Document:

exv10w2

 EXHIBIT 10.2

EARN OUT AGREEMENT

     THIS
EARN OUT AGREEMENT (the “Agreement”), is
entered into this 14th day of December, 2010
by and between ENERGY STEEL ACQUISITION CORP., a Delaware corporation (“ESAC”), Graham Corporation,
a Delaware corporation (“Graham” in its capacity of Guarantor under Section 2.3 and otherwise as
expressly provided herein as a direct party to this Agreement), and LISA D. RICE, individually and
as the Trustee of the Lisa D. Rice Revocable Trust dated June 5, 2003 (“Seller”). Capitalized
terms not otherwise defined in this Agreement shall have the meaning ascribed to them in that
certain Stock Purchase Agreement by and among Graham, ESAC, Energy Steel & Supply Co., a Michigan
corporation (“Energy Steel”) and the Seller dated on even date herewith (the “Stock Purchase
Agreement”).

     WHEREAS, the Seller beneficially owns all of the outstanding shares of capital stock of Energy
Steel, which is engaged in the manufacture and supply of products and raw materials to the nuclear
power generation industry (the “Energy Steel Business”);

     WHEREAS, simultaneously with the execution of this Agreement, ESAC is acquiring Energy Steel
pursuant to and subject to the conditions set forth in the Stock Purchase Agreement; and

     WHEREAS, as a condition to the consummation of the transactions set forth in the Stock
Purchase Agreement, the Stock Purchase Agreement provides that this Agreement shall be entered into
by the parties, pursuant to which Seller shall be eligible to receive certain performance-based
payments from ESAC if certain performance conditions are satisfied (the “Earn Out Consideration”)
with respect to the Energy Steel Business.

     NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and
conditions contained herein and such other consideration the receipt and sufficiency of which is
hereby acknowledged, the parties hereby agree as follows:

ARTICLE I.

EARN OUT CONSIDERATION

     Section 1.1 Defined Terms.

     “2011 EBITDA Thresholds” and “2012 EBITDA Thresholds” mean those EBITDA thresholds set forth
in the following tables:

	 	 	 
	2011 EBITDA Thresholds	 	Amount of First Year Payment
	3
 $3,625,000
	 	$250,000
	3
 $3,750,000
	 	$500,000
	3
 $3,875,000
	 	$750,000
	3
 $4,000,000
	 	$1,000,000

 

 

	 	 	 
	2012 EBITDA Thresholds	 	Amount of Second Year Payment
	3
 $3,625,000
	 	$250,000
	3
 $3,750,000
	 	$500,000
	3
 $3,875,000
	 	$750,000
	3
 $4,000,000
	 	$1,000,000

     “Catch-Up EBITDA Threshold” means, subject to the satisfaction of conditions set forth in
Sections 1.3 and 1.4, an aggregate EBITDA of Energy Steel for Fiscal Year 2011 and Fiscal Year 2012
of $7,250,000.

     “EBITDA” means, for any period, Energy Steel’s net income from continuing operations for such
period on a stand alone basis, plus Energy Steel’s (i) provisions for taxes based on income for
such period, (ii) interest expenses for such period, and (iii) depreciation and amortization of
tangible and intangible assets of Energy Steel for such period as determined in accordance with
GAAP and subject to the GAAP Exceptions. Further, EBITDA shall be adjusted as described in the
last sentence of this definition, and by excluding the effects of, or otherwise taking into
account, any and all of the following accounting principles to the extent otherwise included in the
determination of earnings from operations:

	 	(a)	 	gains, losses or profits realized by Energy Steel from the sale
of assets other than in the ordinary course of business and any “extraordinary
items” of gain or loss (as determined in accordance with GAAP and subject to
the GAAP Exceptions);

	 	(b)	 	any management fees, general overhead expenses, or other
intercompany charges, of whatever kind or nature, charged by ESAC, Graham or
any other Affiliates to the Energy Steel Business, except to the extent they
offset expenses that would otherwise be incurred by Energy Steel (e.g., blanket
insurance coverage);

	 	(c)	 	any legal or accounting fees and expenses incurred in
connection with this Agreement or the Stock Purchase Agreement.

	 	(d)	 	material modifications to staffing levels and compensation
packages during the earn out period will require the reasonable agreement of
the Seller prior to the implementation of such strategy. If the Seller
disagrees with the addition, we would partition out both the costs and
corresponding benefits of such addition to be excluded from the EBITDA
calculation.

	 	(e)	 	Items deemed to be outside the course of normal operations of
the Energy Steel Business which are non-recurring or non-operational shall be
an adjustment for purposes of the earn out calculation.

	 	(f)	 	For purposes of the earn out calculation, material variances
in the use of estimates, accounting methodologies, prepaid and accrued expense
treatment, and application of GAAP shall be adjustments.

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	 	(g)	 	As of the date of closing, Graham has simultaneously entered
into a real estate lease for the premises on which Energy Steel conducts its
business. The provisions of the lease also grant Graham on option to purchase
the real estate. To the extent that Graham exercises its option to purchase
the real estate, adjustments will be made to the earn out EBITDA such that the
expenses reflect those which would have occurred under the terms of the lease
had the option not been exercised.

     In determining earnings from operations, the purchase and sales prices of goods and services
sold by Energy Steel (or ESAC) to Graham or its Affiliates, or purchased by the Energy Steel (or
ESAC) from Graham or its Affiliates, or payment of royalties, shall be adjusted to reflect the
amounts that Energy Steel (or ESAC) would have received or paid if dealing with an independent
party in an arm’s-length commercial transaction.

     “First Year Payment” means the amount(s) specified in the chart included in the definition of
2011 EBITDA Thresholds and 2012 EBITDA Thresholds above.

     “Fiscal Year 2011” means Energy Steel’s year ending December 31, 2011.

     “Fiscal Year 2012” means Energy Steel’s year ending December 31, 2012.

     “Fiscal Year 2011 EBITDA” means the EBITDA of Energy Steel for the Fiscal Year 2011, based on
the audited financial statements of Energy Steel, as determined by Graham’s independent auditors in
their reasonable discretion.

     “Fiscal Year 2012 EBITDA” means the EBITDA of Energy Steel for the Fiscal Year 2012 as
determined by Graham’s independent auditors in their reasonable discretion.

     “Second Year Payment” means the amount(s) specified in the chart included in the definition of
2011 EBITDA Thresholds and 2012 EBITDA Thresholds above.

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     Section 1.2 Generally.

          (a) On the terms and subject to the conditions set forth in this Agreement, the Seller shall
be eligible to receive the Earn Out Consideration (as more particularly defined below). Subject to
the satisfaction of the conditions set forth herein, the Earn Out Consideration may consist of two
cash payments. The first payment shall be for and measured against the performance of the Energy
Steel Business during the Fiscal Year 2011, and it shall be known as the “First Year Payment.” The
second payment shall be for and measured against the performance of the Energy Steel Business
during the Fiscal Year 2012, and it shall be known as the “Second Year Payment” (collectively, the
First Year Payment and the Second Year Payment shall comprise the “Earn Out Consideration”).
Except as set forth in Section 1.4 below, each payment is intended to be separate from and
independent of the other payment. Thus, the Seller need not receive the First Year Payment in
order to be eligible to receive the Second Year Payment (and vice versa). The amount of each
payment shall be determined in accordance with Section 1.5 hereof, and no payment shall be made
unless the associated conditions to payment are satisfied in accordance with Sections 1.3 and 1.4
hereof.

          (b) ESAC shall pay to the Seller (i) the First Year Payment that corresponds to the 2011
EBITDA Threshold attained by Energy Steel as set forth in the table above, and (ii) the Second Year
Payment that corresponds to the 2012 EBITDA Threshold attained by Energy Steel as set forth in the
table above.

     Section 1.3 Conditions to First Year Payment, Second Year Payment and Catch-Up Payment.

          (a) ESAC shall pay to the Seller the First Year Payment if, and only if, the Energy Steel
Business as operated by ESAC (or an affiliate thereof), generates EBITDA equal to or in excess of
$3,625,000 during the Fiscal Year 2011.

          (b) ESAC shall pay to the Seller the Second Year Payment if, and only if, the Energy Steel
Business as operated by ESAC (or an affiliate thereof), generates EBITDA equal to or in excess of
$3,625,000 during the Fiscal Year 2012.

          (c) ESAC shall pay the Seller the Catch-Up Payment if, and only if, the Energy Steel Business
as operated by ESAC (or an affiliate thereof), generates EBITDA equal to or in excess of the
Catch-Up EBITDA Threshold set forth in the table below.

     Section 1.4 Catch-Up Payment.

          (a) In the event that no First Year Payment is made during Fiscal Year 2011 as a result of
Energy Steel’s failure to meet the minimum EBITDA threshold of $3,625,000, the Seller will be
entitled to receive a catch-up payment in the amount of up to $1,000,000 (the “Catch-Up Payment”),
if Energy Steel’s Fiscal Year 2011 EBITDA plus Energy Steel’s Fiscal Year 2012 EBITDA exceeds the
Catch-Up EBITDA Thresholds, as set forth below:

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	Catch-Up Payment Thresholds	 	Amount of Catch-Up Payment
	3
 $7,250,000
	 	$250,000
	3
 $7,500,000
	 	$500,000
	3
 $7,750,000
	 	$750,000
	3
 $8,000,000
	 	$1,000,000

By way of examples: (i) if the Fiscal Year 2011 EBITDA is $3,500,000 (an event in which the First
Year Payment would not be earned) and the Fiscal Year 2012 EBITDA is $4,500,000, ESAC shall make
pay Seller the Second Year Payment of $1,000,000 plus a Catch-Up Payment in the amount of
$1,000,000; and (ii) if the Fiscal Year 2011 EBITDA is $3,500,000 (an event in which the First Year
Payment would not be earned) and the Fiscal Year 2012 EBITDA is $4,000,000, ESAC shall pay Seller a
Catch-Up Payment in the amount of $500,000.

          (b) Notwithstanding the aforementioned subsection (a), Seller’s right to receive the Catch-Up
Payment is conditioned upon Energy Steel’s Fiscal Year 2011 EBITDA being in excess of $3,000,000.
For example, if the Fiscal Year 2011 EBITDA is $2,900,000 (an event in which the First Year Payment
would not be earned) no Catch-Up Payment would be made regardless of the Fiscal Year 2012 EBITDA
attained.

     Section 1.5 Calculation and Payment of Earn Out Consideration.

          (a) Within a period of ten (10) calendar days following ESAC’s receipt of final financial
statements for Energy Steel for Fiscal Year 2011 and Fiscal Year 2012 (which shall be prepared not
more than one hundred twenty (120) days following the end of such fiscal year), ESAC will deliver
to Seller (i) a calculation of the EBITDA for each such year, and (ii) a statement as to whether
the Seller is entitled to the First Year Payment, Second Year Payment or Catch-Up Payment, as
applicable. If ESAC determines that any payment is due hereunder, each such payment shall be made
within ten (10) business days of the delivery of the calculation of such payment to the Seller.
When payments are due hereunder, in each case, ESAC shall make the payment to the Seller by issuing
a check in the payment amount. If any payment date hereunder falls on a day that is a Saturday,
Sunday or holiday on which ESAC is closed, such payment shall be due on the next day on which ESAC
is open for business.

          (b) The parties agree that any dispute as to whether Earn Out Consideration is earned
hereunder shall be resolved in accordance with the procedures set forth in Section 2.2 of the Stock
Purchase Agreement.

ARTICLE II.

ADDITIONAL COVENANTS AND ACKNOWLEDGMENTS

     Section 2.1 Commercially Reasonable Efforts. In consideration of the opportunity pursuant to
this Agreement to earn the Earn Out Consideration, Seller agrees to use her commercially reasonable
efforts to promote the interests of Graham, ESAC and the Energy Steel Business during the periods
of time covered by this Agreement. ESAC and Graham agree that

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they will use commercially reasonable efforts to promote the interests and EBITDA of the
Energy Steel Business and in carrying out its obligations under this Agreement. In this regard,
Graham and ESAC shall ensure that the Energy Steel Business has adequate working capital and other
resources necessary to carry on the business and affairs consistent with past practice in the
ordinary course of business throughout Fiscal Year 2011 and 2012.

     Section 2.2 Right of Setoff. The Seller acknowledges and agrees that any and all amounts of
Earn Out Consideration owed to her pursuant to this Agreement shall be subject to the right of
setoff in favor of Graham and ESAC contained in the Stock Purchase Agreement.

     Section 2.3 Guarantee of Graham. Graham hereby unconditionally and irrevocably guarantees
each and every obligation of ESAC under this Agreement as if Graham was the direct party obligated
for all payments due hereunder to Seller, as Graham will benefit directly and indirectly from the
transactions contemplated by this Agreement and the Stock Purchase Agreement. Graham hereby waives
all defenses afforded a guarantor or surety under applicable Laws. Graham’s obligations hereunder
shall be binding upon its successors and assigns and shall not be extinguished by any bankruptcy or
reorganization of ESAC.

     Section 2.4 Covenants of ESAC as to Operation During Earn Out Periods.

          (a) ESAC and Graham will maintain the Energy Steel Business as a separate enterprise within
their corporate structure;

          (b) ESAC and Graham will provide sufficient working capital for operation of the Energy Steel
Business throughout Fiscal Years 2011 and 2012;

          (c) ESAC shall utilize reasonable commercial efforts to maintain Key Employees of Energy Steel
throughout the Fiscal Years 2011 and 2012;

          (d) ESAC shall operate and market the Energy Steel Business using the name “Energy Steel” (or
any derivative thereof deemed appropriate by Graham) throughout Fiscal Years 2011 and 2012; and

          (e) ESAC and Graham shall direct all new orders in the same product line as the Energy Steel
Business to Energy Steel and shall not otherwise divert opportunities of Energy Steel to its
Affiliates.

     Section 2.5 Acceleration and Early Termination. The payment obligations of ESAC and Graham
hereunder shall be subject to acceleration upon the occurrence of any one (1) of the following
events:

          (a) ESAC determines in its discretion to terminate this Agreement for its business purposes;

          (b) The sale (subsequent to the date hereof) of all or substantially all of the assets of
Energy Steel, ESAC and/or Graham;

          (c) A change in control of Energy Steel, ESAC and/or Graham occurs; or

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          (d) ESAC and/or Graham have committed a material breach of any of their payment obligations,
covenants, or agreements under this Agreement; provided Seller has notified Graham and ESAC of the
breach, and the breach has continued without cure for a period of thirty (30) days after the
written notice of breach.

     In the event of an acceleration under this Section 2.5, Seller shall be entitled to immediate
payment of the maximum payments available for each Fiscal Year. Seller acknowledges that the
maximum payments hereunder shall not exceed $2,000,000 in the aggregate.

ARTICLE III.

GENERAL PROVISIONS

     Section 3.1 Amendment and Waiver. Only a writing executed by each of the parties hereto may
amend this Agreement. No waiver of compliance with any provision or condition hereof, and no
consent provided for herein, will be effective unless evidenced by an instrument in writing duly
executed by the party sought to be charged therewith. No failure on the part of any party to
exercise, and no delay in exercising, any of its rights hereunder will operate as a waiver thereof,
nor will any single or partial exercise by any party of any right preclude any other or future
exercise thereof or the exercise of any other right.

     Section 3.2 Assignment. No party will assign or attempt to assign any of its rights or
obligations under this Agreement without the prior written consent of each of the other parties
hereto and any attempted assignment will be null and void; provided, however, that
without such consent, but upon notice to Seller, ESAC may assign all of its rights and obligations
hereunder to any subsidiary of Graham so designated by Graham, it being agreed that such assignment
will not relieve ESAC from its obligations hereunder.

     Section 3.3 Notices, Etc. Each notice, report, demand, waiver, consent and other
communication required or permitted to be given hereunder will be in writing and will be sent in
accordance with Section 9.2 of the Stock Purchase Agreement.

     Section 3.4 Binding Effect. Subject to the provisions of Section 3.2, this Agreement will be
binding upon and will inure to the benefit of the parties and their respective successors and
assigns. This Agreement creates no rights of any nature in any Person not a party hereto.

     Section 3.5 Governing Law. This Agreement will be governed by and construed in accordance
with the Laws of the State of New York without regard to its principles of conflicts of laws. The
parties agree that the sole and exclusive forum for any Claim related to this Agreement, the
interpretation or construction hereof and the transactions contemplated hereby will be the Supreme
Court of and for the County of Monroe, State of New York. Each party unconditionally and
irrevocably agrees not to bring any Claim in any other forum and not to plead or otherwise attempt
to defeat the trial of such a matter in such court whether by asserting that such court is an
inconvenient forum, lacks jurisdiction (personal or other) or otherwise. Each party hereby waives
the right to a trial by jury.

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     Section 3.6 Entire Agreement. This Agreement sets forth the entire understanding of the
parties, and supersedes any and all prior agreements, arrangements and understandings, written or
oral, relating to the subject matter hereof.

     Section 3.7 Headings; Counterparts. The headings of this Agreement are for convenience of
reference only and do not form a part hereof and do not in any way modify, interpret or construe
the intention of the parties. This Agreement may be executed in one or more counterparts, each of
which will be deemed an original, but all of which together will constitute one and the same
instrument. The parties agree that facsimile copies of signatures will be deemed originals for all
purposes hereof and that a party may produce such copies, without the need to produce original
signatures, to prove the existence of this Agreement in any proceeding brought hereunder.

     Section 3.8 Independent Counsel; Seller Taxes. The parties state that they have carefully read
this Agreement, know its contents, and freely and voluntarily agree to all of its terms and
conditions. Each party acknowledges that it has been represented by independent legal counsel of
its choice throughout all the negotiations that preceded the execution of this Agreement, and this
Agreement has been executed with the consent and upon the advice of such independent legal counsel.
Each party shall bear its own legal fees incurred as a result of the preparation, review and
negotiation of this Agreement. Seller shall be responsible for all taxes incurred by Seller as a
result of this Agreement and neither ESAC not Graham shall be required to withhold any payments
made hereunder except as may be required by law.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first written
above.

	 	 	 	 	 
	 	ESAC:

ENERGY STEEL ACQUISITION CORP.,

a Delaware corporation

 	 
	 	By: 	/s/
Jeffrey F. Glajch 	 
	 	  	Jeffrey F. Glajch 	 
	 	Its: 	Chief
Financial Officer 	 
	 
	 	GRAHAM:

GRAHAM CORPORATION, a Delaware

corporation

 	 
	 	By:	/s/
James R. Lines 	 
	 	  	James R. Lines 	 
	 	Its:	President
and Chief Executive Officer 	 
	 
	 	SELLER:	 
	 
	 	/s/
Lisa D. Rice
 	 
	 	LISA D. RICE,
individually and as the Trustee of the Lisa D. Rice Revocable Trust
dated June 5, 2003	 
	 

9exv10w3

EXHIBIT
10.3

ESCROW AGREEMENT

     THIS
ESCROW AGREEMENT (this
“Agreement”), dated as of this 14th day of December, 2010,
is by and among PNC BANK, NATIONAL ASSOCIATION (“Escrow Agent”), ES ACQUISITION CORP., a Delaware
corporation (“Purchaser”), and LISA D. RICE, individually and as Trustee of the Lisa D. Rice
Revocable Trust dated June 5, 2003 (collectively, the “Seller”).

R E C I T A L S:

     A. Purchaser, Seller and Graham Corporation have entered into that certain Stock Purchase
Agreement of even date herewith (the “Purchase Agreement”).

     B. The execution and delivery of this Agreement is a condition to the consummation of the
transactions contemplated by the Purchase Agreement.

     C. Capitalized terms used in this Agreement but not defined are used in this Agreement as
defined in the Purchase Agreement.

A G R E E M E N T:

     NOW THEREFORE, in consideration of the mutual promises and subject to the terms and
conditions herein contained, and other good and valuable consideration, had and received the
sufficiency and receipt of which are hereby acknowledged, the parties hereto agree as follows:

     1. Appointment of Escrow Agent. Purchaser and Seller hereby appoint and designate the
Escrow Agent as the escrow agent for the purposes set forth in this Agreement, and the Escrow Agent
hereby accepts such appointment under the terms and conditions set forth in this Agreement.
Notwithstanding the references in this Agreement to the Purchase Agreement, Purchaser and Seller
acknowledge that the Escrow Agent is not a party to the Purchase Agreement for any purpose or
responsible for its interpretation or enforcement.

     2. Deposit in Escrow. Concurrently with the execution and delivery of this Agreement,
Purchaser shall deposit $1,750,000.00 by wire transfer of immediately available funds to a separate
account (the “Escrow Amount”) maintained by the Escrow Agent. The Escrow Agent shall hold and,
subject to the terms and conditions of this Agreement, disburse the Escrow Amount and any and all
income earned on the Escrow Amount (together, the “Escrow Funds”) as permitted by Section 3
and otherwise in accordance with the terms and conditions of this Agreement.

     3. Investment. The Escrow Agent shall invest the Escrow Funds in a manner specified
in writing from time to time by Purchaser and Seller. Absent such written direction, the Escrow
Agent shall invest the Escrow Funds in a PNC Bank Money Market Deposit Account (MMDA), or a
successor or similar fund or account offered by the Escrow Agent. The Escrow

 

 

     4. Agent is hereby authorized to execute purchases and sales of permitted investments through
the facilities of its own trading or capital markets operations or those of any affiliated entity.
Any investment income realized on the Escrow Funds is to be reinvested in the account from which
the income was earned. Any and all taxes realized with respect to the investment income realized
on the Escrow Funds shall be paid by Seller. Promptly following the conclusion of each calendar
year, the Escrow Agent shall deliver to Seller (a) a written statement of account with respect to
any investment income realized on the Escrow Funds, and (b) a form 1099 for Seller with respect to
all investment income earned during the immediately preceding calendar year. At or prior to the
time of execution of this Agreement, Seller shall furnish to the Escrow Agent a certified copy of a
form W-9. Seller understands that if such tax reporting documentation is not provided and
certified to the Escrow Agent, the Escrow Agent may be required by the Internal Revenue Code of
1986, as amended, and the Regulations promulgated thereunder, to withhold a portion of any interest
or other income earned on the Escrow Funds. The Escrow Agent shall have no responsibility for the
preparation and/or filing of any tax or information return with respect to any transactions,
whether or not related to this Agreement, that occurs outside the Escrow Account. To the extent
that the Escrow Agent becomes liable for the payment of any taxes in respect of income derived from
the investment of the Escrow Funds, the Escrow Agent shall satisfy such liability to the extent
possible from the Escrow Funds. Seller hereby agrees to indemnify, defend and hold the Escrow
Agent harmless from and against any tax, late payment, interest, penalty or other cost or expense
that may be assessed against the Escrow Agent on or with respect to the Escrow Funds and the
investment thereof unless such tax, late payment, interest, penalty or other expense was directly
caused by the gross negligence or willful misconduct of the Escrow Agent. The indemnification
provided by this Section 3 is in addition to the indemnification provided in Section
8 and shall survive the resignation or removal of the Escrow Agent and the termination of this
Agreement.

     5. Voting of Proxies. The parties hereto other than the Escrow Agent hereby instruct
Escrow Agent to vote all proxies in accordance with the proxy policy in effect from time to time
for the Escrow Agent unless otherwise specifically instructed jointly by the parties. Each of said
parties specifically acknowledges that it understands that this provision may involve the Escrow
Agent’s voting shares of mutual funds that pay fees to the Escrow Agent or its affiliates and that,
in voting such shares, the Escrow Agent may be in a position to vote to change fees paid at the
mutual fund level to itself or to an affiliate.

     6. Escrow Investments (FDIC insurance). Shares of mutual funds are not insured by the
FDIC (or have limited FDIC insurance), are not deposits of or guaranteed by the Escrow Agent or its
affiliate(s) and are subject to investment risks, including the loss of principal.

     7. Security Transaction Confirmation Disclosure. During the term of this Agreement,
the Escrow Agent shall provide each of Purchaser and Seller (for purposes of this paragraph, the
“Recipient”) with quarterly statements containing the beginning balance in the Escrow Account as
well as all principal and income transactions for the statement period. Recipient shall be
responsible for reconciling such statements. The Escrow Agent shall be forever released and
discharged from all liability with respect to the accuracy of such statements and the transactions
listed therein, except with respect to any such act or transaction as to which Recipient shall,
within ninety (90) days after making the statement available, file written

Escrow Agreement

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objections with the Escrow Agent. Recipient is aware that Federal Regulations require the
Escrow Agent, without charge and within one business day of its receipt of a broker/dealer
confirmation for each security transaction in the Escrow Account to forward to Recipient a written
notification which discloses, among other things: the Escrow Agent’s name, Recipient’s name, the
capacity (capacities) in which the Escrow Agent is acting, the date (and time, within a reasonable
period, upon written request of Recipient) of execution, the identity, price, number of shares or
units or principal amount of debt securities purchased or sold by Recipient, the name of the
broker/dealer, the amount of any remuneration received by such broker/dealer from Recipient and the
amount of any remuneration received by the Escrow Agent. Recipient is also aware that, under the
terms of this Agreement, the Escrow Agent will be providing to Recipient periodic statements that
include a listing of all securities transactions, receipts and disbursements during the period,
together with a current listing of the assets held in the Escrow Account. Recipient shall accept
such periodic statements in satisfaction of the Escrow Agent’s obligation to provide written
notification as described above; provided, that upon Recipient’s request, the Escrow Agent will
provide to Recipient within a reasonable time and at no additional cost the information required by
Federal Regulations.

     8. No Liability for Investment Losses. The Escrow Agent shall be entitled to sell or
redeem any investments held in the Escrow Account as necessary to make any distributions required
under this Escrow Agreement and shall not be liable or responsible for any loss resulting from any
such sale or redemption. The Escrow Agent shall not be liable or responsible for any fluctuations
in value of any such investments.

     9. Escrow Claims and Distributions.

          During the term of this Agreement, the Escrow Funds will be utilized for reimbursement of
Losses (as defined in the Purchase Agreement) incurred by Purchaser in respect of which Seller is
obligated pursuant to Article 7 of the Purchase Agreement to indemnify Purchaser
(“Indemnified Losses”).

          9.1 Escrow Funds Distribution and Termination.

               (a) From time to time prior to the distribution of the Escrow Funds to the Seller as set forth
below, Purchaser may deliver to the Escrow Agent a written notice (an “Escrow Claim”) requesting an
immediate distribution to Purchaser of a specified amount of the Escrow Funds in full or partial
payment of the Indemnified Losses obligations of the Seller to Purchaser pursuant to Article 7 of
the Purchase Agreement, along with a delivery receipt or other proof of delivery to the Seller of a
copy of such Escrow Claim. The Escrow Claim shall include evidence that Purchaser has notified the
Escrow Agent that an Asserted Liability (as defined in the Purchase Agreement) has been properly
and timely made in good faith under the Purchase Agreement and the amount of the Escrow Funds
(which shall be no more than the Indemnified Losses set forth in the Asserted Liability) to be
withheld from distribution to the Seller.

               (b) If the Escrow Agent is not in actual receipt of a written objection from the Seller to an
Escrow Claim for an immediate distribution within thirty (30) days following the date of the Escrow
Agent’s actual receipt of such Escrow Claim, then on the thirty-

Escrow Agreement

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first (31st) day following such actual receipt (or if the thirty-first
(31st) day is not a business day for the Escrow Agent, then on the first business day
after the thirty-first (31st) day), the Escrow Agent shall disburse to Purchaser the
amount of the Escrow Funds specified in the Escrow Claim. If the Escrow Agent is in actual receipt
of a written objection from the Seller to an Escrow Claim within thirty (30) days following the
date of the Escrow Agent’s actual receipt of such Escrow Claim (or if the thirtieth
(30th) day is not a business day for the Escrow Agent, then on the first business day
after the thirtieth (30th) day), the Escrow Agent shall withhold from the Escrow Funds
distributable pursuant to this Section 4 an amount sufficient to satisfy such Escrow Claim
and such funds shall be disbursed in accordance with Section 4.1(c) below.

               (c) Except for the distribution of Escrow Funds pursuant to either Section 4.1(b), 4.1(d)
or 4.1(e), the Escrow Agent shall not disburse any Escrow Funds until it shall have received
either (i) non-conflicting written instructions from the Seller and Purchaser as to the disposition
of the Escrow Funds, or (ii) an order of a court having jurisdiction over the matter which is final
and not subject to further court proceedings or appeal. Upon receipt of any such written
instructions or order, the Escrow Agent shall distribute the Escrow Funds it holds in accordance
therewith.

               (d) Except as otherwise provided in this Section 4, on the ten and one-half (10.5)
month anniversary of the Closing, the Escrow Agent shall release and disburse from the Escrow Funds
to an account designated by Seller, the amount, if any, by which the then-existing Escrow Funds
exceed the sum of (i) $875,000.00, plus (ii) the amount of any Escrow Claims under this Agreement
that are then pending (whether disputed or not).

               (e) Except as otherwise provided in this Section 4, on the twenty-first
(21st) month anniversary of the Closing (the “Final Release Date”), the Escrow Agent
shall release and disburse from the Escrow Funds to an account designated by Seller, the amount, if
any, by which the then-existing Escrow Funds exceed the sum of any Escrow Claims under this
Agreement that are then pending (whether disputed or not). In addition, in accordance with the
foregoing, if any Escrow Funds continue to be held after the Final Release Date for any Escrow
Claim pending as of the Final Release Date, then such Escrow Funds shall be disbursed as provided
herein and as provided in the Purchase Agreement.

     10. Escrow Agent Compensation. The Escrow Agent is to be compensated in accordance
with the fee schedule attached to this Agreement as Exhibit B for the performance of its
duties under this Agreement (the “Escrow Fees”) and for reimbursement of its reasonable
out-of-pocket expenses including, but not by way of limitation, the fees and costs of attorneys or
agents which it may reasonably find necessary to engage in performance of its duties hereunder.
The Escrow Fees are to be borne out of the Escrow Funds and shall be paid first out of income
realized on the Escrow Amount and then out of the principal, at the times such Escrow Fees are due.
The Escrow Agent shall have, and is hereby granted, a prior lien upon the Escrow Funds with
respect to its unpaid fees, non-reimbursed expenses and unsatisfied indemnification rights,
superior to the interests of any other persons or entities and is hereby granted the right to set
off and deduct any unpaid fees, non-reimbursed expenses and unsatisfied indemnification rights from
the Escrow Funds.

Escrow Agreement

-4-

 

     11. Obligations and Liabilities of the Escrow Agent.

          (a) The Escrow Agent has no duties or obligations other than those specifically set forth in
this Agreement.

          (b) The Escrow Agent is not responsible in any manner whatsoever for any failure or inability
of any party other than the Escrow Agent to honor any of the provisions of this Agreement.

          (c) The Escrow Agent is fully protected in acting or refraining from acting upon and relying
upon any written notice, direction, request, waiver, consent, receipt or other paper or document
that the Escrow Agent in good faith reasonably believes to have been signed or presented by the
proper party or parties. Concurrent with the execution of this Agreement, the Parties shall
deliver to the Escrow Agent authorized signers’ forms in the form of Exhibit C-1 and
Exhibit C-2 to this Agreement.

          (d) The Escrow Agent will not be liable, directly or indirectly, for any (i) damages, losses
or expenses arising out of the services provided hereunder, other than damages, losses or expenses
which have been finally adjudicated to have directly resulted from the Escrow Agent’s gross
negligence, willful misconduct or act of bad faith or (ii) special, indirect or consequential
damages or losses of any kind whatsoever (including without limitation lost profits) even if the
Escrow Agent has been advised of the possibility of such losses or damages and regardless of the
form of action.

          (e) The Escrow Agent may consult with, and obtain advice from, legal counsel in the event of
any dispute or construction of any of the provisions of this Agreement or its duties under this
Agreement, and the Escrow Agent will incur no liability and will be fully protected in acting or
refraining from acting in good faith in accordance with the opinion and instruction of such
counsel.

     12. Automatic Succession; Resignation and Removal of Escrow Agent.

          (a) Any company into which the Escrow Agent may be merged or with which it may be consolidated
or any company to whom the Escrow Agent may transfer a substantial amount of its global escrow
business, will be the successor to the Escrow Agent without the execution or filing of any paper or
further act on the part of any parties, notwithstanding anything in this Agreement to the contrary.

          (b) The Escrow Agent may resign as escrow agent at any time with or without cause by giving
written notice to Purchaser and Seller, such resignation to be effective 30 calendar days following
the date such notice is given. In addition, Purchaser and Seller jointly may remove the Escrow
Agent as escrow agent at any time with or without cause by an instrument (which may be executed in
counterparts), given to the Escrow Agent, which instrument must designate the effective date of
such removal. If any such resignation or removal occurs, a successor escrow agent will be
appointed by Purchaser and Seller. Any such successor escrow agent shall deliver to Purchaser and
Seller a written instrument accepting such

Escrow Agreement

-5-

 

appointment and upon such delivery it will succeed to all of the rights and duties of the
Escrow Agent under this Agreement and will be entitled to receive the Escrow Funds.

          (c) If Purchaser and Seller are unable to agree upon a successor escrow agent or have failed
to appoint a successor escrow agent prior to the expiration of 30 calendar days following the date
of the notice of resignation or removal, the then acting escrow agent shall petition any court of
competent jurisdiction for the appointment of a successor escrow agent or other appropriate relief,
and any such resulting appointment will be binding upon all of the parties to this Agreement.

          (d) Upon acknowledgment by any successor escrow agent of the receipt of the Escrow Funds, the
then replaced escrow agent will be fully relieved of all duties, responsibilities and obligations
under this Agreement except with respect to actions previously taken or omitted by such replaced
escrow agent.

     13. Indemnification of Escrow Agent. In partial consideration of the Escrow Agent’s
acceptance of this appointment, Purchaser and Seller shall indemnify and hold the Escrow Agent
harmless as to any liability incurred by it to any Person by reason of its having accepted such
appointment or in carrying out the terms of this Agreement and, subject to Section 5 of
this Agreement, shall reimburse the Escrow Agent for all of its reasonable costs and expenses,
including, among other things, reasonable attorneys’ fees and expenses arising out of any matter
for which the Escrow Agent is entitled to indemnification under this Section 8.
Notwithstanding the foregoing, no indemnity need be paid in case of any liability caused by the
Escrow Agent’s gross negligence, willful misconduct or breach of this Agreement. This paragraph
shall survive the termination of this Agreement for any reason and the resignation and removal of
the Escrow Agent.

     14. Right to Interplead. Should any dispute arise with respect to this Escrow
Agreement or the Escrow Account, whether such dispute arises between the parties hereto and others,
or between the parties hereto themselves, it is understood and agreed that the Escrow Agent may
petition (by means of an interpleader or any other appropriate measure) any court of competent
jurisdiction for instructions with respect to such dispute and the other parties hereto will hold
the Escrow Agent harmless and indemnify it against all consequences and expenses that may be
incurred by the Escrow Agent in connection therewith, which indemnity shall survive the termination
of this Escrow Agreement or the resignation or removal of Escrow Agent.

     15. Attachment of Escrow Funds; Compliance with Legal Orders. In the event that any
Escrow Funds shall be attached, garnished or levied upon by any court order, or the delivery
thereof shall be stayed or enjoined by an order of a court, or any order, judgment or decree shall
be made or entered by any court order affecting the Escrow Funds, the Escrow Agent is hereby
expressly authorized, in its sole discretion, upon five (5) days advance written notice to
Purchaser and Seller, to respond as it deems appropriate or to comply with all writs, orders or
decrees so entered or issued, or which it is advised by legal counsel of its own choosing is
binding upon it, whether with or without jurisdiction. In the event that the Escrow Agent obeys or
complies with any such writ, order or decree it shall not be liable to any of the parties or

Escrow Agreement

-6-

 

to any other person, firm or corporation, should, by reason of such compliance
notwithstanding, such writ, order or decree be subsequently reversed, modified, annulled, set aside
or vacated.

     16. Notices. All notices must be in writing and will be deemed to have been given (i)
if delivered in person or by a nationally recognized overnight courier service or (ii) upon
confirmation of receipt if sent by facsimile, to the following addresses:

	 	 	 

	(a) If to Purchaser:

	 	ES Acquisition Corp.

c/o Graham Corporation

20 Florence Avenue

Batavia, New York 14020

Attention: Chief Financial Officer

Fax No.: (585) 343 — 1097
	 
	 	 
	     with copies to:

	 	Harter Secrest & Emery LLP

One Bausch and Lomb Place

Rochester, New York 14064

Attention: Daniel R. Kinel, Esq.

Fax No.: (585) 232 — 2152
	 
	 	 
	(b) If to Seller:

	 	Lisa D. Rice

c/o 2647 Invitational Drive

Oakland, Michigan 48363

Fax No.: 248) 645-1568
	 
	 	 
	     with copies to:

	 	Howard & Howard Attorneys PLLC

450 West Fourth Street

Royal Oak, Michigan 48067

Attention: Joseph J. DeVito, Esq.

Fax No.: (248) 645-1568
	 
	 	 
	(c) If to Escrow Agent:

	 	PNC Bank, National Association

1900 East Ninth Street, 13th Floor

Locator B7-YB13-13-2

Cleveland, Ohio 44114

Attention: Lissa Vitale

Fax No.: (216) 222-0178 

     17. Bank Bound Only by Actual Receipt. Notwithstanding anything to the contrary
herein, Escrow Agent shall not be bound by any notice unless actually received by Escrow Agent.

     18. Binding Effect. This Agreement is binding and inures to the benefit of the
parties and their respective successors and assigns.

Escrow Agreement

-7-

 

     19. Assignment. This Agreement may not be assigned or transferred except upon a
written agreement executed by each of the parties to this Agreement; provided,
however, that Purchaser may assign this Agreement to any of its lenders or any Affiliate of
Purchaser. The foregoing proviso notwithstanding, no such assignment shall be binding on the
Escrow Agent unless and until written notice of such assignment shall be delivered to and
acknowledged by the Escrow Agent.

     20. Third Party Beneficiaries. Nothing in this Agreement is intended or will be
construed to confer on any Person other than the parties or their successors and assigns any rights
or benefits under this Agreement.

     21. Headings. The headings in this Agreement are intended solely for the convenience
of reference and will be given no effect in the construction or interpretation of this Agreement.

     22. Exhibits. The Exhibits and other attachments hereto will be deemed to be a part
of this Agreement.

     23. Counterparts. This Agreement may be executed in multiple counterparts, each of
which will be deemed an original, and all of which together will constitute one and the same
document.

     24. Governing Law. This Agreement must be governed by and construed in accordance
with the laws of the State of Pennsylvania, without regard to conflict of laws principles.

     25. Amendment. No amendment of this Agreement is binding unless made in a written
instrument that specifically refers to this Agreement and is signed by Purchaser, Seller and the
Escrow Agent.

     26. Entire Agreement. This Agreement and its Exhibits contains the entire
understanding among the parties and supersedes any prior understanding and agreements between them,
in each case respecting this subject matter. There are no representations, agreements or
understandings, oral or written, between or among the parties to this Agreement relating to the
subject matter of this Agreement that are not fully expressed in this Agreement.

[REMAINDER OF PAGE INTENTIONALLY BLANK]

Escrow Agreement

-8-

 

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date
first above written.

	 	 	 	 	 
	 	ESCROW AGENT:

PNC BANK, NATIONAL ASSOCIATION

 	 
	 	By:  	/s/
Robert Grimaldi 	 
	 	Its: 	Robert Grimaldi 

	 	 	  	Vice President
	 	 	 

	 
	 
	 	PURCHASER::

ES ACQUISITION CORP., a Delaware corporation

 	 
	 	By:  	/s/
Jeffrey F. Glajch 	 
	 	 	Jeffrey F. Glajch 	 
	 	Its:	Chief Financial Officer 	 
	 	

SELLER:

/s/ Lisa D. Rice

	 	LISA D. RICE, individually and as Trustee

for the Lisa D. Rice Revocable Trust dated

June 5, 2003	 
	 	 	 
	 	 	 

					
	 
	 	 
	 	Escrow Agreement

- 9 -

 

EXHIBIT A

__________ __, 20__

PNC Bank, National Association

1900 East Ninth Street, 13th Floor

Locator B7-YB13-13-2

Cleveland, Ohio 44114

Attention: Lissa Vitale

Fax No.: (216) 222-0178

[Address]

[City, State ZIP]

Attention: [______________]

Facsimile: [______________]

Ladies and Gentlemen:

     Reference is hereby made to the Escrow Agreement, dated _______________, 2010 (the “Escrow
Agreement”), by and among Purchaser, Seller and you, as Escrow Agent. Capitalized terms used but
not defined in this notice are used as defined in the Escrow Agreement.

     Pursuant to Section 4.1 of the Escrow Agreement, this letter will serve as instructions to the
Escrow Agent to deliver $__________ [specify portion of Escrow Funds, which amount shall take into
account any applicable limitations set forth in the Purchase Agreement] of the Escrow Funds to
[specify Person or Persons to receive such portion], for [specify the matter or matters entitling
such Person or Persons to the Escrow Funds and the aggregate dollar amount of Indemnified Losses
sustained or estimated to be sustained (including the amount by which the Indemnified Losses
claimed hereunder exceed the limitations set forth in the Purchase Agreement)], via wire transfer
as follows: [specify wire transfer instructions of recipient(s)]. Such amount must be delivered
in accordance with the terms of Section 4.1 of the Escrow Agreement, unless the Escrow Agent
receives a Counter Notice within thirty (30) calendar days of its receipt of this letter.

	 	 	 	 	 
	 	Very Truly Yours,

ES ACQUISITION CORP.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

					
	 
	 	 
	 	Escrow Agreement

A – 1 

 

EXHIBIT B

ESCROW AGENT’S FEE SCHEDULE

Annual administrative escrow fee payable upon execution of this Agreement, and annually
thereafter upon the anniversary date of the account opening:

Annual Administrative Fee: $3,500.00

One Time Legal Fee: $750.00

Any reasonable out-of-pocket expenses or extraordinary fees or expenses such as reasonable
attorney’s fees or messenger costs, are additional and are not included in this schedule.

These fees cover a full year, or any part thereof, and thus are not prorated in the year of
termination. The annual fee is billed in advance and payable prior to that year’s service.

					
	 
	 	 
	 	Escrow Agreement

B – 1 

 

EXHIBIT C-1

CERTIFICATE AS TO AUTHORIZED SIGNATURES

The specimen signatures shown below are the specimen signatures of the individuals who have
been designated as authorized representatives of ES Acquisition Corp., a Delaware corporation, and
are authorized to initiate and approve transactions of all types for the escrow account or accounts
established under the Escrow Agreement to which this Exhibit C-1 is attached, on behalf of
Purchaser.

	 	 	 	 	 

	 

	 	Name / Title
	 	Specimen Signature
	 
	 	 	 	 
	 

	 	James R. Lines	 	/s/ James R. Lines 
	 

	 	 
	 	 
	 

	 	Name
	 	Signature
	 

	 	 
Chairman	 	 
	 

	 	 	 	 
	 

	 	Title 	 	 
	 

	 	 
Jeffrey Glajch	 	
/s/ Jeffrey Glajch 
	 

	 	 
	 	 
	 

	 	Name
 

Chief Financial Officer
	 	Signature
	 

	 	 	 	 
	 

	 	Title 	 	 

					
	 
	 	 
	 	Escrow Agreement

C-1 – 1 

 

EXHIBIT C-2

CERTIFICATE AS TO AUTHORIZED SIGNATURES

The specimen signatures shown below is the specimen signature of LISA D. RICE, who is
authorized to initiate and approve transactions of all types for the escrow account or accounts
established under the Escrow Agreement to which this Exhibit C-2 is attached, on behalf of Seller.

	 	 	 	 	 

	 

	 	Name / Title
	 	Specimen Signature
	 
	 	 	 	 
	 

	 	Lisa D. Rice	 	/s/ Lisa D. Rice 
	 

	 	 
	 	 
	 

	 	Name
	 	Signature
	 

	 	individually and as Trustee of the Lisa D.
Rice Revocable Trust dated June 5, 2003	 	 

					
	 
	 	 
	 	Escrow Agreement

C-2 – 1

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