein and may place the same in storage at a public warehouse at the expense and risk of Tenant. 16.3 Termination. If Landlord elects to terminate this Lease Landlord may recover from Tenant as damages, the following: (i) the worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of the Rent loss that could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the Rent loss that could be reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease including, but not limited to, any costs or expenses incurred by Landlord in retaking possession of the Premises, including reasonable attorneys' fees therefor; maintaining or preserving the Premises after such default; preparing the Premises for reletting to a new tenant, including repairs or alterations to the Premises for such reletting; leasing commissions; and any other costs necessary or appropriate to relet the Premises; and (v) such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of Washington. As used in this Paragraph 16.3, the "worth at the time of award" shall be computed by allowing interest at the greater of nine percent (9%) per annum or two percentage points (2%) above the prime rate as publicly announced by Seattle First National Bank, N.A., or its lawful successor. For purposes of this Paragraph only, the term "rent" shall be deemed to be the rent and all additional rent and other sums required to be paid by Tenant pursuant to the terms of this Lease. 17. COSTS AND ATTORNEYS' FEES. If by reason of any default on the part of Landlord, Tenant or Guarantor it becomes necessary for another party hereto to employ an attorney, or in case Landlord, Tenant or Guarantor shall bring suit to recover any amount due hereunder, or for breach of any provision of this Lease (including the Guaranty), or to recover possession of the leased Premises, or if Landlord, Tenant or Guarantor shall bring any action for any relief against the other, declaratory or otherwise, arising out of this Lease, then and in any of such events, the prevailing party shall be entitled to a reasonable attorneys' fee and all costs and expenses expended or incurred in connection with such default or action, including any appellate action. 18. ASSIGNMENT AND SUBLETTING. On twenty (20) days prior notice to Landlord, Tenant may assign its interest in this Lease or sublease all or any portion of the Premises. Tenant and its guarantor, Esterline Technologies Corporation, shall be released from liability under this Lease if Tenant assigns its interest hereunder to an entity which assumes this Lease and has a net worth of at least equal to guarantor's at the time of assignment, otherwise no such assignment or subletting shall relieve Tenant of any liability under this Lease, and Tenant and guarantor shall remain primarily liable hereunder. 19. OPTION TO PURCHASE. Landlord hereby grants Tenant the option to purchase the Real Property and Building ("Purchase Option"). The Purchase Option must be exercised prior to the expiration of the Third Lease Year for the purchase price of $7,000,000 plus one percent (1%) per month beginning with the Commencement Date (the "Purchase Price"). Tenant shall provide Landlord with written notice of its exercise of the Purchase Option prior to expiration of the Third Lease Year. In the event Tenant exercises its Purchase Option, such sale shall close no later than six (6) months after option exercise and Landlord shall, upon receipt of the Purchase Price together with full payment of any unpaid Rent and other amounts due and payable by Tenant with respect to any period ending on or before the date of the purchase, deliver to Tenant a statutory warranty deed which conveys to Tenant the Real Property and Building free and clear of all monetary liens and free of all other encumbrances except those Tenant has agreed in writing to accept; provided, Tenant's sole remedy in the event it does not accept any nonmonetary encumbrance is to terminate its Purchase Option. Landlord covenants and agrees that until the end of the Third Lease Year it will not further encumber the Premises except with utility easements and/or other items necessary for the use and operation of the Real Property; provided, consensual monetary encumbrances which are removed by closing are permitted. Upon such conveyance of the Real Property and Building, this Lease shall terminate. Landlord shall pay the cost of standard title insurance, attorneys' fees incurred by Landlord in connection with such conveyance, real estate excise taxes and one-half of the escrow fee. Tenant shall pay all recording fees and attorneys fees incurred by Tenant in connection with the conveyance of the Real Property and Building, any title insurance premium above standard coverage, any personal property tax and one-half of the escrow fee. If such sale shall fails to be consummated this Lease shall continue in full force and effect, and any options to extend or renew the Term of this Lease which otherwise would have expired during the escrow period of such proposed sale shall be deemed to remain in effect for thirty (30) days after termination of the escrow or other arrangement covering the closing of such proposed sale. If such sale fails to close due to a default by Tenant, Tenant shall reimburse Landlord all Landlord's out-of-pocket costs directly related to such sale as Landlord's sole remedy. Tenant agrees to cooperate with Landlord if Landlord elects to complete the sale as a like kind exchange under Section 1031 of the Internal Revenue Code, and Landlord shall pay Tenant for any additional cost incurred and indemnify and hold Tenant harmless from and against any liability sustained as a result of such cooperation. Landlord shall use a qualified intermediary and employ direct deeding in any such exchange. Such purchase shall be on an "as-is" basis, but without releasing or indemnifying Landlord from any liability, and Landlord shall, as part of such sale, assign to Tenant all warranties and indemnities received from its seller, the Seattle School District. 20. SUCCESSORS. All of the covenants, agreements, terms and conditions contained in this Lease shall apply to and be binding upon Landlord and Tenant and their respective heirs, executors, administrators, successors and assigns. 21. SUBORDINATION. This Lease is subject to and is hereby subordinated to all present mortgages, deeds of trust and other encumbrances affecting the Premises. Tenant will execute such instruments as may be required to subordinate the rights and interest of the Tenant under this Lease to the lien of any mortgage or deeds of trust at any time placed on the land of which the leased Premises are a part; provided, however, that any subordination effected by this Section shall not affect Tenant's rights under this Lease, including without limitation Tenant's right to possession, use and occupancy of the Premises. Tenant further agrees that any such subordination agreement will contain a provision whereby Tenant will agree, in the event of foreclosure of any such mortgage or deeds of trust to attorn to and recognize as its landlord under the terms of this Lease said lender or any purchaser of the leased property at a foreclosure sale or their heirs, successors or assigns. 22. NONDISTURBANCE AGREEMENT. Landlord covenants and agrees to obtain from the holder of the sole existing loan secured by the Premises a Nondisturbance Agreement in a form reasonably acceptable to Tenant no later than twenty (20) days prior to the Commencement Date. 23. SURRENDER OF POSSESSION. Upon expiration of the term of this Lease, whether by lapse of time or otherwise, Tenant shall promptly and peacefully surrender Premises to Landlord in good condition and repair, except for ordinary wear and tear, damage from condemnation or casualty and such repairs as Tenant is not required to make hereunder. On or before expiration of the term of this Lease, Tenant shall be entitled to remove its trade fixtures and equipment installed by it from Premises. Any damage caused by such removal shall be repaired by Tenant at its expense. 24. HOLD OVER TENANCY. If (without execution of a new lease or written extension) Tenant shall hold over after the expiration of the term of this Lease (as it may have been extended pursuant to this Lease), it shall be deemed to be occupying Premises as a Tenant from month to month, which tenancy may be terminated by either party as provided by law. During such tenancy, all terms and conditions of this Lease in effect for the last month of the Term, as it may have been extended shall apply, and the parties shall be bound by all of the terms, covenants and conditions as herein specified; provided, if Tenant holds over without Landlord's consent minimum monthly rent shall be 125% of that payable prior to immediately prior to expiration. 25. WAIVER OF SUBROGATION. Landlord and Tenant each releases and relieves the other and waives its entire right of recovery against the other for loss or damage arising out of or incident to the perils of fire, explosion, or any other perils described in the "extended coverage" insurance endorsement approved for use in Washington, which occurs in, on or about the Premises, whether due to the negligence of either party, their agents, employees, or otherwise, provided liability and fire extended coverage insurance providing said waiver is reasonably available without a significant increase in the premiums. 26. NOTICES. All notices under this Lease shall be in writing and delivered in person or sent by registered or certified mail, return receipt requested, to Landlord at the address to which rent payments are designated to be sent and to Tenant at the Premises, effective as of personal delivery, if delivered, or two (2) business days after mailing, if mailed. Either party may change the address for notice by giving written notice thereof to the other party. Any notice to Landlord hereunder shall also be given to Landlord's lender, which shall be given a reasonable time to cure any default by Landlord. Landlord shall give Tenant written notice of the name and address of its lender and, from time to time, of the change in its lender. 27. CONDEMNATION. If all of the Premises or such portions thereof as may be required for Tenant's reasonable use of the Premises as determined by Tenant, are taken by eminent domain, this Lease shall automatically terminate as of the date Tenant is required to vacate the Premises and all rentals shall be paid to that date. In case of a taking of a part of the Premises, or another portion of the Building or Real Property not required for Tenant's reasonable use of the Premises, then this Lease shall nonetheless continue in full force and effect and the rental shall be equitably reduced based on the proportion by which the floor area of the Premises is reduced (or Tenant's use of the Premises is affected, if such taking pertains to the Building or the land upon which it is located), such rent reduction to be effective as of the date possession of such portion is delivered to the condemning authority, and there shall be a corresponding reduction in sublease rent due from Landlord. Landlord reserves all rights to damage to the Premises for any taking by eminent domain, and Tenant hereby assigns to Landlord any right Tenant may have to such damages or award, and Tenant shall make no claim against Landlord for damages for termination of the leasehold interest or interference with Tenant's business. Tenant shall, however, have the right to claim against the condemning authority for any losses compensable under relevant law; provided that the same does not reduce the amount received by Landlord or Landlord's lender. 28. ESTOPPEL CERTIFICATE. Tenant or Landlord shall, from time to time, within ten (10) business days after receiving a written request from the other party, execute and deliver a written statement. This written statement, which may be relied upon by Landlord and any third party with whom Tenant or Landlord is dealing, shall certify: 28.1 The accuracy of the Lease document(s); 28.2 The beginning and ending dates of the Lease; 28.3 Whether or not the Lease is in full force and effect and the date through which rent is paid; 28.4 Whether there is any known default or if Landlord or Tenant has any claims or demands; and, if so, specifying the default claim or demand; and 28.5 To the accuracy of other correct and ascertainable facts that are covered by the Lease terms. 29. AUTHORITY. If either party is a corporation, partnership or limited liability company, each individual executing this Lease on behalf of said entity represents and warrants that he/she is duly authorized to execute and deliver this Lease on behalf of said entity and that this Lease is binding upon said entity in accordance with its terms. 30. MISCELLANEOUS. 30.1 Time is of the essence of this Lease. 30.2 This Lease contains all of the agreements between the parties hereto relating to the subject matter hereof and may be amended only in a writing signed by all the parties hereto. 30.3 The titles to Sections in this Lease are not a part of this lease and shall have no effect upon the construction or interpretation of any part thereof. Tenant will be referred to by the pronouns "it" and "its" irrespective of number, gender or the fact of incorporation. This Lease shall be construed and governed by the law of the State of Washington. This Lease shall be interpreted without regard to which party drafted any or all of its provisions. 30.4 In the event of any dispute between the parties in connection with this Agreement, the parties hereby consent to the jurisdiction of the Superior Court for the State of Washington with venue in King County and confirm that said jurisdiction is exclusive. 30.5 Whenever provision is made in this Lease for any written notice or demand by Landlord or Tenant to be given to the other party, it shall be hand delivered, faxed (with receipt confirmed), or mailed postage prepaid, return receipt requested, to Landlord or Tenant at the following addresses or such other address as the parties shall inform each other in writing: FOR TENANT: Korry Electronics Co. Attn: Bill Mason 901 Dexter Avenue North Seattle, WA 98109 COPY TO Timothy R. Osborn Bogle & Gates P.L.L.C. Two Union Square 601 Union Street Seattle, Washington 98101 FOR GUARANTOR: Esterline Technologies Corporation Attn: Robert W. Stevenson 10800 N.E. 8th, Suite 600 Bellevue, Washington 98004 FOR LANDLORD: 810 Dexter L.L.C. c/o Michael Maloney The Highlands Seattle WA 98177 COPY TO: Bruce H. Benson Helsell Fetterman LLP 1500 Puget Sound Plaza 1325 Fourth Avenue Seattle, WA 98101 30.6 If any term, covenant, condition or provision of this Lease or the application thereof to any person or circumstances shall, at any time or to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to person or circumstances other than those as to which this Lease is held invalid or unenforceable, shall not be affected thereby, and each term, covenant, condition and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 30.7 This Lease shall not be recorded, but at the request of either Landlord or Tenant the parties shall execute and acknowledge a Memorandum of this Lease for recording. The Memorandum shall include such provisions of this Lease as the parties desire, excluding, however, the amount of rent and other monetary terms. 31. AGENCY. The parties represent and warrant to each other that no real estate broker or agent has been involved in connection with this Lease for which a claim may be made against Landlord or Tenant, and Landlord or Tenant agree to indemnify the other against and hold the other harmless from any claim, loss or liability in connection with a breach of said representation and warranty. This indemnification and hold harmless agreement shall survive the termination or expiration of this Lease. 32. QUIET ENJOYMENT. So long as Tenant is not in default hereunder past any applicable cure period Tenant shall have quiet enjoyment of the Premises, free from any claims of parties claiming by, under, or through Landlord and Landlord shall defend, indemnify and hold Tenant harmless from any and all damages or liability (including actual attorneys' fees) incurred as a result of a breach of the foregoing provision, or any claim that if successful would result in breach. 33. SURVIVAL OF REPRESENTATIONS, ETC. The representations, warranties, covenants and agreements in this Lease or pursuant hereto shall survive the execution and delivery of this Lease and the expiration or earlier termination of this Lease for the applicable statute of limitations period. 34. ACCESS. Landlord and its agents shall have the right to enter into and upon the Premises at all reasonable times and upon reasonable notice (or without notice in the event of emergency such as fire) for the purposes of inspecting the Premises, making repairs required of Landlord, and/or showing the Premises to a prospective purchaser, tenant or lender. Landlord shall have the right to place a "for rent" sign on the Premises and show the Premises for one hundred seventy (170) days prior to the expiration of the lease term. 35. BINDING ON SUCCESSORS AND ASSIGNS. The terms, provisions and covenants, and conditions contained in this Lease shall apply to, inure to the benefit of and be binding upon, the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns. 36. AMENDMENTS TO THE LEASE. This Lease may not be altered, changed or amended except by an instrument in writing signed by both parties hereto. 37. SEVERABILITY. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws effective during the term of this Lease, then and in that event it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby. 38. INTEREST. Rent and any other sums due under this Lease from Landlord or Tenant shall bear interest at the greater of nine percent (9%) per annum or two percentage points (2%) over the prime rate as announced by Seafirst Bank or its lawful successor, until paid in full. 39. NO IMPLIED WARRANTIES. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER KIND ARISING OUT OF THIS LEASE REGARDING THE CONDITION OF THE BUILDING, THE PREMISES OR THE REAL PROPERTY. LANDLORD MAKES NO WARRANTIES REGARDING THE CONDITION OF THE BUILDING, THE PREMISES OR THE REAL PROPERTY. 40. BROKERS. Tenant and Landlord each represents and warrants to the other that it has not entered into any agreement with, nor otherwise had any dealings with, any broker or agent in connection with the negotiation or execution of this Lease which could form the basis of any claim by any such broker or agent for a brokerage fee or commission, finder's fee or any other compensation of any kind or nature in connection herewith. Each party shall indemnify, defend and hold the other harmless from and against any costs (including but not limited to court costs and attorneys' fees), expenses or liability for commissions or other compensation claimed by any broker or agent other than those listed above in this Paragraph with respect to this Lease which arises out of any agreement or dealings, or alleged agreement or dealings, between Landlord or Tenant and any such agent or broker. 41. NO WAIVER. No waiver by either party of any covenant, condition or agreement in this Lease shall operate as a waiver of the covenant, condition or agreement itself, or of any subsequent breach thereof. 42. REMEDIES CUMULATIVE. The specified remedies to which Landlord or Tenant may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord or Tenant may lawfully be entitled in case of any breach or threatened breach by Tenant or Landlord of any provision of this Lease. In addition to the other remedies in this Lease provided, Landlord or Tenant shall be entitled to the restraint by injunction of the violation, or attempted or threatened violation, of any of the covenants, conditions or provisions of this Lease. 43. SUBLEASE. Landlord hereby subleases from Tenant and Tenant subleases to Landlord on the following terms and conditions: 43.1 For the first three (3) years of the Lease, beginning on the Commencement Date and continuing through the Third Lease Year, Landlord will sublease from Tenant both the bottom floor and the middle floor of the Building and the parking as referred to in Section 2 above for a minimum monthly rental amount of $24,000 per month in advance. 43.2 For the fourth and fifth years of the Lease, beginning on the first day of the Fourth Lease Year and continuing through the last day of the Fifth Lease Year, Landlord will sublease from Tenant the bottom floor of the Building for a minimum monthly rental amount of $12,000 per month. The first five (5) Lease Years are sometimes referred to herein as the "Sublease Term." 43.3 During the Sublease Term, Landlord shall pay when due a share of taxes, insurance and utilities as follows: (a) Taxes: Real estate taxes and assessments attributable to land value shall be prorated on a Building square footage basis, and for improvements shall be allocated based on 40% for the top floor, 30% for the middle floor and 30% for the bottom floor for existing improvements and, assuming no improvements to the subleased premises by Landlord, Tenant shall be responsible for all increases in real estate taxes subsequent to 1996 for improvements. (b) Insurance: All Tenant's insurance costs shall be allocated 40% to the top floor, 30% to the middle floor and 30% to the bottom floor which for allocation purposes shall be limited to Landlord's current cost of insurance, which for 1996 is $6,000, subject to annual increase by the percentage increase in the Index for the prior year. (c) Utilities: Landlord shall pay all utilities of the type required to be paid by Tenant pursuant to Section 6 of this Lease which are metered separately to the subleased premises or are not allocated to Tenant as Tenant's share under Section 6. 43.4 During the sublease term, Landlord shall maintain the interior of the subleased premises in a manner determined by Landlord, but Tenant shall retain control over the exterior of Premises, including the premises subleased by Landlord, and Landlord's right to place or retain signs on the exterior of the Building shall be as provided in Section 9.1(c). Landlord shall have the right to paint the exterior of the Building. Except for damage caused by Tenant or its employees, contractors, agents or invitees, Tenant's obligations under Section 7 of the Lease, "Repair and Care of Premises", shall not apply to the subleased premises. 43.5 Tenant, as sublessor hereunder, agrees that with respect to the sublease set forth in this Section, Landlord may use and sub-sublease the property so subleased for any commercial use that is in accordance with law, is consistent with the prime Lease and which would not, in Tenant's reasonable judgment, materially impair or interfere with Tenant's use of the Premises. No sub-sublease shall be for a term beyond the Sublease Term except for the LCM International lease. Landlord warrants and it has the right to eliminate LCM's right to lease beyond the Sublease Term and shall do so at Tenant's request. Tenant approves the existing uses identified as follows: - bakery - storage of boats and vehicles - auto repair and painting - auto detailing - wholesale wine - distribution - wholesale clothing - limo service - delivery service - storage of advertising materials Landlord, as subtenant hereunder, shall not do or permit to be done in or about Premises anything which is illegal or unlawful, or which will be dangerous to life or limb, or which will constitute a nuisance or increase the existing rate of insurance upon the Building, or cause cancellation of any insurance policy covering any part of the Building or the Premises. 43.6 Landlord and Tenant agree that with respect to the sublease of premises from Tenant to Landlord set forth in this Section 43, Tenant shall not be liable or held responsible for any actions of Landlord in connection with its use of the premises so subleased hereunder. 43.7 Tenant shall not be responsible for any breach or default in payment of rent or otherwise under this Lease if and to the extent caused by Landlord's breach of this sublease. 43.8 In lieu of Landlord paying Tenant sublease rent and other and sums due from Landlord to Tenant under this sublease, Tenant shall deduct any and all amounts due from Landlord to Tenant under this Sublease from any all amounts owed by Tenant to Landlord under this Lease. 43.9 All obligations and duties of Tenant under this Lease regarding the Premises shall not apply to subleased premises during the Sublease Term. Landlord shall be subject to the same obligations with respect to holding over and surrendering the subleased premises as Tenant is under Sections 26 and 27 of this Lease regarding the Premises. 43.10 Landlord shall not assign its interest in this sublease. If Landlord is a corporation, partnership or limited liability company, transfer of a controlling interest in such entity shall be deemed as assignment. Landlord may sub-sublease all or a portion of the subleased premises pursuant to Section 43.5 During the first five (5) years of the prime Lease, any new sub-subleases by Landlord shall contain a provision allowing Landlord to terminate such sub-sublease on six (6) months notice, which Landlord shall exercise if so directed by Tenant following Tenant's irrevocable election to terminate the Sublease (by purchasing the Premises or otherwise by mutual agreement) at the end of such six (6) month period. 43.11 Tenant shall also have the first opportunity to terminate the sublease as to all or portions of the subleased premises, as follows: If Landlord desires to sub-sublease at least 2000 square feet of the subleased premises, it shall first offer said space to Tenant in writing. Tenant shall have twenty (20) days after receipt to accept said offer. If Tenant accepts, the additional space shall automatically become part of the Premises free of the sublease, subject to all terms of this Lease, and rent for such space shall be determined based on the average square footage rate being paid by Tenant at that time, and the sublease rent shall be reduced based on the average square footage rate being paid by Landlord at that time. If Tenant does not accept Landlord's offer within the twenty (20) day period, Landlord may proceed to sub-sublease to the proposed new tenant. Tenant's right of first opportunity shall again become effective anytime Landlord desires to sub-sublease part of the subleased premises at least 2000 square feet in area. 44. GUARANTY. Esterline Technologies Corporation ("Guarantor") hereby guaranties Tenant's obligations under this Lease. Landlord may not exercise its rights against Guarantor under this guaranty until thirty (30) days have elapsed following expiration of the cure period specified in the Lease. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and year first above written. Landlord: Tenant: 810 DEXTER L.L.C. KORRY ELECTRONICS CO. By /s/ Michael J Maloney By /s/ David G. Elkins ------------------------ -------------------- Michael J. Maloney Its Sole Managing Member Its President --------- Guarantor: ESTERLINE TECHNOLOGIES CORPORATION By /s/ Larry A. Kring ------------------- Its Group Vice President -------------------- EX-11 4 EXHIBIT 11 Exhibit 11 ESTERLINE TECHNOLOGIES CORPORATION Computation of Primary Earnings Per Common Share (in thousands, except per share amounts)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Net Earnings $ 21,354 $ 17,381 $ 7,563 $ (25,635) $ 5,094 =========== =========== ========== ============ ========= Average Number of Common Shares Outstanding 7,921 6,568 6,513 6,512 6,506 Net Shares Assumed to be Issued for Stock Options 246 302 58 67 161 ------------ ----------- ---------- ------------ --------- Total 8,167 6,870 6,571 6,579 6,667 =========== =========== ========== ============ ========= Earnings Per Common Share - Primary Basis $ 2.61 $ 2.53 $ 1.15 $ (3.90) $ .76 =========== =========== ========== ============ =========
ESTERLINE TECHNOLOGIES CORPORATION Computation of Fully Diluted Earnings Per Common Share (in thousands, except per share amounts)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Net Earnings $ 21,354 $ 17,381 $ 7,563 $ (25,635) $ 5,094 =========== =========== ========== =========== ========= Average Number of Common Shares Outstanding 7,921 6,568 6,513 6,512 6,506 Net Shares Assumed to be Issued for Stock Options 253 362 269 67 161 Total Common Shares on a Fully Diluted Basis 8,174 6,930 6,782 6,579 6,667 =========== =========== ========== =========== ========= Earnings Per Common Share - Fully Diluted Basis $ 2.61 $ 2.51 $ 1.12 $ (3.90) $ .76 =========== =========== ========== =========== ========= Earnings Per Common Share - Primary Basis $ 2.61 $ 2.53 $ 1.15 $ (3.90) $ .76 ========== =========== ========== =========== ========= Dilutive Effect Per Common Share $ None $ .02 $ .03 $ None $ None ========== ========== ========== =========== =========
EX-13 5 EXHIBIT 13 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Esterline management continues to build upon a basic strategy of balancing inherent swings in demand in markets for capital intensive engineered products through the development of manufacturing businesses that serve different industrial markets. This approach was affirmed in 1996 as reduced sales and operating earnings experienced by the Automation and Instrumentation Groups were more than offset by a solid recovery realized by the Aerospace / Defense Group. Esterline presently consists of 13 separate operating units grouped into three business segments. The six units that comprise the core of the Company - Excellon, Whitney, Armtec, Auxitrol, Federal and Korry - accounted for approximately 81% and 82% of net sales and 81% and 83% of operating earnings in 1996 and 1995, respectively. RESULTS OF OPERATIONS YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED OCTOBER 31, 1995 Net sales remained consistent with the prior period at $352.8 million in 1996 compared with $351.9 million in 1995. Automation Group sales declined 6% to $146.7 million compared with $156.1 million for the prior year. Much of the revenue decline was attributed to uncertainty among automated manufacturing equipment users, especially in the printed circuit board industry, as they delayed capital purchase decisions. The Instrumentation Group also experienced a slight decrease in sales of 3% to $94.5 million compared with $97.8 million in 1995. However, on a proforma basis when results are restated for Scientific Columbus which was sold late in 1995, the group experienced an increase in net sales of 6%. The Aerospace / Defense Group compensated for the slight declines in revenues experienced by the other two segments by posting a 14% increase in net sales totalling $111.7 million compared to $98 million for the prior year. A recovering aerospace market and the acquisition of Mason Electric Co., which was completed at the beginning of the fourth quarter of 1996, were primarily responsible for the improvement. Net sales to foreign customers, including export sales by domestic operations, totaled $122.6 million and $124.1 million in 1996 and 1995, respectively, and accounted for 35% of the Company's net sales in both years. Net sales for the year ended October 31, by group, were as follows: In thousands 96 95 - ------------- ------------------------ Automation $146,698 $156,116 Aerospace and Defense 111,691 98,027 Instrumentation 94,454 97,754 $352,843 $351,897 Total gross margin as a percentage of sales remained consistent with the prior year at 39%. On a comparative basis, in 1996, the Automation and Aerospace/Defense Groups' gross margins increased while the Instrumentation Group's gross margin decreased. The gross margins by group ranged from 38% to 39% in 1996, compared with 38% to 41% in the prior year. Selling, general and administrative expenses (which include corporate expenses, and research, development and related engineering costs) decreased to $103.4 million in 1996 when compared with $107.1 million in the prior year. Reductions were realized in large measure due to the absence of selling, general and administrative expenses at Scientific Columbus in 1996. As a percentage of sales, these expenses improved to 29% in 1996 from 30% in 1995. Research, development, and related engineering costs decreased to $15.4 million in 1996 from $16.6 million in 1995. In 1996, operating earnings (excluding corporate expenses) increased 15% to $42.8 million from $37.3 million in the prior year. The primary areas of improvement were in the Aerospace / Defense Group where operating earnings more than doubled to $13.6 million in 1996 from $6.5 million in the prior year. Recovery in aerospace markets as well as the operating earnings generated by Mason contributed to this increase. The Automation Group's operating earnings decreased 2% to $23.7 million in 1996 from $24.2 million in 1995 reflecting a showdown in electronics industry capital expenditures. The Instrumentation Group's operating earnings decreased to $5.5 million in 1996 when compared with $6.6 million in the prior year. Interest income for the year increased to $2 million in 1996 compared with $1.2 million in the prior year. Cash, generated from operations and the proceeds of a public offering, was primarily invested in tax-exempt securities. Interest expense decreased $1.3 million in 1996 to $4.3 million compared with $5.6 million in 1995. This reduction is primarily related to a continuing decline in debt which included the initial principal payment on the 8.75% Senior Notes. The effective income tax rate for 1996 was 33% compared with 34% in the prior year. The decrease in the effective rate is attributed primarily to tax-exempt interest generated in the current year. Net earnings were $21.4 million, or $2.61 per share, for 1996 compared with net earnings of $17.4 million, or $2.53 per share, in the prior year period. In 1995, earnings included $.20 per share and $.12 per share from the restructuring credit and proceeds from a patent infringement settlement, respectively. Without these items, 1995 earnings per share from operations was $2.21. Orders for 1996 increased 1% to $361.4 million from $358.3 million in the prior year period. Backlog at October 31, 1996 was $127.3 million compared with $103.2 million a year earlier. The increase in backlog relates to the aerospace recovery and the Mason acquisition. Approximately $24.6 million of backlog was scheduled to be delivered after 1997. All orders in backlog are subject to cancellation until delivery. YEAR ENDED OCTOBER 31, 1995 COMPARED TO YEAR ENDED OCTOBER 31, 1994 Net sales in 1995 were $351.9 million compared with $294 million in 1994. The net sales improvement was primarily attributable to the Automation Group, where net sales increased $47.5 million, or 44%, to $156.1 million. The Automation Group benefited from a strong market for automated manufacturing equipment, particularly at Excellon where the growing capacity requirements of circuit board manufacturers and the proliferation of increasingly smaller holes was helping to drive replacement of older drilling machines. Net sales in the Company's two other groups, Aerospace / Defense and Instrumentation, also improved in 1995. In the Aerospace / Defense Group, net sales for 1995 were $98 million, compared with $93.4 million in the prior year. This increase was primarily due to a strengthening in the aerospace markets. Instrumentation Group net sales for 1995 were $97.8 million, versus $92 million in 1994. This increase was primarily a result of new product introductions and expanded sales efforts at Federal. Including export sales by domestic operations, net sales to foreign buyers totaled $124.1 million and $91 million in 1995 and 1994, respectively and accounted for 35% and 31% of the Company's total net sales in each year, respectively. Total gross margin as a percentage of sales remained consistent with the prior year at 39%. Gross margin percentages by business segment decreased in 1995 in both the Automation and Aerospace / Defense Groups, and increased in the Instrumentation Group. By group, gross margins ranged from 38% to 41% in 1995, compared with 39% to 42% in the prior year. Selling, general and administrative expenses (which includes corporate expenses, and research, development and related engineering costs but excludes the restructuring credit) for 1995 increased to $107.1 million compared with $100.8 million in 1994. As a percent of sales, however, they decreased from 34% in 1994 to 30% in 1995 because of cost containment and operating leverage the Company is experiencing due to increased sales volumes. Research, development and related engineering costs for 1995 increased to $16.6 million, versus $13.7 million in 1994, reflecting the Company's continuing commitment to invest in strategic product development programs. Operating earnings (excluding corporate expenses and the restructuring credit) increased from $23.3 million in 1994 to $37.3 million in 1995. The improvement was primarily attributable to the Automation Group where earnings more than doubled to $24.2 million in 1995 from $11.9 million in 1994. The Automation Group's earnings improvement is due to the operating leverage of increased sales. The earnings of the Instrumentation Group also increased sharply from $1.5 million to $6.6 million due to favorable product mix of sales and receipt of a patent infringement settlement of $1.3 million. The Aerospace / Defense Group's earnings decreased to $6.5 million in 1995 from $9.8 million in the prior year. This decrease was primarily due to the above referenced decline in gross margins. Interest income for 1995 was $1.2 million compared with $0.1 million in 1994 due to increases in cash and equivalents which were generated primarily from operations. Interest expense for 1995 was $5.6 million compared with $6.1 million in 1994 due primarily to reduced debt levels. The effective income tax rate for 1995 was 34% compared with 14% in 1994. The low effective 1994 rate was primarily due to a $2 million benefit recorded in 1994 from a settlement with the Internal Revenue Service of audits of certain federal income tax returns. Net earnings for 1995, were $17.4 million, or $2.53 per share, compared with net earnings of $7.6 million, or $1.15 per share in the prior year period. Earnings in the current year period include $.20 per share and $.12 per share, respectively, from the restructuring credit and patent infringement settlement discussed above. Orders for 1995, were $358.3 million, compared with $319.4 million a year earlier. The increase was primarily attributable to the Automation Group and its improved markets as discussed above. Backlog at October 31, 1995 was $103.2 million, compared with $96.8 million a year earlier. Approximately $11.9 million of Companywide backlog was scheduled to be delivered after 1996. LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents at October 31, 1996 totaled $46.4 million, an increase of $24.3 million from October 31, 1995. This increase was generated through operations and a public offering of common stock, and was reduced by acquisitions, debt paydown and an increase in other working capital elements. Net working capital increased to $73.4 million at October 31, 1996 from 35.7 million at October 31, 1995. Total debt at October 31, 1996 was $40.9 million, a $9.4 million decrease from a year earlier. The debt reduction is primarily due to a scheduled principal payment of $5.7 million on the Company's 8.75% Senior Notes. The scheduled repayments began on July 30, 1996 and will continue annually until maturity on July 30, 2002. At October 31, 1996, total outstanding debt included $34.3 million under the Company's 8.75% Senior Notes, and $6.6 million under various foreign currency debt agreements. Total credit facilities equaled $44 million of which $35.4 million was available at October 31, 1996. The Company recently renegotiated its primary bank financing arrangement, reducing the covenant restrictions and lowering the interest rate. Capital expenditures, consisting of buildings, machinery, equipment and computers are anticipated to be approximately $27 million during fiscal 1997, compared with $17.2 million in 1996. The planned increase in capital expenditures for fiscal 1997 primarily relates to the need for new, expanded manufacturing facilities. Capital expenditures for 1996 (excluding acquisitions) were comprised of machinery, equipment and computers. Management believes cash on hand, funds generated from operations and available bank credit lines will adequately service cash requirements through fiscal 1997. FORWARD-LOOKING STATEMENTS Certain statements in the above commentary and throughout this annual report contain forward-looking information that involves risk and uncertainty, including industry trends, backlog, capital expenditures and cash requirements. The Company's business is susceptible to economic cycles and its results can vary widely based on a number of factors, including domestic and foreign economic conditions and developments affecting the specific industries and customers served. The products sold by most of these businesses represent capital investment or support for capital investment by either the initial customer or the ultimate end-user. Also a significant portion of the sales and profitability of some Company businesses is derived from the telecommunications, computer, aerospace and defense markets. Changes in general economic conditions or conditions in these and other specific industries, capital acquisition cycles, and government policies, collectively or individually, can have a significant effect on the Company's results of operations and financial condition. Thus, these forward-looking statements may be materially different from actual future outcomes. The Company does not undertake any obligation to publicly release the results of any revisions that may be made to these forward-looking statements to reflect any future events or circumstances. RECENT ACCOUNTING PRONOUNCEMENT In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which is effective for fiscal years beginning after December 15, 1995. This Statement defines and prescribes a fair value based method of accounting for stock-based compensation plans in which compensation cost is computed at the option grant date and expensed over a service period. While full adoption of this statement is encouraged, companies will be permitted to continue accounting for stock-based compensation under the current guidance of Accounting Principles Board (APB) Opinion No. 25; provided that certain pro forma disclosures of the impact of full implementation are made. The Company does not plan to adopt the accounting provisions of this standard and accordingly will continue applying the provisions of APB Opinion No. 25.
SELECTED FINANCIAL DATA IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, FOR THE YEARS ENDED OCTOBER 31, 96 95 94 93 92 - ------------------------------------------------------------------------------------------------------- Operating Results Net sales $352,843 $351,897 $294,044 $285,152 $304,827 Cost of sales 215,015 215,934 178,397 175,568 187,235 Selling, general and administrative 103,415 107,113 100,845 100,669 102,202 Restructuring provision (credit) -- (2,067) -- 40,626 -- Interest income (1,989) (1,156) (113) (122) (143) Interest expense 4,328 5,598 6,098 6,446 7,389 Income tax expense (benefit) 10,720 9,094 1,254 (12,400) 3,050 Net earnings (loss) 21,354 17,381 7,563 (25,635) 5,094 Net earnings (loss) per share $ 2.61 $ 2.53 $ 1.15 $ (3.90) $ 0.76 Financial Structure Total assets $276,646 $225,714 $217,524 $205,672 $232,024 Long-term debt, net 29,007 35,543 41,714 62,267 68,622 Shareholders' equity 142,304 83,706 65,491 55,323 82,622 Average number of shares outstanding 8,167 6,870 6,571 6,579 6,667 MARKET PRICE OF ESTERLINE COMMON STOCK Principal Market - New York Stock Exchange
FOR THE YEARS ENDED OCTOBER 31, 96 95 - ------------------------------------------------------------------------------ Quarter High Low High Low First $24.00 $19.13 $14.75 $11.13 Second 23.88 20.38 17.63 12.50 Third 26.00 18.75 24.75 16.63 Fourth 23.38 20.00 30.38 21.25 At October 31, 1996 there were approximately 1,032 holders of record of the Company's common stock. Certain of the Company's financing arrangements impose restrictions on the payment of dividends. (See Note 6 of Notes to Consolidated Financial Statements.) CONSOLIDATED STATEMENT OF OPERATIONS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, FOR THE YEARS ENDED OCTOBER 31, 96 95 94 - ----------------------------------------------------------------------------- Net Sales $ 352,843 $ 351,897 $ 294,044 Costs and Expenses Cost of sales 215,015 215,934 178,397 Selling, general and administrative 103,415 107,113 100,845 Restructuring credit -- (2,067) -- Interest income (1,989) (1,156) (113) Interest expense 4,328 5,598 6,098 - ----------------------------------------------------------------------------- 320,769 325,422 285,227 - ----------------------------------------------------------------------------- Earnings Before Income Taxes 32,074 26,475 8,817 Income Tax Expense 10,720 9,094 1,254 - ----------------------------------------------------------------------------- Net Earnings $ 21,354 $ 17,381 $ 7,563 ============================================================================= Net Earnings Per Share $ 2.61 $ 2.53 $1.15 ============================================================================= see notes to consolidated financial statements CONSOLIDATED BALANCE SHEET IN THOUSANDS, OCTOBER 31, 96 95 - ---------------------------------------------------------------------------- ASSETS Current Assets Cash and equivalents $ 46,436 $ 22,097 Accounts receivable, net of allowances of $4,084 and $4,117 69,120 63,825 Inventories 45,399 39,963 Deferred income taxes 15,321 14,122 Prepaid expenses 2,504 2,199 - ---------------------------------------------------------------------------- Total Current Assets 178,780 142,206 Property, Plant and Equipment Land 3,619 3,913 Buildings 43,875 43,669 Machinery and equipment 112,809 99,076 - ---------------------------------------------------------------------------- 160,303 146,658 Accumulated depreciation 106,813 97,426 - ---------------------------------------------------------------------------- 53,490 49,232 Intangibles, net and Other Assets 44,376 34,276 - ---------------------------------------------------------------------------- $ 276,646 $ 225,714 ============================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 20,836 $ 23,143 Accrued liabilities 68,492 66,363 Credit facilities 5,242 7,721 Current maturities of long-term debt 6,660 7,030 Federal and foreign income taxes 4,105 2,208 - ---------------------------------------------------------------------------- Total Current Liabilities 105,335 106,465 Long-Term Debt 29,007 35,543 Shareholders' Equity Common stock, par value $.20 per share, authorized 30,000,000 shares, issued and outstanding 8,501,668 and 6,645,780 shares 1,700 1,328 Capital in excess of par value 48,417 10,390 Retained earnings 93,686 72,332 Cumulative translation adjustment (1,499) (344) - ----------------------------------------------------------------------------- Total Shareholders' Equity 142,304 83,706 - ---------------------------------------------------------------------------- $ 276,646 $ 225,714 =========================================================================== see notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS IN THOUSANDS, FOR THE YEARS ENDED OCTOBER 31, 96 95 94 - ------------------------------------------------------------------------------------------------ Cash Flows Provided (Used) by Operating Activities Net earnings $21,354 $ 17,381 $ 7,563 Restructuring credit -- (2,067) -- Depreciation and amortization 16,269 16,599 16,414 Deferred income taxes (413) (2,969) (1,303) Working capital changes, net of effect of acquisitions Accounts receivable (4,319) 280 (15,625) Inventories (2,694) (9,496) 7,590 Prepaid expenses (291) (176) 38 Accounts payable (2,399) 4,121 3,564 Accrued liabilities 605 7,196 6,910 Federal and foreign income taxes 1,886 897 144 Other, net 2,411 882 92 - ------------------------------------------------------------------------------------------------ 32,409 32,648 25,387 - ------------------------------------------------------------------------------------------------ Cash Flows Provided (Used) by Investing Activities Capital expenditures (17,203) (11,461) (11,288) Capital dispositions 1,054 3,773 3,945 Acquisitions (20,485) -- -- - ------------------------------------------------------------------------------------------------ (36,634) (7,688) (7,343) - ------------------------------------------------------------------------------------------------ Cash Flows Provided (Used) by Financing Activities Net change in credit facilities (2,214) 7,483 (5,218) Repayment of long-term debt (6,812) (19,837) (7,290) Net proceeds provided by sale of common stock 38,365 -- -- - ------------------------------------------------------------------------------------------------ 29,339 (12,354) (12,508) - ------------------------------------------------------------------------------------------------ Effect of Exchange Rates (775) 415 322 Net Increase in Cash and Equivalents 24,339 13,021 5,858 Cash and Equivalents - Beginning of Year 22,097 9,076 3,218 - ------------------------------------------------------------------------------------------------ Cash and Equivalents - End of Year $46,436 $ 22,097 $ 9,076 ================================================================================================ Supplemental Cash Flow Information Cash paid during the year for Interest expense $ 4,480 $ 4,577 $ 6,033 Income taxes 6,357 10,452 2,212 see notes to consolidated financial statements
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY IN THOUSANDS, FOR THE YEARS ENDED OCTOBER 31, 96 95 94 - ------------------------------------------------------------------------------------------------ Common Stock, par value $.20 per share Beginning of year $ 1,328 $ 1,302 $ 1,302 1,800,000 shares issued 360 -- -- Shares issued under stock option plans 12 26 -- - ------------------------------------------------------------------------------------------------ End of year 1,700 1,328 1,302 - ------------------------------------------------------------------------------------------------ Capital in Excess of Par Value Beginning of year 10,390 10,482 10,482 1,800,000 shares issued 38,005 -- -- Shares issued under stock option plans 22 (92) -- - ------------------------------------------------------------------------------------------------ End of year 48,417 10,390 10,482 - ------------------------------------------------------------------------------------------------ Retained Earnings Beginning of year 72,332 54,951 47,388 Net earnings 21,354 17,381 7,563 - ------------------------------------------------------------------------------------------------ End of year 93,686 72,332 54,951 - ------------------------------------------------------------------------------------------------ Cumulative Foreign Currency Translation Adjustments Beginning of year (344) (1,244) (3,849) Change in foreign currency translation (1,155) 900 2,605 - ------------------------------------------------------------------------------------------------ End of year (1,499) (344) (1,244) - ------------------------------------------------------------------------------------------------ Shareholders' Equity $142,304 $83,706 $65,491 ================================================================================================ see notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ACCOUNTING POLICIES NATURE OF OPERATIONS Esterline Technologies Corporation (the Company) - through its 13 separate operating units - designs, manufactures and markets a broad array of capital intensive engineered products. The company principally serves the aerospace and defense industry, electronic equipment manufacturers, metal fabricators and general manufacturing industries throughout the world. BASIS OF PRESENTATION The consolidated financial statements include all subsidiaries. All significant intercompany accounts and transactions have been eliminated. Classifications have been changed for certain amounts in the preceding period to conform with the current year's presentation. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. FOREIGN CURRENCY TRANSLATION Foreign currency assets and liabilities are translated into their U.S. dollar equivalents based on year-end exchange rates. Revenue and expense accounts are generally translated at average exchange rates. Aggregate exchange gains and losses arising from the translation of foreign assets and liabilities are included in shareholders' equity. Transaction gains and losses are included in income and have not been significant in amount. INVENTORIES Most inventories are stated at the lower of cost (first in, first out) or market. Three subsidiaries state their inventories at the lower of cost (last in, first out) or market. Inventory cost includes material, labor and factory overhead. RESEARCH, DEVELOPMENT AND RELATED ENGINEERING COSTS Research, development and related engineering costs approximated $15,373,000, $16,638,000 and $13,711,000 in 1996, 1995 and 1994, respectively, and are generally expensed as incurred. PROPERTY, PLANT AND EQUIPMENT, AND DEPRECIATION Property, plant and equipment is carried at cost and includes expenditures for major improvements which increase useful lives. Depreciation is provided generally on the straight-line method. For income tax purposes, depreciation is also computed using various accelerated methods. INTANGIBLES Intangible assets arise primarily from business acquisitions and include the cost of purchased businesses in excess of amounts assigned to identifiable assets. Intangible assets are being amortized over estimated lives of up to 30 years. ASSET VALUATION The carrying amount of long-life assets is reviewed periodically. If the asset carrying amount is not recoverable, the asset is considered to be impaired and the carrying amount is adjusted. ENVIRONMENTAL Environmental exposures are provided for in total at the time they are known to exist or are considered reasonably probable. EARNINGS PER SHARE Earnings per share is computed using the average number of common and common equivalent shares outstanding during each year. The average number of shares were 8,167,000, 6,870,000, and 6,571,000 in 1996, 1995 and 1994, respectively. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with maturities of three months or less. Fair value of cash equivalents approximates carrying value. NOTE 2 INVENTORIES Inventories at October 31 consisted of the following: IN THOUSANDS 96 95 - ---------------------------------------------------------------------- Raw materials and purchased parts $15,880 $11,422 Work in process 23,195 22,052 Finished goods 6,324 6,489 - ---------------------------------------------------------------------- $45,399 $39,963 ====================================================================== Inventories stated under the last in, first out method totaled $9,653,000 and $9,989,000 at October 31, 1996 and 1995, respectively. Had the first in, first out method been used, these inventories would have been $4,450,000 and $3,896,000 higher than reported at October 31, 1996 and 1995, respectively. NOTE 3 ACCRUED LIABILITIES Accrued liabilities at October 31 consisted of the following: IN THOUSANDS 96 95 - ---------------------------------------------------------------------- Payroll and other compensation $19,670 $19,971 Self-insurance provisions 8,649 7,151 Interest 2,321 2,453 Warranties 9,065 10,202 State and other tax accruals 8,554 6,912 Other 20,233 19,674 - ---------------------------------------------------------------------- $68,492 $66,363 ====================================================================== NOTE 4 RETIREMENT BENEFITS Pension benefits are provided for substantially all U.S. employees under contributory and non-contributory pension and other plans, and are based on years of service and five-year average compensation. The Company makes actuarially computed contributions as necessary to adequately fund benefits. The actuarial computations assumed discount rates on benefit obligations and expected long-term rates of return on plan assets of 7.5% and annual compensation increases of 5%. Plan assets primarily consist of publicly traded common stocks, bonds and government securities. Total pension expense for all benefit plans, including defined benefit plans, was $2,329,000, $2,016,000 and $1,232,000 for the years ended October 31, 1996, 1995 and 1994, respectively. Net periodic pension expense for the Company's defined benefit plans for the years ended October 31 consisted of the following: IN THOUSANDS 96 95 94 - ----------------------------------------------------------------------------- Service cost - benefits earned during the year $ 2,871 $ 2,316 $ 2,322 Interest cost on projected benefit obligation 5,154 4,698 4,457 Actual return on plan assets - investment gains (8,074) (13,496) (2,827) Net amortization and deferral 1,319 7,599 (3,515) - ----------------------------------------------------------------------------- Net pension expense $ 1,270 $ 1,117 $ 437 ============================================================================= The funded status of the defined benefit pension plan at October 31 was as follows: IN THOUSANDS 96 95 - --------------------------------------------------------------------------- Plan assets at fair value $91,509 $84,598 Projected benefit obligation for service rendered to date 71,066 62,223 - --------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 20,443 22,375 Unrecognized net gain (7,576) (8,297) Unrecognized transition asset (1,925) (2,406) - ---------------------------------------------------------------------------- Prepaid pension expense, included in other assets $10,942 $11,672 =========================================================================== Actuarial present value of accumulated benefit obligation, including vested benefits of $62,012 and $51,716 $62,329 $51,978 =========================================================================== The Company also has an unfunded supplemental retirement plan for key executives providing for periodic payments upon retirement. The related accrued pension liability was $2,630,000 and $2,046,000 as of October 31, 1996 and 1995, respectively. NOTE 5 INCOME TAXES Income tax expense (benefit) for the years ended October 31 consisted of the following: IN THOUSANDS 96 95 94 - -------------------------------------------------------------------------- Current $11,133 $12,063 $ 2,557 Deferred (413) (2,969) (1,303) - -------------------------------------------------------------------------- $10,720 $ 9,094 $ 1,254 ========================================================================== Primary components of the Company's deferred tax assets and (liabilities) for the years ended October 31 resulted from temporary tax differences associated with the following: IN THOUSANDS 96 95 - -------------------------------------------------------------------------- Reserves and liabilities $17,546 $15,797 Employee benefits 4,007 4,039 Foreign tax loss carryforward 1,430 1,627 - -------------------------------------------------------------------------- Total deferred tax assets 22,983 21,463 Depreciation and amortization (2,902) (1,412) Retirement benefits (3,034) (3,417) - ------------------------------------------------------------------------- Total deferred tax liabilities (5,936) (4,829) - ------------------------------------------------------------------------- $17,047 $16,634 ========================================================================= A valuation allowance was not required due to the nature of and circumstances associated with the temporary tax differences. A reconciliation of the United States federal statutory income tax rate to the effective income tax rate for the years ended October 31 was as follows: 96 95 94 - ------------------------------------------------------------------------- U.S. statutory income tax rate 35.0% 35.0% 34.0% State income taxes 2.8 3.5 6.6 Foreign tax rates (0.3) (1.5) 2.5 Foreign sales corporation (2.1) (1.7) (3.5) Tax settlement -- -- (22.7) Tax exempt interest (1.5) -- -- Other, net (0.5) (1.0) (2.7) - ------------------------------------------------------------------------- Effective income tax rate 33.4% 34.3% 14.2% ========================================================================= During 1994, the Internal Revenue Service completed an examination of certain federal income tax returns and reached agreement with the Company on various filing positions. As a result, the Company recorded a $2,000,000 tax benefit in the fourth quarter of 1994. No provision for federal income taxes has been made on accumulated earnings of foreign subsidiaries, since such earnings have either been permanently reinvested or would be substantially offset by foreign tax credits. NOTE 6 DEBT Long-term debt at October 31 consisted of the following: IN THOUSANDS 96 95 - --------------------------------------------------------------------- 8.75% Senior Notes, due 2002 $34,285 $40,000 Other 1,382 2,573 - --------------------------------------------------------------------- 35,667 42,573 Less current maturities 6,660 7,030 - --------------------------------------------------------------------- $29,007 $35,543 ===================================================================== The 8.75% Senior Notes are unsecured and payable in equal annual installments. Interest is payable semi-annually in January and July of each year. The aggregate long-term debt maturing in the next five years is as follows: 1997 - $6,660,000; 1998 -$6,023,000; 1999 - $5,780,000; 2000 - $5,775,000; 2001 - $5,714,000. Short-term credit facilities at October 31 consisted of the following: IN THOUSANDS 96 95 - -------------------------------------------------------------------------- Outstanding Interest Outstanding Interest Borrowings Rate Borrowings Rate U. S. dollar $ -- -- $ -- -- Foreign 5,242 7.8% 7,721 7.7% - -------------------------------------------------------------------------- $5,242 $7,721 ========================================================================== During 1996, the Company renegotiated its primary U.S. dollar credit facility of $35,000,000 with a group of banks. The new credit facility is unsecured and interest is based on standard inter-bank offering rates. The company's credit facilities total $44,000,000, including unsecured foreign currency credit facilities of $9,000,000. The credit facilities contain various covenant restrictions, including maintenance of net worth, payment of dividends, interest coverage and limitations on additional borrowings. Available credit under the above credit facilities was $35,358,000 when reduced by outstanding borrowings and letters of credit of $3,400,000. The fair value of the Company's long-term debt and short-term credit facilities was estimated at $41,900,000 and $51,500,000 at October 31, 1996 and 1995, respectively. These estimates were derived using interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities. NOTE 7 CONTINGENCIES In October 1995, the Company identified irregularities in the allocation of certain labor charges at its Armtec Defense Products subsidiary and is participating in the Department of Defense Voluntary Disclosure Program. Management believes that the eventual outcome of this issue will not have a material adverse effect on the financial position or future operating results of the Company. In addition, the Company has various lawsuits and claims, both offensive and defensive, and contingent liabilities arising from the conduct of business, including those associated with Government contracting activities, none of which, in the opinion of management, is expected to have a material effect on the Company's financial position or results of operations. Liabilities have been accrued for environmental remediation costs expected to be incurred in the disposition of manufacturing facilities. No provision has been recorded for environmental remediation costs which could result from changes in laws or other circumstances currently not contemplated by the Company. NOTE 8 OPERATING LEASES Net rental expense for operating leases amounted to $3,159,000, $3,103,000 and $3,170,000 in 1996, 1995 and 1994, respectively. The Company's rental commitments for noncancelable operating leases with a duration in excess of one year are as follows: IN THOUSANDS 1997 $ 3,090 1998 2,896 1999 2,605 2000 2,394 2001 2,474 2002 and thereafter 7,138 - ---------------------------------------------------------------------- $20,597 ====================================================================== NOTE 9 STOCK OPTION PLANS At October 31, 1996, the Company had 851,500 shares of common stock reserved for issuance to officers and key employees under its 1987 Stock Option Plan, of which 93,375 shares were available for future grant. Authority to grant additional shares under the 1987 Plan expires on October 28, 1997. The Board of Directors has approved a replacement plan and intends to solicit shareholder approval for its plan including the allocation of 400,000 additional shares to be issuable under the new plan at the next shareholders' meeting on March 5, 1997. The Board of Directors has authorized the Compensation and Stock Option Committee to administer option grants, and their terms, under both plans. Options granted under the plans become exercisable over a period of four years following the date of grant and expire not later than the tenth anniversary of the grant. Option exercise prices are equal to the fair value of the Company's common stock on the date of grant. The following summarizes the changes in outstanding options granted under the Company's stock option plans: Shares Option Prices Per Share Balance - October 31, 1993 978,500 $ 7.63 - $11.25 Granted 119,000 7.38 - 9.88 Canceled (54,000) 7.38 - 11.25 Exercised (5,000) 9.00 - ------------------------------------------------------------------------- Balance - October 31, 1994 1,038,500 7.38 - 11.25 Granted 105,000 12.88 - 17.75 Canceled (7,500) 7.38 - 11.25 Exercised (381,375) 7.38 - 9.50 - ------------------------------------------------------------------------- Balance - October 31, 1995 754,625 7.38 - 17.75 Granted 129,000 21.00 - 23.38 Canceled (3,750) 7.63 Exercised (121,750) 7.38 - 11.25 - ------------------------------------------------------------------------- Balance - October 31, 1996 758,125 $ 7.38 - $23.38 ========================================================================= Exercisable at October 31, 1996 475,250 $ 7.38 - $17.75 ========================================================================= NOTE 10 CAPITAL STOCK The authorized capital stock of the Company consists of 500,000 shares of preferred stock, including 25,000 shares ($100 par value) and 475,000 shares ($1.00 par value) issuable in series, and 30,000,000 shares of common stock ($.20 par value). At October 31, 1996, there were no shares of preferred stock outstanding and 851,500 shares of common stock were reserved for issuance under the Company's stock option plans. On February 8, 1996 the Company completed the public offering of 1.8 million shares of common stock priced at $23 per share, generating net proceeds of $38.4 million. These funds provide additional financial resources for general corporate purposes, including the acquisition of other companies. The Company has a Shareholder Rights Plan providing for the distribution of one Preferred Stock Purchase Right for each share of common stock held on December 23, 1992. Each Right entitles the holder to purchase one-one hundredth of a share of Series A Serial Preferred Stock at an exercise price of $56. The Rights expire December 23, 2002. The Rights will be exercisable and transferable apart from the common stock only if a person or group acquires beneficial ownership of 10% or more of the Company's common stock or commences a tender offer or exchange offer which would result in a person or group beneficially owning 10% or more of the Company's common stock. The Rights will be redeemable by the Company for $.01 each at any time prior to the tenth day after an announcement that a person or group beneficially owns 10% or more of the common stock. Upon the occurrence of certain events, the holder of a Right can purchase, for the then current exercise price of the Right, shares of common stock of the Company (or under certain circumstances, as determined by the Board of Directors, cash, other securities or property) having a value of twice the Right's exercise price. Upon the occurrence of certain other events, the holder of each Right would be entitled to purchase, at the exercise price of the Right, shares of common stock of a corporation or other entity acquiring the Company or engaging in certain transactions involving the Company, that has a market value of twice the Right's exercise price. NOTE 11 ACQUISITIONS On August 1, 1996, the Company acquired all of the operating assets of Mason Electric Company. The purchase method of accounting was used, with the results of operations included since the date of acquisition. The allocation of purchase price to the assets and liabilities acquired was based on preliminary estimates of fair value, and is subject to finalization. The Company also acquired a noncontrolling equity interest in a company, and executed an agreement to acquire a product line. The total purchase price, including closing and other direct costs of these purchase transactions was approximately $22 million, and includes excess of cost over identifiable tangible and intangible assets of approximately $12 million. On a pro forma basis, prepared as though the business combination had occurred at the beginning of fiscal 1995, consolidated revenues would be $365,108,000 and $365,685,000, net earnings would be $21,910,000 and $17,729,000, and net earnings per share would be $2.68 and $2.58, for the years ended October 31, 1996 and 1995, respectively. These pro forma results are unaudited, have been prepared for comparative purposes only, and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of 1995, or of results which may occur in the future. NOTE 12 RESTRUCTURING PROVISION The Company recorded a restructuring charge in the fourth quarter of 1993. In the third quarter of fiscal year 1995 the Company recorded a credit of $2.1 million ($1.4 million, or $.20 per share, net of income tax) representing the substantial completion of the 1993 restructuring. NOTE 13 BUSINESS SEGMENT INFORMATION Details of the Company's operations by business segment for the years ended October 31 were as follows: Business Segment IN THOUSANDS 96 95 94 - ----------------------------------------------------------------------------- Net Sales Automation $146,698 $ 156,116 $108,642 Aerospace and Defense 111,691 98,027 93,370 Instrumentation 94,454 97,754 92,032 - ----------------------------------------------------------------------------- $352,843 $ 351,897 $294,044 ============================================================================= Earnings Before Income Taxes Automation $ 23,684 $ 24,215 $ 11,913 Aerospace and Defense 13,649 6,493 9,809 Instrumentation 5,507 6,627 1,537 - ----------------------------------------------------------------------------- Operating Earnings 42,840 37,335 23,259 - ----------------------------------------------------------------------------- Corporate expense (8,427) (8,485) (8,457) Restructuring credit -- 2,067 -- Interest income 1,989 1,156 113 Interest expense (4,328) (5,598) (6,098) - ----------------------------------------------------------------------------- $ 32,074 $ 26,475 $ 8,817 ============================================================================= Identifiable Assets Automation $ 67,360 $ 57,849 $ 49,540 Aerospace and Defense 86,303 68,785 76,681 Instrumentation 46,507 45,412 49,822 Corporate(1) 76,476 53,668 41,481 - ----------------------------------------------------------------------------- $276,646 $ 225,714 $217,524 ============================================================================= Capital Expenditures Automation $ 7,379 $ 5,848 $ 4,214 Aerospace and Defense 3,414 2,750 3,158 Instrumentation 5,926 2,833 3,847 Corporate 484 30 69 - ----------------------------------------------------------------------------- $ 17,203 $ 11,461 $ 11,288 ============================================================================= Depreciation and Amortization Automation $ 4,667 $ 4,388 $ 3,546 Aerospace and Defense 5,705 6,002 6,128 Instrumentation 5,618 5,754 6,257 Corporate 279 455 483 - ----------------------------------------------------------------------------- $ 16,269 $ 16,599 $ 16,414 ============================================================================= (1) Primarily cash, prepaid pension expense (see Note 4) and net deferred tax assets (see Note 5). NOTE 13 BUSINESS SEGMENT INFORMATION (CONTINUED) The Company's operations by geographic area for the years ended October 31 were as follows: Geographic Area IN THOUSANDS 96 95 94 - ----------------------------------------------------------------------------- Sales Domestic Unaffiliated customers - U.S. $230,286 $227,810 $203,010 Unaffiliated customers - export 57,130 61,051 34,248 Intercompany 11,367 11,132 6,231 - ----------------------------------------------------------------------------- 298,783 299,993 243,489 - ----------------------------------------------------------------------------- Foreign Unaffiliated customers 65,427 63,036 56,786 Intercompany 1,900 1,073 628 - ----------------------------------------------------------------------------- 67,327 64,109 57,414 - ----------------------------------------------------------------------------- Eliminations (13,267) (12,205) (6,859) - ----------------------------------------------------------------------------- Net Sales $352,843 $351,897 $294,044 ============================================================================= Operating earnings (1) Domestic $ 41,227 $ 38,238 $ 20,449 Foreign 1,195 (80) 2,994 Eliminations 418 (823) (184) - ----------------------------------------------------------------------------- $42,840 $ 37,335 $ 23,259 ============================================================================= Identifiable assets (2) Domestic $157,069 $134,897 $133,200 Foreign 43,101 37,149 42,843 - ----------------------------------------------------------------------------- $200,170 $ 172,046 $176,043 ============================================================================= 1 Before restructuring credit and corporate expense, shown on page 44. 2 Excludes Corporate, shown on page 44. The Company's principal foreign operations consist of manufacturing facilities located in France, Spain, Mexico and Italy and include sales and service operations located in England, Germany, Japan and France. The above sales are based upon geographic origin of sale. Intercompany sales are made at selling prices comparable with sales to unaffiliated customers. Sales to any single customer or government entity did not exceed 10% of consolidated sales. Product lines contributing more than 10% of total sales in any of the years ended October 31 were as follows: 96 95 94 - ---------------------------------------------------------------------- Printed circuit board drilling equipment 22% 26% 18% Gauge products 12% 12% 13% NOTE 14 QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly financial information:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FOURTH THIRD SECOND FIRST - --------------------------------------------------------------------------------- Year ended October 31, 1996 Net sales $98,142 $81,729 $88,975 $83,997 Gross margin 36,519 32,205 35,802 33,302 Net earnings 6,782 5,028 6,195 3,349 Net earnings per share1 $ .78 $ .58 $ .75 $ .48 Year ended October 31, 1995 Net sales $96,435 $87,318 $84,812 $83,332 Gross margin 36,642 34,334 30,993 33,994 Net earnings 5,543 6,589(2) 3,051 2,198 Net earnings per share $ .84 $ .93(2) $ .44 $ .32 1 The sum of quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted average shares outstanding for each period. 2 Net earnings in the third quarter of 1995 reflect nonrecurring items including a pre-tax restructuring credit of $2.1 million, or $.20 per share on an after-tax basis, and a pre-tax patent infringement settlement credit of $1.3 million, or $.12 per share on an after-tax basis. Without these credits, net earnings would have been $4.2 million, or $.61 per share.
REPORT OF INDEPENDENT AUDITORS To the Shareholders and the Board of Directors Esterline Technologies Corporation Bellevue, Washington We have audited the accompanying consolidated balance sheets of Esterline Technologies Corporation and its subsidiaries as of October 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended October 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Esterline Technologies Corporation and its subsidiaries as of October 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Seattle, Washington December 11, 1996 EX-21 6 EXHIBIT 21 - SUBSIDIARIES Exhibit 21 SUBSIDIARIES The subsidiaries of the Company as of October 31, 1996 are as follows: Jurisdiction of Name of Subsidiary Incorporation - ------------------ --------------- Angus Electronics Co. Delaware Armtec Defense Products Co. Delaware Auxitrol Co. Delaware Equipment Sales Co. Connecticut Excellon Automation Co. California Tulon Co. California Excellon U.K. California Excellon Europa GmbH Germany Amtech Automated Manufacturing Technology, Inc. Utah Federal Products Co. Delaware Federal Products U.K. Delaware Hytek Finishes Co. Delaware Korry Electronics Co. Delaware Mason Electric Co. Delaware Midcon Cables Co. Delaware TA Mfg. Co. California W.A. Whitney Co. Illinois Auxitrol Technologies S.A. France Auxitrol S.A. France The above list excludes certain subsidiaries that, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of October 31, 1996. EX-23 7 EXHIBIT 23 - INDEPENDENT AUDITORS' CONSENT Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 2-89293, No. 33- 22321, No. 33-22322, No. 33-37134, No. 33-52851, No. 33-58281 and No. 33-58375 of Esterline Technologies Corporation on Form S-8 and No. 33-62625 on Form S-3 of our report dated December 11, 1996 appearing in this Annual Report on Form 10-K of Esterline Technologies Corporation for the year ended October 31, 1996. /s/ Deloitte & Touche LLP Seattle, Washington January 29, 1997 EX-10 8 EXHIBIT 10.16E EXHIBIT 10.16e ESTERLINE TECHNOLOGIES CORPORATION LONG-TERM INCENTIVE COMPENSATION PLAN--CYCLE V FISCAL YEARS 1995 through 1998 PURPOSE OF PLAN This Plan is for the fiscal years 1995 through 1998 and is intended to provide a program to retain and compensate Esterline officers based on the long-term performance of Esterline Technologies. The Plan is designed to reward successful management employment of Esterline's resources to achieve superior performance, measured by: (1) continuous increase in Esterline earnings, and (2) increase in the long-term return on shareholders' equity. MEMBERSHIP IN PLAN Esterline officers shall be eligible for membership in the Plan after appointment and return of a signed acceptance of the appointment letter specifying the member's award level. The Plan may be modified, amended or terminated at any time; but any such modification, amendment or termination shall not, without a member's written consent, affect his/her incentive compensation accrued prior to such modification, amendment or termination of the Plan. Nothing in this Plan limits Esterline from exercising the right to terminate an employee at any time for any reason. APPOINTMENTS AND PERFORMANCE TARGETS Each appointee to the Plan shall be entitled to incentive compensation based on Esterline's combined performance on two equally weighted specific criteria adjusted for relative industry performance of Esterline's "industry peer group" (see Exhibit 1). Additionally, if directed, the above computed awards for officers may be further adjusted, up or down, by the Compensation & Stock Option Committee of the Board of Directors by an amount not to exceed the greater of 25% of the computed award or target award, whichever is greater. The industry peer group criteria are: A. Cumulative earnings per share for the four years ending October 31, 1998, excluding any gains or losses from the divestiture of any primary operating subsidiary. All earnings per share computations shall be adjusted for stock dividends, splits or reverse splits. The four-year earnings per share target is $5.66 if the average annualized growth rate achieved by Esterline's industry peer group is 9% to 13%. (See Attachment A for other targets for varying levels of industry peer group performance.) B. Average return on common shareholders' equity for the four years ending October 31, 1998. The four-year mathematical average shall be based on each year's audited beginning and ending common shareholders' equity, excluding any amounts for any preferred shares. * The minimum return on equity criteria is three percentage points less than the four-year return on shareholders' equity of Esterline's industry peer group. * The target return on equity criteria is one percentage point more than the four-year return on shareholders' equity of Esterline's industry peer group. * The maximum return on equity criteria is four percentage points more than the four-year return on shareholders' equity of Esterline's industry peer group. No award will be earned for a target if the performance is less than minimum. No additional award will be earned for any performance above the maximum. Awards will be prorated for other performance levels. COMPUTATION OF FOUR-YEAR AWARDS Esterline's performance is calculated relative to each performance target individually. Achievement of each criteria at the target level earns 100% of the individual's total award--50% for each performance target. (See Attachment B for award percentages at the target, less than minimum, minimum and maximum levels for each performance target.) Awards for performance between a target and its minimum or between a target and its maximum will be prorated. BASIS FOR COMPUTATION OF PARTIAL PAYMENTS Cumulative Four-Year Relative Earned Performance Performance Basis of Four-Year Award Level Estimated based on 1/3 FY 1995 & 1996 actuals Estimated based on FY 1995, 1996 & 1997 actuals 2/3 PAYMENT OF AWARDS Payment shall be made at three intervals in the cycle. Partial payment shall be computed based on the latest estimate of the four-year outcome and shall be paid after completion of fiscal 1996 and 1997; these payments shall be made no later than March 1, 1997 and March 1, 1998, respectively. Final payment shall be made after completion of fiscal 1998, and no later than March 1, 1999. The amount of each payment, if any, shall be the amount earned for the cumulative performance for the cycle-to-date period less any amounts previously paid. Partial payments, once paid, are not refundable to Esterline Technologies. A Plan member must be an employee on October 31, 1996, 1997 or 1998 to receive payment related to that portion of the Cycle. However, if an employee's participation in the Plan is terminated during any Plan year due to normal retirement, death or disability, a pro rata share of his/her award will be determined after completion of fiscal 1998, and paid no later than March 1, 1999. In the case of death, payments shall be made to his/her estate. /s/ W. P. Hurlbut - ----------------- W. P. Hurlbut Chairman, President and Chief Executive Officer ATTACHMENT A ESTERLINE TECHNOLOGIES CORPORATION LONG-TERM INCENTIVE COMPENSATION PLAN--CYCLE V ADJUSTMENTS FOR VARYING LEVELS OF INDUSTRY PEER GROUP PERFORMANCE EPS PERFORMANCE TARGETS Average Annual EPS Minimum EPS Maximum EPS Compounded EPS Growth Rate Performance Performance Performance of Industry Peer Group Targets Targets Targets Less than 4% $4.66 $3.65 $6.37 4 - 9% 5.16 4.15 6.87 9 - 13% (A) 5.66 4.65 7.37 More than 13% 6.16 5.15 7.87 (A) Esterline base EPS target. EXHIBIT 1 ESTERLINE TECHNOLOGIES CORPORATION LONG-TERM INCENTIVE COMPENSATION PLAN--CYCLE V INDUSTRY PEER GROUP Value Line Industry Group* Machine Tool Computer and Peripherals Electronics Aerospace/Defense *As reported by Value Line in their latest report at time of calculation of awards under the cycle. ATTACHMENT B ESTERLINE TECHNOLOGIES CORPORATION LONG-TERM INCENTIVE COMPENSATION PLAN--CYCLE V PERCENTAGE OF APPOINTEE'S AWARD EARNED AT VARYING LEVELS OF COMPANY PERFORMANCE Performance Relative to % of Award % of Award Total % of Appointee's Target Level from ROE Target from EPS Target Award Earned Less than Minimum 0% 0% 0% Minimum Level 12.5 12.5 25 Target Level 50 50 100 Maximum Level 100 100 200 EX-10 9 EXHIBIT 10.16F EXHIBIT 10.16f ESTERLINE TECHNOLOGIES CORPORATION LONG-TERM INCENTIVE COMPENSATION PLAN--CYCLE VI FISCAL YEARS 1996 through 1999 PURPOSE OF PLAN This Plan is for the fiscal years 1996 through 1999 and is intended to provide a program to retain and compensate Esterline officers based on the long-term performance of Esterline Technologies. The Plan is designed to reward successful management employment of Esterline's resources to achieve superior performance, measured by: (1) continuous increase in Esterline earnings, and (2) increase in the long-term return on shareholders' equity. MEMBERSHIP IN PLAN Esterline officers shall be eligible for membership in the Plan after appointment and return of a signed acceptance of the appointment letter specifying the member's award level. The Plan may be modified, amended or terminated at any time; but any such modification, amendment or termination shall not, without a member's written consent, affect his/her incentive compensation accrued prior to such modification, amendment or termination of the Plan. Nothing in this Plan limits Esterline from exercising the right to terminate an employee at any time for any reason. APPOINTMENTS AND PERFORMANCE TARGETS Each appointee to the Plan shall be entitled to incentive compensation based on Esterline's combined performance on two equally weighted specific criteria adjusted for relative industry performance of Esterline's "industry peer group" (see Exhibit 1). Additionally, if directed, the above computed awards for officers may be further adjusted, up or down, by the Compensation & Stock Option Committee of the Board of Directors by an amount not to exceed the greater of 25% of the computed award or target award, whichever is greater. The industry peer group criteria are: A. Cumulative earnings per share for the four years ending October 31, 1999, excluding any gains or losses from the divestiture of any primary operating subsidiary. All earnings per share computations shall be adjusted for stock dividends, splits or reverse splits. The four-year earnings per share target is $7.50 if the average annualized growth rate achieved by Esterline's industry peer group is 9% to 13%. (See Attachment A for other targets for varying levels of industry peer group performance.) B. Average return on common shareholders' equity for the four years ending October 31, 1999. The four-year mathematical average shall be based on each year's audited beginning and ending common shareholders' equity, excluding any amounts for any preferred shares. * The minimum return on equity criteria is three percentage points less than the four-year return on shareholders' equity of Esterline's industry peer group. * The target return on equity criteria is one percentage point more than the four-year return on shareholders' equity of Esterline's industry peer group. * The maximum return on equity criteria is four percentage points more than the four-year return on shareholders' equity of Esterline's industry peer group. No award will be earned for a target if the performance is less than minimum. No additional award will be earned for any performance above the maximum. Awards will be prorated for other performance levels. COMPUTATION OF FOUR-YEAR AWARDS Esterline's performance is calculated relative to each performance target individually. Achievement of each criteria at the target level earns 100% of the individual's total award--50% for each performance target. (See Attachment B for award percentages at the target, less than minimum, minimum and maximum levels for each performance target.) Awards for performance between a target and its minimum or between a target and its maximum will be prorated. BASIS FOR COMPUTATION OF PARTIAL PAYMENTS Cumulative Four-Year Relative Earned Performance Performance Basis of Four-Year Award Level Estimated based on 1/3 FY 1996 & 1997 actuals Estimated based on FY 1996, 1997 & 1998 actuals 2/3 PAYMENT OF AWARDS Payment shall be made at three intervals in the cycle. Partial payment shall be computed based on the latest estimate of the four-year outcome and shall be paid after completion of fiscal 1997 and 1998; these payments shall be made no later than March 1, 1998 and March 1, 1999, respectively. Final payment shall be made after completion of fiscal 1999, and no later than March 1, 2000. The amount of each payment, if any, shall be the amount earned for the cumulative performance for the cycle-to-date period less any amounts previously paid. Partial payments, once paid, are not refundable to Esterline Technologies. A Plan member must be an employee on October 31, 1997, 1998 or 1999 to receive payment related to that portion of the Cycle. However, if an employee's participation in the Plan is terminated during any Plan year due to normal retirement, death or disability, a pro rata share of his/her award will be determined after completion of fiscal 1999, and paid no later than March 1, 2000. In the case of death, payments shall be made to his/her estate. /s/ W. P. Hurlbut - ----------------- W. P. Hurlbut Chairman, President and Chief Executive Officer ATTACHMENT A ESTERLINE TECHNOLOGIES CORPORATION LONG-TERM INCENTIVE COMPENSATION PLAN--CYCLE VI ADJUSTMENTS FOR VARYING LEVELS OF INDUSTRY PEER GROUP PERFORMANCE EPS PERFORMANCE TARGETS Average Annual EPS Minimum EPS Maximum EPS Compounded EPS Growth Rate Performance Performance Performance of Industry Peer Group Targets Targets Targets Less than 4% $4.60 $6.30 $8.80 4 - 9% 5.20 6.90 9.40 9 - 13% (A) 5.80 7.50 10.00 More than 13% 6.40 8.10 10.60 (A) Esterline base EPS target. EXHIBIT 1 ESTERLINE TECHNOLOGIES CORPORATION LONG-TERM INCENTIVE COMPENSATION PLAN--CYCLE VI INDUSTRY PEER GROUP Value Line Industry Group* Machine Tool Computer and Peripherals Electronics Aerospace/Defense *As reported by Value Line in their latest report at time of calculation of awards under the cycle. ATTACHMENT B ESTERLINE TECHNOLOGIES CORPORATION LONG-TERM INCENTIVE COMPENSATION PLAN--CYCLE VI PERCENTAGE OF APPOINTEE'S AWARD EARNED AT VARYING LEVELS OF COMPANY PERFORMANCE Performance Relative to % of Award % of Award Total % of Appointee's Target Level from ROE Target from EPS Target Award Earned Less than Minimum 0% 0% 0% Minimum Level 12.5 12.5 25 Target Level 50 50 100 Maximum Level 100 100 200 EX-10 10 EXHIBIT 10.20C EXHIBIT 10.20c ESTERLINE TECHNOLOGIES CORPORATION CORPORATE MANAGEMENT INCENTIVE COMPENSATION PLAN FISCAL YEAR 1997 PURPOSE OF PLAN This Plan is intended to reward eligible officers and key employees of Esterline's corporate staff for successful management in fiscal year 1997. It is believed that the Plan will provide incentives to put forth maximum efforts to employ Esterline's assets effectively. MEMBERSHIP IN PLAN Officers and key employees of the Esterline corporate staff shall be eligible for membership in the Plan after appointment and return of a signed acceptance of the appointment letter. The Plan may be modified, amended or terminated at any time; but any such modification, amendment or termination shall not, without a member's written consent, affect his/her incentive compensation accrued prior to such modification, amendment or termination of the Plan. Nothing in this Plan limits Esterline from exercising the right to terminate an employee at any time for any reason. TERMS AND CONDITIONS 1. Individual participants payouts will vary from 5% to 60%, as stipulated in his/her appointment letter, of fiscal year-end 1997 salary. These target nomination awards will be earned if earnings per share of $2.51 are achieved. 2. Actual earnings per share will be as audited before extraordinary items for the year ending October 31, 1997. 3. Awards will be pro-rated for performance and will be interpolated on the following basis. EPS Award Below $2.51 Pro-rata share of target award At $2.51 performance 100% of target award 120% or more of $2.51 150% of target award 4. Actual individual payouts earned from earnings per share computations are limited to 150% of target nomination. 5. If directed, computed awards for officers may be further adjusted, up or down, by the Compensation & Stock Option Committee of the Board of Directors by an amount not to exceed greater than 25% of the computed award or target award for the Plan, whichever is greater. 6. Payout of awards will be no later than March 1, 1998 if the auditors have issued an opinion; otherwise payout is delayed until an opinion is issued for FY 1997. 7. If a Plan member is terminated for any reason other than death or disability prior to the end of fiscal 1997, he/she shall not receive the benefits provided by the Plan. (However, Esterline retains the right to grant a pro-rata award to a terminated employee, based upon salary earned prior to termination, except those terminated for cause.) a. If the company in its sole discretion specifically determines that the employment of a Plan member has been terminated prior to the end of such fiscal year because of disability, the Plan member will be paid a pro-rata amount based on the time he/she was a Plan member prior to his/her termination for disability. b. For any Plan member who dies prior to the end of Esterline's fiscal 1997, a pro-rata amount based on the time he/she was a Plan member prior to the date of death will be paid to his/her estate. 8. An employee who becomes a Plan member as of a date after the beginning of Esterline's fiscal 1997 will be paid a pro-rata amount based on the time the employee participates in the Plan. /s/ Wendell P. Hurlbut - ---------------------- Wendell P. Hurlbut Chairman, President and Chief Executive Officer EX-27 11 ARTICLE 5 FDS FOR ANNUAL 10-K
5 The Schedule Contains Summary Financial Information Extracted From the Esterline Technologies Corporation Consolidated Balance Sheets at October 31, 1996 and the Related Consolidated Statements of Operations for the Twelve Months then Ended and is Qualified in its Entirety by Reference to Such Financial Statements. 1,000 OCT-31-1996 NOV-01-1995 OCT-31-1996 12-MOS 46,436 0 73,204 4,084 45,399 178,780 160,303 106,813 276,646 105,335 29,007 0 0 1,700 140,604 276,646 352,843 352,843 215,015 215,015 103,415 0 2,339 32,074 10,720 21,354 0 0 0 21,354 2.61 2.61
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