SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 1-7037
ENVIRONMENT ONE CORPORATION
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
NEW YORK 14-1505298
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
2773 Balltown Road, Niskayuna, New York 12309-1090
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (518) 346-6161
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
Common Stock $.10 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosures will 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-KSB or any
amendment to this Form 10-KSB. [ ]
Revenue for the year ended December 31, 1997: $24,330,721
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 30, 1998: $36,326,438
The number of shares of Common Stock, par value $.10 outstanding as of January
30, 1998: 4,295,827
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
Environment One Corporation
Form 10-KSB
Part I
Item 1. Business
The Environment One Corporation (EONE) is an environment-oriented product and
service company which started operations in January 1969. The Company operates
in two business segments: (A) Sewer Systems Business and (B) Detection Systems
Business. In January, 1996, the Company sold its Cirrus Incipient Fire Detector
(IFD) product line to PROTEC Fire Detection, plc of Nelson, Lancashire, England.
Information regarding this sale is set forth below in Item 6. Information
regarding the percentages of total sales attributable to the two business
segments for the past two fiscal years is set forth below in Item 6.
Potential Change of Control
On February 24, 1998 the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") among the Company, Precision Castparts Corp. (PCC), an
Oregon Corporation, and a wholly owned subsidiary of PCC (Purchaser), for the
Purchaser to acquire all shares (fully diluted) of common stock of the Company
for $15.25 per share. The Merger Agreement is discussed in Items 10, 11 and 12
and explained in the Company's Solicitation/Recommendation Statement on Form
14D-9 filed with the Commission on March 3, 1998 which is incorporated by
reference within Item 13 to this filing.
Sewer Systems
Low pressure sewer systems in the market today were pioneered by EONE. It has
proven to be an economical and effective method of handling wastewater in
otherwise difficult real estate developments including: waterfront, hilly
terrain, very flat lands and areas with high water tables. As more and more
communities are looking for cost effective solutions to wastewater collection
problems, EONE's pressure sewer systems (EONE Sewers), are increasingly used in
mainstream municipal and real estate development applications.
Grinder pumps developed by the Company make the pressure sewer system feasible.
These units accept wastewater from point sources, grind it into a fine slurry,
and pressurize it to permit transport through small diameter pipe. This small
diameter pressurized pipe can follow the contour of the terrain, resulting in
reduced costs of installation compared to conventional gravity lines. Several
models of the grinder pump are manufactured with and without storage tanks.
The manufacture of the grinder pump involves use of independent suppliers for
several of the components. Fabrication, machining, assembly and testing of the
assembled units are completed at the Company's plant.
The principal markets served by the pressure sewer systems are city and county
sewer districts, residential builders and land developers along with individual
homeowners. Products are sold to these markets from regional sales offices
across the United States and through a network of more than 30 distributors
throughout the United States, Canada, Europe and Japan. Several other pump
manufacturers offer grinder pumps and compete with EONE in these markets.
Environment One's positive displacement pump and tank are unique, offering
several distinct advantages over the centrifugal pump. The Company believes it
is well known in this marketplace.
<PAGE>
Environment One Corporation
Form 10-KSB
Part I (con't.)
Detection Systems
The Company's Detection Systems' products include: (1) Generator Condition
Monitor; and (2) Hydrogen Control Cabinet. These detection instruments are based
on the Company's expertise in the detection of sub-microscopic particles and gas
monitoring.
Generator Condition Monitor (GCM)
The GCM is designed to provide early warning of certain thermal failure
conditions which could lead to shutdown of hydrogen-cooled electric power
generators. The monitor also facilitates preventive maintenance of such
equipment. The principal market served is the electric utility industry, both
domestic and international. Customers are served by direct sales from the
Company's marketing function or by manufacturers' representatives in certain
parts of the world. There are only two other manufacturers of this equipment
worldwide and the Company is believed to be the leader in this market.
As a companion to the GCM, the Company also manufactures and sells an instrument
for air-cooled electric generators (GCM-A). This extends the marketing of
condition monitors to include hydroelectric and gas turbine driven generating
stations.
As an ancillary product to the GCM, the Company sells tagging compounds under
the name GEN-TAGS that are applied to critical areas of large electric power
generator units. The tagging compounds will assist utilities to quickly locate
"hot spots" developing in generators causing the GCM to alarm at which time a
sample of the overheated tagging compound (pyrolysate) is collected. Analysis of
the sample determines the location of the "hot spot" area. Depending on the area
of overheating, a different "fingerprint" or "chemical signature" will identify
each area for location of potential trouble.
Hydrogen Control Cabinet (HCC)
The HCC continuously analyzes the purity of hydrogen and controls the rate of
scavenging in hydrogen-cooled turbine generators. It is vital to maintain the
purity of the hydrogen because it directly affects both efficiency and safety.
To maintain a hydrogen purity of approximately 98% in the generator casing, a
small quantity of hydrogen gas is continuously scavenged from the generator's
end seals and discharged to the atmosphere.
The major components of the HCC are two completely independent, interactive
hydrogen sensors and associated electronics that were designed by Environment
One. The micro-controller based system and explosion proof design represents a
new generation of hydrogen purity analyzer.
The HCC is sold direct by the Detection Systems marketing function and has the
potential for sale to the same customer base as the GCM.
<PAGE>
Environment One Corporation
Form 10-KSB
Part I (con't.)
Financial Data - 2 Year Summary
Industry segment information is included in Note 8 to the Company's consolidated
financial statements included in Item 7.
Net Sales Backlog
The backlog of unshipped orders by industry segment is shown below. Generally,
all orders in the backlog at year-end are shipped during the following year. The
backlog has been calculated by EONE's normal practice of including only orders
that are to be delivered within twelve months. While these orders are firm, they
could be subject to change or cancellation in the future. In the past, the
effect of changes and cancellations has not been significant.
Net Sales Backlog as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Sewer Systems ... $1,600,811 1,403,661
Detection Systems 2,051,205 517,788
---------- ----------
$3,652,016 1,921,449
========== ==========
</TABLE>
Sources of Supply
Principal components used in the manufacture of the Company's grinder pump
include a motor, high density polyethylene parts, cast iron parts, fabricated
stainless steel and solid state controls. The principal components of the GCM
and HCC include fabricated aluminum, sheet metal and stainless steel, assembled
miscellaneous electronics, printed circuit boards and mechanical gauges.
The Company does not believe that it is dependent on any one supplier or
subcontractor to the extent that termination or loss of the supplier or
subcontractor relationship would have a material adverse effect on the Company's
business.
Patents
Since inception, the Company has been issued numerous U.S. and foreign patents
and it has filed numerous patent applications relating to product features. The
Company believes that patent protection is important and materially strengthens
its competitive position with respect to all the specific products that it now
markets. The Company, however, does not depend on any single patent or group of
patents.
Research and Development
All research and development costs are charged directly to operations as
incurred. Research and development costs were approximately $215,000 and
$177,000 in 1997 and 1996, respectively.
<PAGE>
Environment One Corporation
Form 10-KSB
Part I (con't.)
Environmental
Compliance by the Company with federal, state and local environmental protection
laws during 1997 and 1996 had no material effect upon capital expenditures,
earnings or the competitive position of the Company.
Employees
At December 31, 1997, the Company had 99 full-time employees.
Principal Customers
The Company had sales equaling 9% and 6% of total company sales to one customer
in 1997 and 1996, respectively.
Foreign Operations and Export Sales
The Company has entered into foreign markets and license agreements with respect
to certain products. In December 1990, Environment One Corporation Japan Co.
Ltd. was founded in Tokyo, Japan as a 70% owned subsidiary of the Company. The
purpose of this corporation is to promote the adaptation and sales of low
pressure sewer systems in Japan.
Export sales of low pressure sewer systems were approximately 6.1% and 2.8% of
total Company sales in 1997 and 1996, respectively. Export sales of detection
instruments (including IFD) were approximately 6.3% and 4.5% of total Company
sales in 1997 and 1996, respectively.
Cautionary Statement for the Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves while limiting unwarranted litigation,
provided that the statements are identified as forward-looking and are
accompanied by meaningful cautionary statements regarding important factors that
could cause actual results to differ materially from those projected in the
statement. The Company desires to take advantage of the "safe harbor" provisions
of the Act, and is including the information set forth below in the Form 10-KSB
to point out the inherent difficulties in predicting the impact of certain
factors.
While the Company believes that its assumptions underlying any forward-looking
statements are reasonable, the following information includes important factors
which could cause the Company's actual results to differ materially from any
result which might be projected, forecasted, estimated, or budgeted by the
Company in its forward-looking statements, whether contained in this Form 10-KSB
or otherwise:
1. Heightened competition, including the intensification of price competition,
the entry of new competitors, and the introduction of new products by new and
existing competitors.
2. Failure to obtain new customers or retain existing customers.
<PAGE>
Environment One Corporation
Form 10-KSB
Part I (con't.)
Cautionary Statement for the Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995 (con't.)
3. Adverse publicity and news coverage impacting the Company's reputation and
sales potential.
4. Inability to carry out marketing and sales plans due to unforeseen factors.
5. Significant economic downturns in the geographic market areas serviced by the
Company.
6. Higher service, administrative, or general expenses occasioned by the need
for additional advertising, marketing, administrative, or management information
systems expenditures.
7. A lack of availability of raw materials, necessary manufacturing equipment,
or contract manufacturers to meet the Company's needs.
8. Underutilization of the Company's manufacturing resources, resulting in
production inefficiencies and higher costs.
9. Start-up expenses, inefficiencies, delays, and increased depreciation costs
in connection with the start of production in new facilities and expansions of
existing facilities.
10.The acquisition of fixed and other assets, including inventory and
receivables, and the making or incurring of any expenditures and expenses,
including but not limited to depreciation and research and development expenses.
11. Any revaluation of assets or related expenses and the amount of, and any
changes to, tax rates.
12. Loss or retirement of key executives.
13. Any activities of parties with which the Company has agreements or
understandings, including matters affecting any investment or joint venture in
which the Company has an investment.
14. The amount, type, and cost of the financing available to the Company, and
any changes to that financing.
15. Adverse results in significant litigation or regulatory proceedings.
16. Adverse changes in laws, regulations, interpretations, and enforcement
policies affecting the company and its business operations.
17. Natural disasters, work stoppages, and other events beyond the control of
the Company.
The foregoing list of factors should not be construed as exhaustive, or as any
admission regarding the adequacy of disclosures made by the Company prior to the
filing of this Form 10-KSB.
Item 2. Property
The Company's headquarters in Niskayuna, New York is located in a modern,
concrete and steel frame, electrically and gas heated and air conditioned
building on approximately 35 acres of wooded land owned in fee. This facility is
subject to a mortgage as described in Note 2 to the Company's consolidated
financial statements included in Item 7. All segments of the business are
operated from the Company's headquarters.
Management believes that the Company's facilities are well maintained, in good
operating condition, adequately covered by insurance and are well adapted to its
present needs.
<PAGE>
Environment One Corporation
Form 10-KSB
Part I (con't.)
Item 3. Legal Proceedings
In the second quarter of 1997, the Company was served with a complaint by a
former distributor, Abaxial Associates, Inc., who was terminated for cause in
1996. The action was filed in the Ontario Court of Justice (General Division),
in Toronto, Canada. Prior to termination, Abaxial Associates, Inc. was a
distributor for the Company's grinder pumps in the Province of Ontario. The
plaintiff's complaint seeks monetary damages in the amount of $1,600,000
(Canadian Dollars), plus interest and costs based on allegations of
misrepresentation and breach of contract relating to the Company's termination
of its relationship with the plaintiff.
Management of the Company is of the opinion that the claim, filed as a result of
termination of the business relationship with Abaxial Associates, Inc., is
unsubstantiated and without merit and that the Company acted properly in
terminating its relationship with Abaxial Associates, Inc. The Company has
engaged legal counsel in Toronto, Canada and intends to vigorously defend the
action. Although no assurances can be given, the Company's management believes
the ultimate outcome of this allegation will not have a material adverse affect
on the financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>
Environment One Corporation
Form 10-KSB
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's common stock is traded on the The Nasdaq Stock Market (Nasdaq)
under the trading symbol EONE. The following table sets forth the high and low
sales prices of the common stock for the calendar quarters indicated, as
reported by the Nasdaq:
High Low
---- ---
1997
Quarter 1 7 3/4 5 5/8
Quarter 2 9 3/4 6 3/8
Quarter 3 10 1/4 8 3/4
Quarter 4 10 7/8 9 3/4
1996
Quarter 1 5 1/2 4 3/4
Quarter 2 6 4 1/2
Quarter 3 5 3/4 4 3/4
Quarter 4 6 5 3/8
Approximate Number of Security Holders
Title of Class: Approximate Number of Holders at 12/31/97:
--------------- ------------------------------------------
Common Stock $.10 par value 2150 (1)
(1) Includes shareholders of record in "nominee" or "street" name held by
brokers and others.
Dividends
The Company paid no dividends on its common stock during 1997 and 1996. The
Company's policy with regard to payment of dividends is evaluated annually with
consideration given to future growth and operating fund requirements. Currently,
Company policy is not to pay dividends.
<PAGE>
Environment One Corporation
Form 10-KSB
Part II (con't.)
Item 6. Management's Discussion and Analysis and Results of Operations
Cash provided from operations, as shown by the statement of cash flows (Item 7),
for 1997 was $2,789,000. This represented an increase of $1,862,000 when
compared to 1996. Net income represented $1,960,000 of the operating cash flow
while non-cash expenses of depreciation/amortization and compensation, current
and deferred, added $627,000 and $755,000, respectively. Major working capital
adjustments included an increase in receivables of $295,000 and a decrease in
accounts payable of $106,000 Investment in capital expenditures for 1997
amounted to $470,000 and represented an increase of $46,000 over 1996. The major
components of capital expenditures in 1997 were an upgrade to the Company's main
computer system, tooling and equipment expenditures in the Sewer Systems
Business for cost reduction, enhanced product performance and to improve the
manufacturing process along with a new trade show exhibit for the Sewer Systems
Business.
In January, 1996, the Company concluded an agreement with PROTEC Fire Detection,
plc of Nelson, Lancashire, England for the sale of its Cirrus IFD product line.
In a two-stage transaction with an approximate value of $750,000, the Company
transferred all Cirrus IFD assets and operations to PROTEC and simultaneously
entered into a product technology development contract that was concluded during
1996.
In September, 1996, the Company recognized the potential uncollectibility of a
note receivable from General Testing Corporation incurring a pre-tax write-off
of $136,000. After failure to receive timely payments on the note, the Company,
through legal counsel, served notice of default on the note to General Testing
Corporation. General Testing Corporation did not cure the payment defaults in
the period required. The Company has pursued collection on the note with little
success.
The following table shows selected balance sheet information for 1997 and 1996
expressed in thousands of dollars:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Current Assets ..... $10,405 7,614
Current Liabilities 4,049 3,628
Working Capital .... 6,356 3,986
Total Assets ....... 14,092 11,255
Long-Term Debt ..... 1,162 1,500
Shareholders' Equity 7,859 5,713
</TABLE>
In 1997, the Company, for all of its systems, began a year 2000 conversion
project to address all necessary changes, testing and implementation. Project
completion for internal systems is estimated to be 3/31/99. Cost for the project
is estimated to be immaterial. The bulk of the systems affected are serviced by
highly reliable third parties who have been contacted by Company personnel and
have provided feedback that any resulting changes will be done in a timely
manner to meet the 3/31/99 deadline.
<PAGE>
Environment One Corporation
Form 10-KSB
Part II (con't.)
Summary
The following table shows a summary of operating results for the years 1997 and
1996 expressed as a percentage of sales:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Net Sales
Sewer Systems 87.1 % 86.9 %
Detection Systems 10.9 8.8
Corporate 2.0 4.3
----- -----
Total Sales 100.0 100.0
Cost of Sales 61.9 66.2
----- -----
Gross Margin 38.1 33.8
Selling, Marketing and G&A 24.9 23.6
----- -----
Income from Operations 13.2 10.2
Other Expense .2 .8
----- -----
Income Before Income Taxes 13.0 9.4
Income Tax Expense 4.9 3.6
----- -----
Net Income 8.1 % 5.8 %
===== ====
</TABLE>
Notes: Amounts referred to below are set forth in Item 7. Gross changes
between years include all businesses. Detailed revenue and cost
analyses exclude the effect of the sale of the IFD as part of Detection
Systems.
Twelve Months Ended December 31, 1997 and 1996
Revenues for the period increased by $2,794,000 or 13.0% when compared to 1996.
Sewer Systems sales increased by $2,473,000 while Detection Systems sales
increased $759,000. The increased sales in Sewer Systems are attributable to the
investment and focus the Company has placed on sales and marketing. Increased
sales are being realized from the Company's revamped distribution system along
with project sales that are increasing in number and size.
The Detection Systems revenue increase is attributable to increases in both GCM
and HCC on a year to year comparative basis. Following the sale of the IFD
business, the Detection Systems selling and marketing organization was able to
focus on a single market, the electric power generation market, resulting in
increased penetration and sales to those customers. Also, the Company's sales of
the HCC benefited from being in its second full year after product introduction
in 1995.
<PAGE>
Environment One Corporation
Form 10-KSB
Part II (con't.)
Twelve Months Ended December 31, 1997 and 1996 (con't.)
Cost of Sales increased by $791,000 when compared to 1996. As a percent of
sales, cost of sales fell to 61.9% in 1997 versus 66.2% in 1996. Direct cost of
sales fell in terms of percent of sales due to product mix and material cost
reductions. Partially offsetting this was an increase in non-labor indirect cost
of sales.
Selling and Marketing costs increased $231,000 when compared to 1996. Sewer
Systems costs in this category increased $310,000 while costs in Detection
Systems decreased $49,000. Offsetting the overall increase were costs avoided
due to the sale of the IFD. Contributing to the increase in Sewer Systems
marketing costs were full year expenses associated with the operations of sales
offices opened in 1996 and the national sales manager hired in 1996, increased
cost for the Florida sales office, sales literature, sales promotion and trade
shows along with increased labor costs. Detection Systems marketing costs
decreased primarily due to reductions in labor and internal sales commission
expenses.
General and Administrative costs, including research and development (R&D)
expense, increased $765,000 over 1996. Excluding R&D, general and administrative
costs increased $727,000. The increase in general and administrative costs is
primarily a result of the growth performance sharing and deferred executive
compensation plan adopted in 1996. This plan allows for bonus and deferred
compensation to be paid and/or accrued only if the Company, as a whole, meets
specified targets for growth in sales, growth in earnings and return on assets.
Other general and administrative expenses showing increases in 1997 over 1996
were labor costs, investor relations, training, travel, legal, consultants and
miscellaneous expenses. Decreases in year to year expenses were realized in
expenses for directors fees, temporary help and allocation of facilities costs.
Research and development labor costs increased $67,000 while non-labor costs
decreased $29,000. R&D costs in Sewer Systems remained virtually flat while
costs in Detection Systems increased $38,000. The increase in Detection Systems
costs is primarily a result of increased expenditures related to new design work
in both the HCC and GCM that were incurred in 1997.
Interest expense decreased to $157,000 in 1997 when compared to $249,000 in
1996. Interest income of $40,000 was recorded due to overnight investment of the
available cash balances. The Company eliminated short-term line of credit
borrowing in 1997 while paying back $338,000 in principal payments on its
long-term debt. The Company's borrowing rate over bank prime rate remained at
prime for the line of credit and prime plus one-half point for the term loan.
Continued control over expenses and capital expenditures, cash provided by
operations, reductions in borrowing and reduced interest rates all contributed
to the reduction in interest expense on a comparative basis.
<PAGE>
Environment One Corporation
Form 10-KSB
Part II (con't.)
Twelve Months Ended December 31, 1997 and 1996 (con't.)
Income Taxes during 1997 and 1996 were $1,204,000 and $767,000, respectively. As
a percent of income before taxes, both years were approximately 38%.
Liquidity
Through cash provided by operations and availability under the operating line of
credit, the Company was able to meet its working capital needs and capital
expenditure requirements in 1997. The Company's line of credit availability was
increased to $5.0 million during 1997. There was no borrowing against the line
of credit as of December 31, 1997. The Company complied with all applicable loan
covenants throughout 1997 and 1996.
Management believes that the Company will be able to meet its cash requirements
in 1998 as a result of cash generated from operations. The line of credit
expires in April of 1998 and is currently being considered for renewal with the
Company's lender. Although no assurances can be given, management is confident
that, if requested, negotiations for renewal will result in a successful
outcome.
Effects of Inflation and Changing Prices
The impact of general inflation on the Company's operations has not been
significant to date and the Company believes inflation will continue to have an
insignificant impact. In response to the limited effect of inflation and
changing prices on the Company's manufacturing and operating costs, the Company
has historically used selling price adjustments, cost containment programs and
improved operating efficiencies to offset the otherwise negative impact on its
operations.
Item 7. Financial Statements
Index to Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheet as of December 31, 1997
Consolidated Statements of Income for the Years Ended
December 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996
Notes to Consolidated Financial Statements
<PAGE>
Independent Auditors' Report
The Shareholders and Board of Directors
Environment One Corporation:
We have audited the consolidated financial statements of Environment One
Corporation and subsidiary as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Environment One
Corporation and subsidiary as of December 31, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Albany, New York
February 6, 1998, except as to note 11,
which is as of February 24, 1998
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 1997
Assets
<S> <C>
Current assets:
Cash and cash equivalents .............................. $ 2,507,866
Receivables:
Trade (note 2) ..................................... 5,330,624
Other .............................................. 3,216
------------
5,333,840
Less allowance for doubtful accounts ............... (106,981)
------------
Net receivables ............................... 5,226,859
Inventories (note 2):
Finished products .................................. 483,906
Work in process .................................... 385,013
Raw materials and supplies ......................... 1,399,533
------------
Total inventories ............................. 2,268,452
Prepaid expenses and other current assets (note 5) ..... 401,837
------------
Total current assets .......................... 10,405,014
------------
Property, plant and equipment (note 2):
Land and land improvements ............................. 334,491
Building and building improvements ..................... 2,324,333
Machinery and equipment ................................ 5,371,630
Construction in progress ............................... 95,393
------------
8,125,847
Less accumulated depreciation .......................... 4,868,005
------------
Net property, plant and equipment ............. 3,257,842
Patents and other assets, net ............................... 104,185
Deferred income taxes (note 5) .............................. 325,197
------------
$ 14,092,238
============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheet, Continued
December 31, 1997
Liabilities and Shareholders' Equity
<S> <C>
Current liabilities:
Book overdraft ............................................... $ 531,498
Current installments of long-term debt (note 2) .............. 338,100
Accounts payable ............................................. 1,812,407
Income taxes payable (note 5) ................................ 350,257
Accrued expenses:
Payroll and related costs (note 6) ....................... 457,777
Interest ................................................. 11,685
Warranty ................................................. 315,000
Other accrued expenses ................................... 232,194
------------
Total current liabilities ........................... 4,048,918
Long-term debt, excluding current installments (note 2) ........... 1,162,394
Deferred compensation (note 6) .................................... 953,429
------------
Total liabilities ................................... 6,164,741
------------
Minority interest ................................................. 68,760
------------
Shareholders' equity (note 4):
Common stock of $.10 par value per share. Authorized 6,000,000
shares; issued 4,257,724 shares .......................... 425,772
Additional paid-in capital ................................... 7,969,197
Accumulated deficit .......................................... (116,119)
------------
8,278,850
Less cost of 80,704 common shares in treasury (note 6) ....... (420,113)
------------
Total shareholders' equity .......................... 7,858,737
------------
Commitments and contingencies (notes 3, 10 and 11)
$ 14,092,238
============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1997 and 1996
1997 1996
------------ ------------
<S> <C> <C>
Net sales ........................................... $ 24,330,721 21,536,430
Cost of goods sold .................................. 15,048,746 14,258,235
------------ ------------
Gross profit ............................... 9,281,975 7,278,195
------------ ------------
Operating expenses:
Selling and marketing .......................... 2,734,121 2,502,644
General and administrative ..................... 3,333,238 2,568,645
------------ ------------
Total operating expenses ................... 6,067,359 5,071,289
------------ ------------
Income from operations ..................... 3,214,616 2,206,906
------------ ------------
Other income (expense):
Interest expense ............................... (157,220) (248,725)
Interest income ................................ 40,335 --
Miscellaneous income (notes 1(a) and 6) ........ 91,906 46,774
Minority interest in (income) loss of subsidiary (25,692) 16,237
------------ ------------
(50,671) (185,714)
------------ ------------
Income before income taxes ................. 3,163,945 2,021,192
Income tax expense (note 5) ......................... 1,203,900 766,505
------------ ------------
Net income ................................. $ 1,960,045 1,254,687
============ ============
Per share amounts:
Basic earnings ............................. $ .46 $ .30
============ ============
Diluted earnings ........................... $ .44 $ .29
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997 and 1996
Total
Additional share-
Common paid-in Accumulated Treasury holders'
stock capital deficit stock equity
----------- ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 412,761 7,295,115 (3,330,851) (29,216) 4,347,809
Exercise of options (22,600 shares
of common stock) 2,260 16,778 - (14,340) 4,698
Tax benefit from exercise of options - 38,182 - - 38,182
Acquisition of 6,775 shares of
common stock - - - (34,490) (34,490)
Issuance of 999 shares of
common stock from treasury - 1,189 - 3,806 4,995
Issuance of 19,755 shares of
common stock 1,976 95,525 - - 97,501
Net income - 1996 - - 1,254,687 - 1,254,687
----------- ------------- ------------- ----------- --------------
Balance at December 31, 1996 416,997 7,446,789 (2,076,164) (74,240) 5,713,382
Exercise of options (5,500 shares
of common stock) 550 13,126 - (6,579) 7,097
Tax benefit from exercise of options - 7,414 - - 7,414
Issuance of 82,257 shares of
common stock 8,225 491,242 - (369,461) 130,006
Issuance of 5,363 shares of common
stock from treasury - - - 30,167 30,167
Compensation expense on issuance of
10,000 warrants - 10,626 - - 10,626
Net income - 1997 - - 1,960,045 - 1,960,045
----------- ------------- ------------- ----------- --------------
Balance at December 31, 1997 $ 425,772 7,969,197 (116,119) (420,113) 7,858,737
=========== ============= ============= =========== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 1,960,045 1,254,687
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................... 627,498 596,293
Gain on termination of defined benefit pension plan ... (63,000) --
Gain on sale of equipment and patents ................. -- (291,544)
Loss on write-off of note receivable .................. -- 135,533
Minority interest in income (loss) of subsidiary ...... 25,692 (16,237)
Non-cash compensation expense ......................... 140,632 102,496
Accrual for deferred compensation ..................... 614,135 369,461
Deferred income taxes ................................. (191,739) (271,539)
Increase in receivables ............................... (295,438) (2,209,701)
Decrease (increase) in inventories .................... 3,648 (422,539)
Decrease (increase) in prepaid expenses ............... (66,832) 4,378
Increase (decrease) in accounts payable ............... (106,459) 774,313
Increase in income taxes payable ...................... 48,127 347,726
Increase in accrued expenses .......................... 93,030 554,013
----------- -----------
Net cash provided by operating activities ......... 2,789,339 927,340
----------- -----------
Cash flows from investing activities:
Capital expenditures, including patents ..................... (469,605) (423,701)
Proceeds from sale of equipment and patents ................. -- 300,000
----------- -----------
Net cash used in investing activities ............. (469,605) (123,701)
----------- -----------
Cash flows from financing activities:
Net increase in book overdraft .............................. 531,498 --
Net decrease in note payable to bank ........................ (75,000) (475,000)
Proceeds from issuance of common stock ...................... 7,097 4,698
Purchases of treasury stock ................................. -- (34,490)
Capital contribution by minority interest ................... -- 10,775
Principal payments on long-term debt ........................ (338,100) (338,100)
----------- -----------
Net cash provided by (used in) financing activities 125,495 (832,117)
----------- -----------
Net increase (decrease) in cash and cash equivalents ............ 2,445,229 (28,478)
Cash and cash equivalents at beginning of year .................. 62,637 91,115
----------- -----------
Cash and cash equivalents at end of year ........................ $ 2,507,866 62,637
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1997 and 1996
1997 1996
---------- ----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ................................................ $ 163,167 251,503
========== ==========
Income taxes ............................................ $1,347,512 689,173
========== ==========
Supplemental disclosure of non-cash financing activity:
Exchange of 892 and 2,390 shares of common stock in full and
partial payment of exercise price on options during 1997 and
1996, respectively ......................................... $ 6,579 14,340
========== ==========
Tax benefit from exercise of stock options .................. $ 7,414 38,182
========== ==========
Issuance of 65,681 deferred compensation shares to treasury .... $ 369,461 --
========== ==========
Issuance of 5,363 deferred compensation shares from treasury ... $ 30,167 --
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a)Description of Business
Environment One Corporation (the "Company") is an
environment-oriented product and service company, which started
operations in January of 1969. The Company operates in two
business segments: (1) low pressure sewer systems, and (2)
detection systems.
The Sewer Systems business primarily manufactures and services
grinder pumps pioneered by the Company to make low pressure
sewer systems feasible. The low pressure sewer system has proven
to be an economical and effective method of sewering otherwise
difficult land developments including: waterfront, hilly
terrain, very flat lands and areas with high water tables. As
more and more communities are looking for cost effective
solutions to waste water collection problems, Environment One
Corporation's solution, EONE Sewers, is increasingly used in
mainstream municipal and developer applications. The principal
markets served by the Company are city and county sewer
districts, builders, land developers, and individual homeowners.
Products are sold by direct sales from the Company's marketing
function and through dealer networks across the United States,
Canada, Europe, and Japan. There are other pump manufacturers
offering grinder pumps for these markets. All but one of the
Company's competitors offer a centrifugal type of pump.
The Detection Systems business manufactures the Generator Condition
Monitor and the Hydrogen Control Cabinet. The Generator
Condition Monitor is designed to provide early warning of
certain thermal failure conditions, which could lead to shutdown
of hydrogen cooled electric power generators. The Hydrogen
Control Cabinet continuously analyzes the purity of hydrogen and
controls the rate of scavenging in hydrogen cooled turbine
generators. The Detection Systems products are sold by direct
sales from the Company's marketing function and through an
independent network of distributors in the United States,
Canada, and a few countries overseas. There are believed to be
only two other manufacturers of this type of detection systems
equipment worldwide.
The Company concluded an agreement with PROTEC Fire Detection, plc
of Nelson, Lancashire, England on January 16, 1996 for the sale
of its Cirrus IFD product line, previously a component of the
Detection Systems business. As a part of this agreement, the
Company sold all Cirrus IFD assets, with a net book value at the
date of sale of $8,456, for a realized gain of $291,544. The
gain, net of certain other expenses, is included in
miscellaneous income in the accompanying 1996 consolidated
statement of income.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
In April 1994, the Company sold its measurements division which had
previously been a component of the Detection Systems business.
As part of the consideration received in this sale, the Company
accepted a five-year promissory note receivable of $141,458.
During 1996, the Company determined that the remaining balance
on the note was uncollectible and recorded a loss on the
write-off of the outstanding balance of $135,533. The loss is
included in miscellaneous income in the accompanying 1996
consolidated statement of income.
(b)Principles of Consolidation
The consolidated financial statements include the financial
statements of Environment One Corporation and its majority-owned
foreign subsidiary, which was incorporated in 1990. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(c)Cash Equivalents
Cash equivalents of $2,289,844 at December 31, 1997 consist of
overnight Eurodollar time deposits issued by a significant
Northeastern United States bank. These overnight time deposits
are not insured by the Federal Deposit Insurance Corporation.
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash
equivalents.
(d)Per Share Amounts
On December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share. SFAS No. 128 establishes standards for
computing and presenting earnings per share ("EPS"). SFAS No. 128
supersedes Accounting Principles Board ("APB") Opinion No. 15,
Earnings per Share and related interpretations. SFAS No. 128
requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital
structures and specifies additional disclosure requirements.
Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity
(such as stock options). All prior-period EPS data have been
restated to conform to the provisions of SFAS No. 128.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The following tables provide calculations of basic and diluted
earnings per share:
Year ended December 31, 1997
<TABLE>
<CAPTION>
Weighted Per
Net average share
income shares amounts
---------- ---------- -----
<S> <C> <C> <C>
Basic earnings per share ............. $1,960,045 4,228,077 $ .46
=====
Effect of dilutive securities:
Options and warrants ............. -- 147,016
Deferred compensation plan ....... -- 58,489
---------- ----------
Diluted earnings per share ........... $1,960,045 4,433,582 $ .44
========== ========== =====
</TABLE>
Year ended December 31, 1996
<TABLE>
<CAPTION>
Weighted Per
Net average share
income shares amounts
---------- ---------- ----
<S> <C> <C> <C>
Basic earnings per share .......... $1,254,687 4,128,175 $.30
====
Effect of dilutive securities:
Options ....................... -- 90,156
Deferred compensation plan .... -- 65,681
---------- ---------- ----
Diluted earnings per share ........ $1,254,687 4,284,012 $.29
========== ========== ====
</TABLE>
(e)Revenues, Costs and Inventories
Sales and related cost of goods sold are recognized when products
are shipped to customers. Inventories are valued at the lower of
cost or market (net realizable value), costs being determined
principally on the basis of standards, which approximate average
current production costs.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation on
property, plant and equipment is computed using the
straight-line method for financial reporting purposes, and
accelerated methods for income tax purposes. For financial
reporting purposes, the Company provides for depreciation of
property, plant and equipment over the following estimated
useful lives:
Land improvements 5-20 years
Building and building improvements 5-45 years
Machinery and equipment 2-20 years
(g)Patents and Other Assets
The costs of patents covering products expected to be viable are
deferred and amortized on a straight-line basis over twenty
years from the date of filing or seventeen years from the date
of issue, whichever is greater. The deferred costs of specific
patent applications are written off if a patent application is
rejected. Loan financing fees are amortized straight line over
the term of the loan to which they relate.
(h)Research and Development
All research and development costs are charged directly to
operations as incurred. Research and development costs of
approximately $215,000 and $177,000 during 1997 and 1996,
respectively, are included in general and administrative
expenses.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(j) Foreign Currency Translation
Accounts of the foreign subsidiary have been translated into U.S.
dollars substantially in accordance
with SFAS No. 52.
(k)Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded
on the date of grant only if, and to the extent that, the
current market price of the underlying stock exceeded the
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
exercise price. On January 1, 1996, the Company adopted SFAS No.
123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if
the fair-value based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure requirements of SFAS No. 123.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of
SFAS No. 121 did not have a material impact on the Company's
financial position, results of operations or liquidity.
(m)Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results
could differ from those estimates.
(2) Short-term and Long-term Debt
The Company has available a $5,000,000 line of credit of which $5,000,000
is available at December 31, 1997. The line is secured by trade
accounts receivable and inventories. The Company had $0 outstanding on
this line of credit at December 31, 1997. The interest rate on this
short-term borrowing at December 31, 1997 is based upon the bank's
prime rate and was 8.50%. The line of credit, unless extended or
renewed, expires on April 29, 1998.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The Company's long-term debt consisted of the following at December 31,
1997:
<TABLE>
<CAPTION>
<S> <C>
Construction note, payable in installments of $28,175
monthly beginning January 1, 1995, plus interest based
on the bank's prime rate plus (% at December 31, 1997
(9.0% at December 31, 1997), maturing December 31, 2000.
Secured by real property $ 1,500,494
Less installments due within one year 338,100
------------
Long-term debt, excluding current installments $ 1,162,394
============
</TABLE>
The line of credit and construction loan agreements require compliance
with certain financial loan covenants related to minimum current, debt
service coverage and debt to worth ratios, as well as minimum working
capital and net worth, and limitations on capital expenditures. At
December 31, 1997, the Company was in compliance with these covenants.
Future principal payments on long-term debt are as follows:
1998 $ 338,100
1999 338,100
2000 824,294
----------
$1,500,494
==========
The Company is not required to maintain compensating balances pursuant to
the credit terms under its line of credit with the bank.
(3) Leases
The Company is a party to noncancellable operating leases for the rental
of equipment and office space. Total rent expense incurred by the
Company under operating leases during 1997 and 1996 was $34,889 and
$17,057, respectively.
The future minimum lease payments under noncancellable operating leases
as of December 31, 1997 are as follows:
Year ending
1998 $ 51,659
1999 40,409
2000 37,614
2001 17,306
--------
$146,988
========
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Shareholders' Equity
During 1997 and 1996, 5,500 and 22,600 shares of the Company's common
stock were issued upon exercise of stock options for $13,676 and
$19,038, respectively. In addition, during 1997 and 1996, 10,000
shares of common stock were issued to the Company's Chairman as
compensation and valued in the amount of $70,000 and $47,501
respectively. During 1996, 999 shares of common stock held in treasury
were issued as compensation to other individuals and valued in the
amount of $4,995.
Also, during 1997, the Company issued 10,000 warrants at an exercise
price of $9.125 to an outside consultant, that resulted in a charge to
earnings in the amount of $10,626 using the Black Scholes
option-pricing model.
(a)Amended and Restated Stock Option Plan
The Company's Amended and Restated Stock Option Plan was established
in 1971 authorizing 100,000 shares for option grants. During
1991, the shareholders approved an amendment to the plan,
authorizing 400,000 shares for option grants. Under the plan,
options to purchase common shares may be granted to directors,
officers and other key employees of the Company, and such shares
may be authorized and unissued shares, or issued and reacquired
shares, as determined by the Board of Directors. The option
price per share may not be less than the fair market value of a
share of common stock on the date the option is granted, and the
maximum term of an option may not exceed ten years. Options
granted under the plan generally are exercisable 20% per year
beginning one year from the date of grant. During 1997 and 1996,
the Company granted options for 10,715 and 38,182 shares,
respectively, under this plan.
At December 31, 1997 and 1996, the Company has reserved 319,691 and
316,976 shares, respectively, of its common stock for the
exercise of stock options under this plan, of which 278,634 and
246,285 shares, respectively, were exercisable. The
weighted-average exercise price per share of those options
exercisable under this plan was $3.28 and $3.14 at December 31,
1997 and 1996, respectively.
(b)1996 Incentive Compensation Plan
During 1996, the Company adopted a stock award and incentive plan
that permits the issuance of incentive stock options,
non-qualified stock options, stock appreciation rights (SARS)
and restricted stock awards to selected directors, officers and
key employees of the Company, and such shares may be authorized
and unissued shares, or issued and reacquired shares, as
determined by the Board of Directors. The plan allows grants for
options on 300,000 shares of common stock and provides that the
term of each award be determined by the Committee of the Board
of Directors ("Committee") charged with administering the plan,
but cannot exceed 10 years.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Under the terms of the plan, options granted may be either
non-qualified or incentive stock options and the exercise price,
determined by the Committee, may not be less than the fair
market value of a share of common stock on the date of grant.
SARS, and SARS granted in tandem with options, shall be
exercisable only to the extent the underlying options are
exercisable, and in no event less than six months from the date
of grant, and the grant price shall be equal to the exercise
price of the underlying options. In addition, the Committee may
grant restricted stock to participants of the plan at no cost.
Other than the restrictions that limit the sale and transfer of
these shares, participants are entitled to all rights of a
shareholder. During 1997 and 1996, the Company granted incentive
stock options for 57,785 and 24,000 shares, respectively, under
this plan.
At December 31, 1997 and 1996, the Company has reserved 81,785 and
24,000 shares, respectively, of its common stock for the
exercise of options under this plan of which 11,943 and 0
shares, respectively, were exercisable. The weighted average
exercise price per share of those options exercisable under this
plan was $6.26 at December 31, 1997.
(c)Plans for Non-Employee Directors
During 1996, the Company adopted a non-qualified stock option plan
for the benefit of all directors who are not employees of the
Company. The plan allows grants for options on 100,000 shares of
common stock and such shares may be authorized and unissued
shares, or issued and reacquired shares, as determined by a
committee of the Board of Directors comprised of disinterested
directors.
The option price per share may not be less than the fair market
value of a share of common stock on the date the option is
granted , and the maximum term of an option may not exceed ten
years. Options granted under the plan shall become exercisable
in full one year from the date of grant. During 1997 and 1996,
the Company granted 5,856 and 9,090 shares, respectively, under
this plan.
At December 31, 1997 and 1996, the Company has reserved 14,946 and
9,090 shares, respectively, of its common stock for the exercise
of options under this plan of which 9,090 shares were
exercisable at December 31, 1997.
In addition, during 1996, the Company established a stock grant
plan for non-employee directors that entitles each non-employee
director to receive a stock grant equivalent to $10,000 on
September 1st of each year following election to the Board of
Directors. The grant is in lieu of all cash compensation for
their participation on the Board of Directors. For the years
ended December 31, 1997 and 1996, the Company granted 6,576 and
9,755 shares of common stock, the equivalent of $60,006 and
$50,000, respectively, which has been recognized as non-cash
compensation expense in the accompanying consolidated statements
of income.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The following tables summarize, by date of grant, the number of
options and warrants issued and the exercise price per share.
Options are generally exercisable 20% per year beginning one
year from date of grant and expire ten years from date of grant:
Date of Grant Number of Options Issued Option Price
------------- ------------------------ ------------
June 1988 22,500 $ 0.9375
May 1990 19,000 $ 2.3750
July 1991 16,500 $ 1.4375
July 1992 30,000 $ 2.8750
April 1993 47,000 $ 2.6250
May 1994 41,000 $ 2.3750
May 1995 48,500 $ 3.0000
May 1995 100,000 (a) $ 2.8500
December 1995 14,544 (b) $ 5.5000
May 1996 23,182 (a) $ 5.2500
July 1996 36,500 $ 5.1300
September 1996 2,500 $ 5.3750
December 1996 9,090 (b) $ 5.5000
March 1997 34,000 $ 6.5000
May 1997 25,000 (a) $ 7.0000
October 1997 9,500 $ 10.6250
December 1997 5,856 (b) $ 10.2500
(a) Exercisable 50% at date of grant and 50% one year from the date
of grant.
(b) Exercisable in full one year from the date of grant.
Date of Grant Number of Warrants Issued Warrant Price
September 1997 10,000 (c) $ 9.1250
(c) Exercisable 100% at date of grant.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The following table summarizes stock option transactions during 1997 and
1996:
<TABLE>
<CAPTION>
Weighted-average
Option shares exercise price per share
------------- ------------------------
<S> <C> <C>
Balance at December 31, 1995 304,894 $ 2.70
Options granted 71,272 5.22
Options exercised (22,600) 0.84
Options expired (3,500) 2.45
-----------
Balance at December 31, 1996 350,066 3.34
Options granted 74,356 7.49
Options exercised (5,500) 2.49
Options expired (2,500) 2.62
-----------
Balance at December 31, 1997 416,422 4.09
===========
</TABLE>
The following table summarizes those stock options outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Weighted-
Weighted- average Weighted-
average remaining average
Shares exercise contractual Shares exercise
Range option exercise price outstanding price life exercisable price
--------------------------- ----------- ----- ---- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 0.9375 - 1.4375 10,750 $ 1.40 3.3 years 10,750 $ 1.40
2.3750 - 3.0000 245,500 2.77 6.7 years 209,800 2.78
5.1300 - 7.0000 144,816 5.86 8.8 years 79,117 5.57
10.2500 - 10.6250 15,356 10.48 9.9 years - -
----------- -----------
416,422 299,667
=========== ===========
</TABLE>
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The per share weighted-average fair value of stock options granted during
1997 and 1996 was $4.48 and $3.22 on the dates of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1997 - expected dividend yield of 0%, risk-free interest
rate of approximately 6.5%, volatility of approximately 35%, and an
expected life of 10 years; 1996 - expected dividend yield of 0%,
risk-free interest rate of approximately 6.5%, volatility of
approximately 37%, and an expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for
its stock options in the accompanying consolidated statements of
income. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net income and related per share amounts would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
--------------- ------------
<S> <C> <C>
Net income:
As reported $ 1,960,045 1,254,687
=============== ============
Pro forma $ 1,890,151 1,113,193
=============== ============
Per share amounts:
Basic earnings per share
As reported $ .46 .30
=============== ============
Pro forma $ .45 .27
=============== ============
Diluted earnings per share
As reported $ .44 .29
=============== ============
Pro forma $ .43 .26
=============== ============
</TABLE>
Pro forma net income and earnings per share reflect only options granted
after January 1, 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma amounts presented above because
compensation cost is reflected over the options' vesting periods,
generally five years, and compensation cost for options granted prior
to January 1, 1995 is not considered.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5) Income Taxes
Income tax expense for the years ended December 31, 1997 and 1996
consists of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current:
Federal $ 1,275,647 958,044
State 119,992 80,000
----------- -----------
1,395,639 1,038,044
Deferred (191,739) (271,539)
----------- -----------
$ 1,203,900 766,505
=========== ===========
</TABLE>
The following table reconciles the expected tax expense at the Federal
statutory rate to the effective tax rate.
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Amount % Amount %
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Computed expected tax expense $ 1,075,741 34.0% $ 687,205 34.0%
State taxes, net of Federal benefit 79,195 2.5 52,800 2.6
Research and experimentation credit (13,826) (0.4) (6,600) (0.3)
Loss (income) of foreign subsidiary (20,820) (0.7) 12,881 0.6
Nondeductible expenses 23,943 0.8 15,247 0.8
Other 59,667 1.9 4,972 0.2
----------- ---- ----------- ----
$ 1,203,900 38.1% $ 766,505 37.9%
=========== ==== =========== ====
</TABLE>
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
For the year ended December 31, 1997, the deferred income tax benefit of
$191,739 results from the changes in temporary differences. The tax
effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities as of December 31, 1997 are presented
below:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Accounts receivable, due to allowance for
doubtful accounts $ 36,374
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax Reform
Act of 1986 and inventory reserves 80,405
Warranty accrual 107,100
Pension settlement 16,421
Deferred compensation 324,166
Property, plant and equipment, due to differences in
depreciation lives and methods 1,031
------------
Total gross deferred tax assets 565,497
Less valuation allowance -
------------
565,497
Deferred tax liability:
Prepaid expenses (11,334)
------------
Net deferred tax asset $ 554,163
============
</TABLE>
At December 31, 1996, the net deferred tax asset was $362,424 and there
was no recorded valuation allowance.
At December 31, 1997, the Company has New York State investment tax
credit carryforwards of approximately $20,000.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the projected
future taxable income and tax planning strategies, as well as
carryback opportunities, in making this assessment. In order to fully
realize the net deferred tax asset, the Company will need to generate
future taxable income of approximately $1,600,000. For the years ended
December 31, 1997 and 1996, the Company's Federal taxable income was
approximately $3,300,000 and $2,600,000, respectively. Based upon the
level of historical taxable income, projections for future taxable
income and carryback opportunities over the periods in which the
deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of these
deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
At December 31, 1997, $228,966 of deferred tax assets are included in
other current assets.
(6) Employee Benefit Plans
(a)Retirement and Profit Sharing Plans
During 1997, the Company terminated its non-contributory defined
benefit pension plan and all eligible employees were provided
with the opportunity to receive a lump-sum payment, rollover the
amount available to their respective 401(k) participant account
or have an annuity purchased on their behalf. As a result of the
termination, the Company realized a gain of $63,000.
Net periodic pension cost for the year ended December 31, 1996
included the following components:
Service cost - benefits earned during
the period $ 143,561
Interest cost on projected benefit
obligation 94,985
Actual return on plan assets (40,671)
Net amortization and deferral 1,247
----------
Net periodic pension cost $ 199,122
==========
Assumptions used in accounting for the pension plan as of December
31, 1996 were:
Discount rate 7.25%
Rate of increase in compensation levels 6.00%
Expected long-term rate of return on assets 8.00%
During 1992, the Company established a 401(k) savings plan that is
available to all employees who meet certain eligibility
requirements. The Company does not contribute to this plan as of
December 31, 1997.
(b)Deferred Compensation Plans
(i) Growth Performance Sharing
During 1996, the Company established a Growth Performance
Sharing ("GPS") plan for all employees based on the
achievement of certain objectives that include sales growth,
profit growth and return on assets. During 1997 and 1996, the
Company recorded $447,284 and $357,126, respectively, of
expense under the GPS plan, and at December 31, 1997 the
unpaid portion, in the amount of $272,792, is included in
accrued payroll and related costs in the accompanying 1997
consolidated balance sheet.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(ii) Deferred Compensation Plan
Effective January 1, 1996, the Company adopted the Deferred
Compensation Plan for Certain Executive Employees (the
"Plan"), which is a non-qualified deferred compensation plan
for a select group of management and highly-compensated
employees. The purpose of the Plan is to permit eligible
employees to defer the receipt of up to 75% of future GPS
bonuses, to have the deferred GPS bonuses applied to acquire
shares of common stock, and to have the shares distributed at
a future date selected by the employee or, if earlier, upon
the employee's involuntary termination of employment. The
Company will match an additional amount equal to 25% of the
deferred GPS bonus.
During 1997, the Company issued 65,681 shares of common stock,
with a cost of $369,461, to a rabbi trust for distribution to
the participating employees at such time as elected. Those
shares placed in the trust have been accounted for as treasury
shares by the Company and there is no additional compensation
expense recorded for appreciation in share value. As
originally elected, one employee received a distribution of
5,363 shares of common stock from treasury.
During 1997 and 1996, the Company recorded $614,135 and
$369,461, respectively, of expense under the Plan.
(7) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
(a) Cash and Cash Equivalents, Accounts Receivable, Book Overdraft,
Accounts Payable, Income Taxes Payable and Accrued Expenses
The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates
fair value because of the short maturity of these instruments.
(b)Long-term Debt
The interest rate on the Company's long-term debt is periodically
reset according to changes in the bank's prime rate which is
reflective of current market rates (see note 2). Consequently,
the carrying value of the long-term debt approximates fair
value.
(8) Industry Segment Information
The Company's operations consist of two segments that are concerned with
the development, production and marketing of products. Sewer Systems
consists of products designed to transport and treat sanitary sewer
waste. Operations of the Detection Systems segment include the
production and sale of products designed to protect equipment and
facilities and until January 1996 included the production and sale of
the Cirrus IFD product line as discussed in note 1(a). For the years
ended December 31, 1996 and 1997, the revenue, income from operations
and total assets specifically attributable to the Cirrus IFD product
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
line have been recorded within Corporate due to the sale of this
product line. Also, during 1996 the Company established a Growth
Performance Sharing plan, as discussed in note 6(b), that is based on
the Company's achievement of certain objectives. The expenses recorded
by the Company under this plan have been presented within Corporate
because such expenses are based upon the performance of the Company as
a whole. Total revenue includes sales to unaffiliated customers; there
are no intersegment sales.
<TABLE>
<CAPTION>
Sales to unaffiliated customers Income (loss) from operations
------------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sewer Systems $ 21,196,777 18,724,259 2,997,062 2,237,321
Detection Systems 2,652,961 1,893,907 1,156,718 463,638
Corporate 480,983 918,264 (939,164) (494,053)
-------------- -------------- ------------ -------------
Total $ 24,330,721 21,536,430 3,214,616 2,206,906
============== ============== ============ =============
<CAPTION>
Total assets
---------------------------------
1997 1996
---- ----
<S> <C> <C>
Sewer Systems $ 8,939,881 8,728,565
Detection Systems 1,324,173 999,135
Corporate 3,828,184 1,517,974
------------- --------------
Total $ 14,092,238 11,245,674
============= ==============
<CAPTION>
Property, plant and equipment
------------------------------------------------------------------------------
Additions Depreciation and amortization
------------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sewer Systems $ 220,623 319,050 440,129 441,867
Detection Systems 9,630 29,800 43,511 47,568
Corporate 214,407 54,918 74,192 74,170
------------- ------------- ----------- -----------
Total $ 444,660 403,768 557,832 563,605
============= ============= =========== ===========
</TABLE>
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Amortization and abandonment
of intangible assets
----------------------------
1997 1996
---- ----
<S> <C> <C>
Sewer Systems $ 69,666 32,688
Detection systems - -
--------- ---------
Total $ 69,666 32,688
========= ==========
</TABLE>
Export sales of low pressure sewer systems were approximately 6.1% and
2.8% of total Company sales in 1997 and 1996, respectively. Export
sales of detection instruments were approximately 6.3% and 4.5% of
total Company sales in 1997 and 1996, respectively.
(9) Business and Credit Concentrations
(a)Concentration of Credit Risk and Sales to Major Customers
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of trade
receivables. The Company sells products to customers primarily
in the United States. At December 31, 1997 and 1996, eight
customers comprised approximately 49% and 43%, respectively, of
trade accounts receivable. To reduce credit risk, the Company
performs ongoing credit evaluations of customers but generally
does not require collateral. Allowances are maintained for
potential credit losses, and such losses have been within
management's expectations.
During 1997 and 1996, sales to eight customers comprised
approximately 42% and 36%, respectively, of the Company's
consolidated net sales. No individual customer comprised more
than 10% of consolidated net sales in 1997 and 1996.
(b)Concentration of Purchasing Risk
During both 1997 and 1996, approximately 52% of the Company's
purchases were made from ten vendors. No individual vendor
comprised more than 10% of total purchases in 1997 and 1996.
(10) Contingent Liabilities
During 1997, an action was brought against the Company based on
allegations of misrepresentation and breach of contract relating to
the Company's termination of its relationship with Abaxial Associates,
Inc. (the "plaintiff"). The plaintiff seeks monetary damages in the
amount of $1,600,000 (CDN), plus interest and certain other costs. In
the opinion of management, the plaintiff's business relationship with
the Company was terminated for cause and the claim is unsubstantiated
and without merit. Although no assurances can be given, the Company's
management believes the ultimate outcome of this allegation will not
have a material adverse affect on the financial position or results of
operations of the Company.
<PAGE>
ENVIRONMENT ONE CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Subsequent Event
On February 24, 1998, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with Precision Castparts Corp. and EOC
Acquisition Corporation providing for the acquisition, subject to the
terms and conditions of the Agreement, by Precision Castparts Corp.,
through its wholly-owned subsidiary EOC Acquisition Corporation, of
all the outstanding shares, including all options and warrants (vested
and unvested), of common stock of the Company for $15.25 per share in
cash, net of the exercise price in the case of all options and
warrants. Under the terms and conditions of the Agreement, the Company
will be the surviving corporation and a wholly-owned subsidiary of
Precision Castparts Corp.
As a result of the Company's acceptance of the terms and conditions of
the Agreement, the Company will be required to pay an outside
consultant a transaction fee, contingent on the closing of the
aforementioned transaction, of approximately $800,000. In addition,
the Company has agreed to indemnify the outside consultant against
certain liabilities, if any.
Additionally, as a result of the Company's acceptance of the terms and
conditions of the Agreement, the Company will be required under the
conditions of a Change in Control Agreement dated January 5, 1998, to
pay the Company's Chairman approximately $350,000, plus a prorated
portion of any 1998 bonus amount to which he is entitled. Also, the
Company has agreed to waive any required health insurance premium that
would be due from the Chairman for a twelve-month period following his
termination.
In addition, pursuant to the Agreement, the Company has entered into
certain other ancillary agreements with specific directors, officers
and key employees of the Company. These agreements are as follows:
(i) The Company entered into employment agreements with eight
named officers and employees for periods of one to two years.
(ii) The Company entered into a stockholder agreement with certain
named directors, officers and employees, under which those
individuals agreed to tender all of their respective shares,
including all options (vested and unvested), of common stock
so long as the offer price is not less than $15.25 per share
in cash.
<PAGE>
Environment One Corporation
Form 10-KSB
Part II (con't.)
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Environment One Corporation
Form 10-KSB
Part III
Item 9. Directors and Executive Officers of the Company
Date
Name Position Office Began Age
---- -------- ------------ ---
Walter W. Aker Director Dec 1968 79
Mark E. Alexander Vice President January 1998 41
John L. Allen Director May 1993 54
Stephen V. Ardia Chairman May 1995 56
President, CEO Sept 1996
David M. Doin Vice President Sept 1991 42
Angelo Dounoucos Director May 1988 65
President, CEO Retired, Sept 1996
Lars Grenback Director May 1993 54
Robert G. James Director May 1984 73
Rolf E. Soderstrom Director May 1991 65
Philip W. Welsh Vice President May 1995 40
Treasurer, CFO
All executive officers of the Corporation are included in the preceding table.
Executive officers serve until the Board of Directors' meeting immediately
following the Annual Meeting of Shareholders or until their successors are
elected.
Directors elected at the Company's Annual Meeting serve until the next Annual
Meeting. All of the above directors were elected by the Shareholders at the
Annual Meeting held May 15, 1997.
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Business Experience During the Past Five Years:
Walter W. Aker
He was vice president of the Company from 1968 to 1975 and from 1982 to 1993. He
was elected corporate secretary from 1976 to 1993.
Mark E. Alexander
He was appointed vice president of marketing in January, 1998. He began his
career with Environment One in January, 1990 as a regional sales manager in the
Sewer Systems Business. He was promoted to national sales manager in 1994 and to
director of marketing in 1995. He earned his master of business administration
in 1995 from Pepperdine University.
John L. Allen
He is managing partner for the Financial Services Practice, North America, for
Heidrick & Struggles, Inc., a global executive search firm. He is located in the
New York, NY office and is also a director of the firm. Prior to his joining the
firm in 1991, he had 24 years in banking including nearly thirteen as a chief
executive officer of Amoskeag Bank Shares, Inc. and Key Bank of Southeastern New
York. He has a bachelor of science degree in business administration from
Rochester Institute of Technology, a master of public administration from the
Graduate School of Public Affairs, State University of New York (SUNY) Albany,
and is a graduate of the Harvard Business School Program for Management
Development.
Stephen V. Ardia
He was elected president and chief executive officer on September 1, 1996. He
received his master of business administration from Rutgers University and a
bachelor of science degree from the U.S. Merchant Marine Academy. After working
with Goulds Pumps, Inc. since 1965, he became its president in 1985. He retired
in 1994 joining Environment One Corporation as chairman in May, 1995. He
presently serves as a member of the board of directors of MaxTec Holdings of
Dallas, Texas.
David M. Doin
He was elected vice president in September, 1991 and also served as the general
manager of the Detection Systems Business until January, 1998 when he was
appointed vice president of sales. He received his bachelor of science degree in
business from the State University of New York at Albany in 1983. He joined the
Company in 1977 in Measurement Services sales and was appointed product manager,
Scientific Instruments, in 1981.
Angelo Dounoucos
He was vice president and director of Environment One Corporation from 1969 to
1976. He rejoined the Company in 1986 after eight years as a project marketing
manager at the General Electric Corporate Research and Development Center. He
was elected president on January 1, 1989 and chief executive officer on March
14, 1990. He retired as president and chief executive officer on September 1,
1996.
Lars Grenback
He received his bachelor of economics and business administration degree from
Uppsala University, Sweden in 1969 and his university certificate in marketing,
advertising and public relations in 1970. Since 1975, he has been working with
the low pressure sewer system in the Scandinavian countries and has been
president of Svensk Kommunalteknik AB since 1980.
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Business Experience of Executive Officers During the Past Five Years (con't.)
Robert G. James
He received his bachelor of science degree from Northwestern University, his
master's degree in business administration from Harvard Business School in 1948
and his doctorate in economics from the Harvard Graduate School in 1952. He is
vice chairman of Enterprise Asset Management Inc. He is also a Certified Public
Accountant.
Rolf E. Soderstrom
He received his bachelor of science degree in engineering from Tufts University
and his master's degree from Northeastern University. He has thirty-five years
of line management experience as vice president of Motorola, executive vice
president of Codex Corporation and assistant general manager of the Systems
Division of the Foxboro Company. He is president of the TCS Group, a management
consulting firm; director of AG-BAG International Limited, a farm equipment
supplier, a director of Walpole Massachusetts Cooperative Bank; and a managing
director of the Nassau Group, a private investment banking company.
Philip W. Welsh
He was elected treasurer in May, 1995 and was appointed vice president and chief
financial officer in January, 1998. Prior to January, 1998 he served as the
director of finance. He received his bachelor of science degree in business from
the Pennsylvania State University in 1979 and his master of business
administration from the California State University at Long Beach in 1987.
Before joining the Company in 1992, he had worked for Hughes Aircraft Company in
Los Angeles, California as a finance and accounting manager.
Compliance with Section 16(a) of the Exchange Act
The Company believes that all directors, executive officers and holders of more
than 10% of the Company's common stock complied with all Section 16(a) filing
requirements in the fiscal year ended December 31, 1997, except for the
following: Mr. Dounoucos filed a late Form 5 with respect to one transaction and
failed to include on his Form 5 an additional transaction, each of which
occurred in 1997 under stock-based compensation plans maintained by the Company
for non-employee directors; Mr. Grenback did not file a required Form 4 with
respect to three transactions occurring in 1997; and each of Messrs. Allen,
Aker, Grenback, James and Soderstrom failed to file a Form 5 with respect to two
transactions under stock-based compensation plans maintained by the Company for
non-employee directors.
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Item 10. Executive Compensation
Compensation of Executive Officers
The following table sets forth information concerning compensation paid by the
Company to (i) all persons who served as chief executive officer of the Company
during 1997, and (ii) the other most highly compensated executive officers whose
annual salary and bonus during 1997 exceeded $100,000.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------------------------------------- ---------
Other Annual Options/ All Other
Name and Salary Bonus Compensation SARs Compensation
Principal Position Year $ ($) ($) (#) ($) (1)
- ------------------ ---- - --- --- --- -------
<S> <C> <C> <C> <C> <C> <C>
Stephen V. Ardia 1997 150,000 224,148 70,000 25,000 45,906
Chairman of the 1996 46,222 113,816 47,500 23,182 21,474
Board, President & 1995 0 0 45,000 101,818 0
CEO since 9/1/96
Mark E. Alexander 1997 91,250 81,817 6,000 16,758
Vice-President - 1996 79,232 37,575 4,000 7,172
Marketing 1995 60,000 35,906 6,000 16,000
David M. Doin 1997 79,100 59,103 5,000 12,107
Vice President - 1996 76,400 28,985 2,000 5,535
Sales 1995 76,400 20,000 5,000 0
George A. Earle 1997 77,851 48,030 4,000 9,534
Director of 1996 71,400 27,091 2,500 5,169
Engineering 1995 71,400 10,685 6,000 0
Philip W. Welsh 1997 77,750 58,091 6,000 11,897
Vice President - 1996 71,000 26,936 4,000 5,141
Finance, Chief 1995 69,769 3,610 6,000 0
Financial Officer,
Treasurer
</TABLE>
(1) For 1997, represents the Corporation's matching contribution under the
Deferred Compensation Plan for Certain Executive Employees of
Environment One Corporation.
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Executive Compensation (cont.):
Option Grants in Last Fiscal Year
The following table provides further information on grants of stock options
pursuant to the Company's Amended and Restated Stock Option Plan and 1996
Incentive Compensation Plan in fiscal year 1997, with respect to each of the
named executive officers in the Summary Compensation Table.
<TABLE>
<CAPTION>
% of Total Options Exercise or
Options Granted to Employees Base Price Expiration
Name Granted (#) in Fiscal Year ($/Sh) Date
- ---- ----------- -------------- ------ ----
<S> <C> <C> <C> <C>
S. Ardia 25,000 36% $7.00 5/15/2007
M. Alexander 6,000 9% $6.50 3/20/2007
D. Doin 5,000 7% $6.50 3/20/2007
G. Earle 4,000 6% $6.50 3/20/2007
P. Welsh 6,000 9% $6.50 3/20/2007
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Value
The following table provides information for the named executive officers with
respect to (i) stock options exercised in fiscal year 1997, (ii) the number of
stock options held at the end of fiscal year 1997, and (iii) the value of
in-the-money stock options at the end of fiscal year 1997.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-Money
Shares Acquired Value Options at 12/31/97 Options at 12/31/97
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
S. Ardia --- --- 137,501 12,499 $939,549 $43,747
M. Alexander --- --- 12,200 15,800 93,421 92,309
D. Doin --- --- 18,750 13,000 153,257 78,467
G. Earle --- --- 15,100 11,400 122,275 67,725
P. Welsh --- --- 11,000 15,000 83,571 85,909
</TABLE>
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Executive Compensation (cont.):
Employment Agreement and Change of Control Agreement with Mr. Ardia
The Company has entered into an Employment Agreement with Mr. Ardia, providing
for Mr. Ardia to serve as the Company's President for a term of one year
beginning on the date that the tender offer (the "Offer") of Precision Castparts
Corp. ("PCC") and EOC Acquisition Corporation (the "Purchaser") is consummated
(see Item 11), after which his employment may be continued on an at-will basis
by mutual agreement of the parties. The agreement provides that Mr. Ardia will
be paid a base salary at the annual rate of $150,000 (which is consistent with
his current salary arrangements). He will be entitled to participate in the
Company's bonus plan through December 31, 1998, and in a similar bonus plan
during the three month period January 1, 1999 through March 28, 1999. Mr. Ardia
will also be entitled to participate in PCC's stock option and stock purchase
programs, in accordance with the terms of those programs. Mr. Ardia may
terminate the agreement upon thirty days' written notice to the Company any time
after the first three months of its effectiveness.
The Company also has a Change in Control Agreement with Mr. Ardia dated January
5, 1998, providing for a payment to Mr. Ardia upon the occurrence of a "Change
of Control" (as defined in the agreement) equal to (i) the amount of his annual
base salary in effect on the date of the Change of Control, and (ii) an amount
equal to the sum of (A) the bonus payable to Mr. Ardia for the year during which
the Change of Control occurs, prorated through the date of the Change of
Control, plus (b) the average annual bonus paid to Mr. Ardia for the two
complete fiscal years that precede the fiscal year during which the Change of
Control occurs. In addition, the Company shall waive for twelve months following
his termination any required premium payment due from Mr. Ardia to allow him to
continue his coverage under the Company's group health plan. A "Change of
Control," as defined in the agreement, would occur upon the Purchaser's
acceptance for payment and payment for Shares pursuant to the Offer (See Item
11).
Employment Agreements with Messrs. Alexander, Doin, Earle and Welsh
The Company also has entered into two-year Employment Agreements with Mr.
Alexander to serve as Vice President of Marketing; Mr. Doin to serve as Vice
President, General Manager; Mr. Earle to serve as Director of Engineering; and
Mr. Welsh to serve as Vice President of Finance. These agreements provide for an
annual salary of $95,000 for Mr. Alexander, $90,000 for Mr. Doin, $80,000 for
Mr. Earle, and $80,000 for Mr. Welsh, respectively (which are consistent with
their current salary arrangements). Each of the foregoing employees will be
entitled to participate in the Company's bonus plan through December 31, 1998,
and in a similar bonus program for the three month period January 1, 1999
through March 28, 1999. Thereafter, any bonus program provided will be
consistent with bonus programs provided by PCC to similarly situated employees.
These employees will also be entitled to participate in PCC's stock option and
stock purchase programs, in accordance with the terms of those programs.
The agreements, which may be terminated by either party upon thirty days'
written notice, provide for a severance benefit equal to the following: (i) if
the employee is terminated before the first anniversary of
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
the effective date of the agreement, the remaining balance of the employee's
base salary for the portion of year from the date of termination until the first
anniversary of the effective date, plus 100% of any calendar year 1998 bonus to
which the employee would have been entitled had he or she remained employed by
the Company through December 31, 1998, plus the Severance Payment (as defined
below); or (ii) if the employee is terminated after the first anniversary of the
effective date of the agreement and prior to the second anniversary of the
effective date, ten months' pay at the employee's then current salary level (the
"Severance Payment"). In addition, the Company shall waive for the remainder of
the unexpired term of the agreement any required premium payment due from the
employee to allow the employee to continue his or her coverage under the
Company's group health plan. The employee is ineligible for the payments
described in this paragraph if he or she voluntarily resigns or withdraws from
employment, is terminated for "cause" (as defined in the agreement), terminates
employment as a result of the expiration of the term of the agreement, breaches
certain confidentiality or non-competition provisions in the agreement, or
accepts reasonably comparable employment with an affiliate of PCC.
Compensation of Directors
As compensation for attendance at Board and Committee meetings, directors who
are not employees of the Company receive a stock grant on September 1st of each
year for a number of shares having an aggregate value of $10,000, based upon the
fair market value of the Company's common stock at the close of business on the
date of grant. In addition, non-employee directors receive a grant of stock
options on the third Tuesday of each December. Each such grant to a director
relates to a total number of shares of the Company's common stock having an
aggregate fair market value, at the close of business on the date of grant,
equal to $10,000. The exercise price of these options is fixed at the fair
market value of the Company's common stock at the close of business on the date
of grant. The Board of Directors believes that this equity-based system of
compensation is beneficial in that it more closely aligns the long-term
interests of directors with those of the Company's shareholders.
As a general rule, directors who are officers or employees of the Company
receive no compensation for attendance at Board or Committee meetings. The
Company does have a Letter of Understanding with Mr. Ardia dated May 22, 1995,
providing for Mr. Ardia to serve as Chairman of the Board. Pursuant to this
Letter of Understanding, Mr. Ardia received a grant of 10,000 shares of common
stock in 1997 having an aggregate market value (on the date of grant) of
$70,000. In addition, during 1997 Mr. Ardia received an option to purchase
25,000 shares of common stock at an exercise price of $7.00 per share, the
market value on the date of grant.
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Item 11. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The following table sets forth, as of March 3, 1998, the ownership of the
Company's common stock by any person who is known by the Company to be the
beneficial owner of more than five percent of the common stock.
Name and Address Amount and Nature Percentage of
of Beneficial Owner of Beneficial Ownership Outstanding Shares
------------------- ----------------------- ------------------
Angelo Dounoucos 243,528(a) 5.60%
720 St. Davids Lane
Schenectady, NY 12309
Robert and Ardis James 486,317(b) 11.31%
Foundation
80 Ludlow Drive
Chappaqua, NY 10514
Cenith Partners L.P. 401,510(c) 9.35%
One Financial Center
Boston, MA 02110
(a) Includes 56,000 shares issuable upon exercise of stock options that are
exercisable within 60 days of March 3, 1998, 60,000 shares held jointly
with his wife and 7,300 shares held in his wife's IRA.
(b) Includes 3,381 shares held by Robert G. James, 43,400 shares held in
custodian accounts for his children, and 3,636 shares issuable upon
exercise of currently exercisable stock options held by Robert G.
James.
(c) Includes 5,000 shares held by Stephen G. Rabinovitz, sole general
partner of Cenith Partners L.P.
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Security Ownership of Certain Beneficial Owners and Management (cont.):
Security Ownership of Management
The following table sets forth, as of March 3, 1998, the ownership of the
Company's common stock by each of the Company's current directors, named
executive officers and all directors and executive officers as a group.
<TABLE>
<CAPTION>
Amount and Nature Percentage of Outstanding
Name of Beneficial Ownership(a)(c) Shares
- ---- ----------------------------- ------
<S> <C> <C>
Walter W. Aker* 189,377(b) 4.40%
Lars G. Grenback* 161,883(b) 3.77%
John L. Allen* 7,683 0.18%
Stephen V. Ardia*+ 190,201(b) 4.29%
Robert G. James* 486,317(b) 11.31%
Angelo Dounoucos* 243,528(b) 5.60%
Rolf E. Soderstrom* 16,683(b) 0.39%
Mark E. Alexander+ 14,008 0.33%
David M. Doin+ 24,004 0.56%
George A. Earle+ 21,094 0.49%
Philip W. Welsh+ 17,225 0.40%
All directors and executive 1,395,859(d) 30.42%
officers as a group
</TABLE>
* Director
+ Executive Officer
(a) Includes all shares for which the named individual possessed sole or
shared voting or investment power, even if beneficial ownership has
been disclaimed as to any of these shares by the named individual.
(b) The listed amounts include shares as to which certain directors are
beneficial owners but not the sole beneficial owner as follows: Mr.
Aker's wife holds 15,000 shares; Mr. Ardia's wife holds 2,600 shares in
an IRA; Mr. Dounoucos's wife holds 7,300 shares in an IRA, and 60,000
shares jointly with Mr. Dounoucos; Mr. Grenback is President of Svensk
Kommunalteknik AB, which holds 153,000 shares, and Mr. Grenback's wife
holds 1,000 shares; 435,900 shares are held by the
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Security Ownership of Certain Beneficial Owners and Management (cont.):
Robert and Ardis James Foundation and 43,400 shares are held in
custodian accounts for Mr. James' children; and Mr. Soderstrom holds
10,000 shares jointly with his wife.
(c) Includes the following shares which the individuals have the right to
acquire, within 60 days of the record date, through exercise of stock
options issued by the Company: Mr. Aker - 3,636 shares, Mr. Allen -
3,636 shares, Mr. Ardia - 137,501 shares, Mr. Dounoucos - 56,000
shares, Mr. Grenback - 3,636 shares, Mr. James - 3,636 shares, Mr.
Soderstrom - 3,636 shares, Mr. Alexander - 13,400 shares, Mr. Doin -
19,750 shares, Mr. Earle - 15,900 shares, Mr. Welsh - 12,200 shares.
These shares are included in the total number of shares outstanding for
the purpose of calculating the percentage ownership of each of the
foregoing individuals and of the group as a whole, but in calculating
the percentage of each individual, the number of outstanding shares
does not include options of other individuals listed in the table.
(d) Includes 292,831 shares issuable upon exercise of stock options that
are exercisable within 60 days of March 3, 1998, and 728,200 shares for
which certain directors and executive officers are beneficial owners,
but not the sole beneficial owners, as set forth in note (b) above.
Changes in Control
The Company has executed an Agreement and Plan of Merger dated as of February
24, 1998 (the "Merger Agreement") among the Company, the Purchaser, and PCC. The
Purchaser is a New York corporation and a wholly owned subsidiary of PCC, an
Oregon Corporation
Pursuant to the Merger Agreement, among other things, the Purchaser commenced a
tender offer on March 3, 1998 to purchase all of the issued and outstanding
shares of the Company's common stock (the "Shares") at a price of $15.25 per
Share, net to the seller in cash, as described in the Purchaser's Offer to
Purchase dated March 3, 1998 and the related Letter of Transmittal (which Offer
to Purchase and related Letter of Transmittal together constitute the "Offer").
The Offer is scheduled to expire at 12:00 midnight, eastern time, on Monday,
March 30, 1998, unless extended. The Offer is subject to, among other things,
the condition that a number of shares representing not less than 66b percent of
all outstanding Shares on a fully diluted basis be validly tendered prior to the
expiration of the Offer and not withdrawn (the "Minimum Condition"). The Merger
Agreement also provides for the merger of the Purchaser with and in to the
Company (the "Merger") as soon as practicable after the consummation of the
Offer. Following the consummation of the Merger (the "Effective Time"), the
Company will be the surviving corporation and a wholly owned subsidiary of PCC.
In the Merger, each Share issued and outstanding immediately prior to the
Effective Time (other than Shares held by PCC, the Purchaser or in the treasury
of the Company, all of which will be canceled) will be converted into the right
to receive cash in the amount of $15.25.
The terms of the Merger Agreement, a summary of the events leading up to the
Offer and the execution of the Merger Agreement and other information concerning
the Offer and the Merger are contained in the Offer to Purchase and in the
Solicitation/Recommendation Statement on Schedule 14D-9 of the Company (the
"Schedule 14D-9") with respect to the Offer, which was filed with the Commission
on March 3, 1998. Certain other documents (including the Merger Agreement) have
been filed with the Commission as Exhibits to the Tender Offer Statement on
Schedule 14D-1 of the Purchaser and PCC and to the Schedule 14D-9.
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Item 12. Certain Relationships and Related Transactions
The Company entered into an Agreement and Plan of Merger with Precision
Castparts Corp. (PCC) on February 24, 1998 that is described in Item 11.
Pursuant to that, Rolf E. Soderstrom, who is a member of the Company's Board of
Directors, is also a managing director of The Nassau Group, Inc. ("Nassau"), an
investment banking firm. Nassau has been retained by the Board of Directors to
act as a financial advisor to the Company with respect to the Offer and the
Merger. Pursuant to an engagement letter with Nassau, the Company (i) has paid
Nassau a monthly cash retainer of $5,000 beginning on September 15, 1997 and
continuing on the 15th day of each succeeding month during the period of
Nassau's engagement; (ii) has issued to Nassau a warrant to purchase 10,000
Shares exercisable within three years of September 22, 1997, the date of the
engagement letter, at an exercise price equal to the closing price of a Share on
September 22, 1997 ($9.125); and (iii) will pay a transaction fee to Nassau in
the amount of 1.1% or the aggregate consideration in a transaction resulting in
a sale of the Company (approximately $804,000 based upon the $15.25 per Share
Offer Price and the existence of certain long-term indebtedness of the Company)
less 50% of the total cash retainer previously paid (the "Transaction Fee"). The
Transaction Fee is contingent upon closing of such a transaction. The Company
has also agreed to indemnify Nassau and certain related parties against certain
liabilities, including liabilities under the federal securities laws.
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Item 13. Exhibits and Reports on Form 8-K
Exhibits
2.1 Agreement and Plan of Merger dated as of February 24, 1998 among PCC,
Purchaser and the Company, previously filed March 3, 1998 as Exhibit 1 to the
Company's Solicitation/Recommendation Statement on Form 14D-9 (File No.
5-35464), and incorporated by reference.
3.1 Registrant's Certificate of Incorporation, as amended, incorporated by
reference to Exhibit 3.1 to Form 10-Q Report for the period ending 6/30/88.
(File No. 1-7037)
3.2 Registrant's by-laws, as amended, incorporated by reference to Exhibit 3.2
to Form 10-Q Report for the period ending 6/30/88. (File No. 1-7037)
3.3 Registrant's amendment to Certificate of Incorporation.
4.1 Specimen of Registrant's Common Stock Certificate incorporated by reference
to Exhibit 4.0 of Registration Statement. (File No. 2-38321)
4.2 $2,500,000 Secured Working Capital Revolving Line of Credit Loan dated
August 19, 1992 between the Registrant and Fleet Bank of New York incorporated
by reference to previously filed Form 10-KSB.
4.3 $3,000,000 Loan and Security Agreement dated December 30, 1992 between the
Registrant and Fleet Bank of New York incorporated by reference to previously
filed Form 10-KSB.
4.4 Note and Secured Revolving Line of Credit Agreement Modification Agreement
No. 2 dated March 20, 1995 between the Registrant and Fleet Bank of New York
incorporated by reference to previously filed Form 10-KSB.
4.5 Note and Loan and Security Agreement Modification Agreement No. 2 dated
March 20, 1995 between the Registrant and Fleet Bank of New York incorporated by
reference to previously filed Form 10-KSB.
4.6 Note and Secured Revolving Line of Credit Agreement Modification Agreement
No. 3 dated March 30, 1995 between the Registrant and Fleet Bank of New York
incorporated by reference to previously filed Form 10-KSB.
4.7 Note and Loan and Security Agreement Modification Agreement No. 3 dated
March 30, 1995 between the Registrant and Fleet Bank of New York incorporated by
reference to previously filed Form 10-KSB.
4.8 Note and Secured Revolving Line of Credit Agreement Modification Agreement
No. 4 dated October 18, 1995 between the Registrant and Fleet Bank of New York
incorporated by reference to previously filed Form 10-KSB.
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Exhibits and Reports on Form 8-K (con't.)
4.9 Note and Loan and Security Agreement Modification Agreement No. 4 dated
October 18, 1995 between the Registrant and Fleet Bank of New York incorporated
by reference to previously filed Form 10-KSB.
4.10 Building Loan Agreement Modification Agreement dated November 15, 1995
between the Registrant and Fleet Bank of New York incorporated by reference to
previously filed Form 10-KSB.
4.11 $2,500,000 Secured Working Capital Revolving Line of Credit Note dated
October 18, 1995 between the Registrant and Fleet Bank of New York incorporated
by reference to previously filed Form 10-KSB.
4.12 Note and Secured Revolving Line of Credit Agreement Modification Agreement
No. 5 dated June 17, 1996 between the Registrant and Fleet Bank of New York.
4.13 Note and Loan and Security Agreement Modification Agreement No. 5 dated
June 17, 1996 between the Registrant and Fleet Bank of New York.
4.14 Note and Secured Revolving Line of Credit Agreement Modification Agreement
No. 6 dated June 17, 1997 between the Registrant and Fleet Bank of New York.
4.15 Note and Loan and Security Agreement Modification Agreement No. 6 dated
June 17, 1997 between the Registrant and Fleet Bank of New York.
10.1 Registrant's 1972 Stock Option Plan incorporated by reference to Exhibit
10.1 to Form 10-K Report for the year ended 12/31/88. (File No. 1-7037)
10.2 Registrant's 1996 Incentive Compensation Plan incorporated by reference to
Exhibit 10.2 to Form 10-KSB for the year ended 12/31/96 by Form S-8 filed
10/31/96. (Registration No.33-15225)
10.3 Registrant's 1996 Incentive Compensation Plan for Non-Employee Directors
incorporated by reference to Exhibit 10.3 to Form 10-KSB for the year ended
12/31/96 by Form S-8 filed 10/31/96.
(Registration No. 33-15221)
10.4 Registrant's Non-Employee Directors Stock Grant Plan incorporated by
reference to Exhibit 10.4 to Form 10-KSB for the year ended 12/31/96 by Form S-8
filed 10/31/96. (Registration No. 33-15223)
10.5 Registrant's Amended and Restated Stock Option Plan incorporated by
reference to Exhibit 10.5 to Form 10-KSB for the year ended 12/31/96 by Form S-8
filed 10/31/96. (Registration No. 33-15227)
10.6 Registrant's Deferred Compensation Plan for Certain Executive Employees of
Environment One Corporation incorporated by reference to Exhibit 10.6 to Form
10-KSB for the year ended 12/31/96 by Form S-8 filed 10/31/96. (Registration No.
33-15229)
<PAGE>
Environment One Corporation
Form 10-KSB
Part III (con't.)
Exhibits and Reports on Form 8-K (con't.)
10.7 Registrant's Deferred Compensation Plan for Certain Executive Employees of
Environment One Corporation incorporated by reference to Exhibit 10.7 to Form
10-KSB for the year ended 12/31/97 by Form S-8 filed 12/23/97. (Registration No.
333-43093)
10.8 Confidentiality Agreement previously filed March 3, 1998 as Exhibit 3 to
the Company's Solicitation/Recommendation Statement on Form 14D-9 (File No.
5-35464), and incorporated by reference.
10.9 Employment Agreement with Mr. Ardia previously filed March 3, 1998 as
Exhibit 4 to the Company's Solicitation/Recommendation Statement on Form 14D-9
(File No. 5-35464), and incorporated by reference.
10.10 Change in Control Agreement with Mr. Ardia previously filed March 3, 1998
as Exhibit 5 to the Company's Solicitation/Recommendation Statement on Form
14D-9 (File No. 5-35464), and incorporated by reference.
10.11 Form of Employment Agreements with Messrs. Alexander, Doin, Earle, and
Welsh previously filed March 3, 1998 as Exhibit 6 to the Company's
Solicitation/Recommendation Statement on Form 14D-9 (File No. 5-35464), and
incorporated by reference.
23.1 Consent of Independent Auditors, KPMG Peat Marwick LLP.
Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended December 31,
1997.
<PAGE>
Environment One Corporation
Form 10-KSB
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Environment One Corporation
(Registrant)
/s/Stephen V. Ardia 3/27/98
- ------------------- -------
Stephen V. Ardia Date
Chairman, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934 this report
has been signed by the following persons, which included the chairman and chief
executive officer, chief financial officer and a majority of the Board of
Directors on behalf of the Registrant and in the capacities and on the dates
indicated.
/s/Stephen V. Ardia 3/27/98 /s/Angelo Dounoucos 3/27/98
- --------------------------------- ---------------------------------
Stephen V. Ardia Date Angelo Dounoucos Date
Chairman, President and CEO Director
/s/Philip W. Welsh 3/27/98 /s/Lars Grenback 3/27/98
- --------------------------------- ---------------------------------
Philip W. Welsh Date Lars Grenback Date
Vice President, CFO and Treasurer Director
/s/Walter W. Aker 3/27/98 /s/Robert G. James 3/27/98
- --------------------------------- ---------------------------------
Walter W. Aker Date Robert G. James Date
Director Director
/s/John L. Allen 3/27/98
- --------------------------------- ---------------------------------
John L. Allen Date Rolf E. Soderstrom Date
Director Director
NOTE AND SECURED REVOLVING LINE OF
CREDIT AGREEMENT MODIFICATION AGREEMENT NO. 6
THIS AGREEMENT, made this seventeenth day of June, 1997, by and between
FLEET BANK f/k/a FLEET BANK OF NEW YORK, a bank organized and existing under the
laws of the State of New York, and having its principal banking house located at
69 State Street, Albany, New York 12201 (herein called the "Bank") and
ENVIRONMENT-ONE CORPORATION, a New York corporation with its principal place of
business at P.O. Box 773, 2773 Balltown Road, Schenectady, New York 12309
(herein called the "Borrower").
W I T N E S S E T H:
WHEREAS, the Borrower did execute and deliver to the Bank a Business
Purpose Promissory Note (Demand - Line of Credit) in the face amount of Two
Million Five Hundred Thousand and no/100 Dollar ($2,500,000.00) dated as of
October 2, 1992 (herein called the "Prior Note"); and
WHEREAS, the Prior Note was subject to the terms and conditions of a
Secured Revolving Line of Credit Agreement also dated as of October 2, 1992 by
and between the Bank and the Borrower (the "Line of Credit Agreement"); and
WHEREAS, the Prior Note and the Line of Credit Agreement were modified
by the parties pursuant to the terms of a Note and Line of Credit Agreement
Modification Agreement by and between the Borrower and the Bank dated the 23rd
day of March, 1994 and a Letter Agreement dated May 10, 1994 (collectively the
"Modification Agreement"); and
WHEREAS, the Prior Note and the Line of Credit Agreement were further
modified by the parties pursuant to the terms of a Note and Line of Credit
Agreement Modification Agreement No. 2 by and between the Borrower and the Bank
dated the 20th day of March, 1995 (the "Modification Agreement No. 2"); and
WHEREAS, the Prior Note and the Line of Credit Agreement were further
modified by the parties pursuant to the terms of a Note and Line of Credit
Agreement Modification Agreement No. 3 by and between the Borrower and the Bank
dated the 30th day of March, 1995 (the "Modification Agreement No. 3"); and
WHEREAS, the Prior Note and the Line of Credit Agreement were further
modified by the parties pursuant to the terms of a Note and Line of Credit
Agreement Modification Agreement No. 4 by and between the Borrower and the Bank
dated the 18th day of October, 1995 (the "Modification Agreement No. 4").
Pursuant to the terms of Modification Agreement No. 4, the Prior Note was
modified, replaced and restated in its entirety by a Line of Credit Note in the
face amount of $2,500,000.00 dated October 18, 1995, executed by the Borrower in
favor of the Bank (the "Prior Note No. 2"); and
WHEREAS, the Prior Note No. 2 and the Line of Credit Agreement were
further modified by the parties pursuant to the terms of a Note and Line of
Credit Agreement Modification Agreement No. 5 by and between the Borrower and
the Bank dated the 17th day of June, 1996 (the "Modification Agreement No. 5");
and
<PAGE>
WHEREAS, the Borrower and the Bank desire to further modify certain
terms of the Prior Note No. 2 and the Line of Credit Agreement, but only
pursuant to the terms and conditions of this Note and Line of Credit Agreement
Modification Agreement No. 6.
NOW, THEREFORE, in pursuance of said agreement and in consideration of
the mutual promises, covenants and agreements herein contained and other good
and valuable consideration, receipt of which is acknowledged by the parties
hereto, the Borrower and the Bank mutually agree and covenant as follows:
1. The Prior Note No. 2 is hereby amended, modified and replaced in its
entirety by a new revolving line of credit note in the original principal amount
of Five Million and no/100 Dollars ($5,000,000.00) (hereinafter the "Note"),
executed by the Borrower in favor of the Bank on even date. A copy of the New
Note is attached hereto as Exhibit "A" and made a part hereof. All references in
the Line of Credit Agreement, as previously modified, to the Prior Note or the
Prior Note No. 2 are deemed to refer to the Note.
2. Paragraph 1(p) of the Line of Credit Agreement, as previously
modified, is hereby modified to read in its entirety as follows:
"(p) The Borrower must maintain a minimum "current ratio" of 1.60 to
1.00. For the purposes of this subparagraph, minimum current ratio
shall mean the ratio of the Borrower's current assets to the Borrower's
current liabilities as would be determined from the fiscal quarter and
fiscal year end financial statements of the Borrower referenced in
subparagraph 1(m) above."
3. Paragraph 1(q) of the Line of Credit Agreement, as previously
modified, is hereby modified to read in its entirety as follows:
"During the term of the Loan, the Borrower must maintain a minimum
working capital of at least Two Million Five Hundred Thousand and
no/100 Dollars ($2,500,000.00). For the purposes of this subparagraph,
working capital shall be defined as the amount by which the current
assets of the Borrower exceed the current liabilities of the Borrower,
as would be determined from the fiscal year end financial statements of
the Borrower referenced in subparagraph 1(m) above."
4. Paragraph 1(r) of the Line of Credit Agreement, as previously
modified, is hereby modified to read in its entirety as follows:
"During the term of the Loan, the Borrower must maintain a minimum net
worth (a/k/a Total Shareholders' Equity) of at least Five Million and
no/100 Dollars ($5,000,000.00), as would be shown on the quarterly and
fiscal year end financial statements of the Borrower referenced in
Schedule B hereof. Beginning December 31, 1997 and on each of the
Borrower's fiscal year ends thereafter during the term of this
Agreement, the Borrower's aforementioned minimum net worth (a/k/a Total
Shareholders' Equity) requirement will increase by Five Hundred
Thousand and no/100 Dollars ($500,000.00) over the previous fiscal
year's net worth. For the purposes of this subparagraph, net worth
(a/k/a Total Shareholders' Equity) shall mean, as of any date of
determination thereof, the sum of the following for the Borrower as
would be determined (without duplication) on a balance sheet of the
Borrower prepared in accordance with GAAP:
<PAGE>
(i) the amount of common stock, plus
(ii) the amount of additional paid-in capital, plus
(iii) the amount of surplus and retained earnings or, in the
case of a surplus or retained earnings deficit, minus the amount of such
deficit, less
(iv) the cost of common shares in Treasury."
5. Paragraph 1(t) of the Line of Credit Agreement, as previously
modified, is hereby modified to read in its entirety as follows:
"During the term of the Loan, the Borrower must maintain a minimum debt
service coverage ratio of 1.75 to 1.00. Debt service coverage ratio
shall be defined as the sum of the Borrower's net income, plus
depreciation, plus amortization and interest less dividends divided by
the sum of the Borrower's current maturities of long term debt plus
interest expense, as would be determined from the fiscal year end
financial statements of the Borrower referenced in subparagraph 1(m)
above."
6. The requirements that the Borrower submit to the Bank (i) a Loan
Formula Certificate at the time of each advance under the Note, and
(ii) quarterly backlog reports are hereby eliminated.
7. All the other terms and conditions of the Line of Credit Agreement,
as previously modified pursuant to the terms of the Modification Agreement, the
Modification Agreement No. 2, the Modification Agreement No. 3, the Modification
Agreement No. 4 and the Modification Agreement No. 5, remain in full force and
effect, with the exception of the modifications set forth above.
8. The Borrower hereby warrants and covenants to the Bank that as of
the date of this Agreement, there are no disputes, offsets, claims or
counterclaims of any kind or nature whatsoever under the Prior Note, the Prior
Note No. 2,the Note, the Line of Credit Agreement, the Modification Agreement,
the Modification Agreement No. 2, the Modification Agreement No. 3, the
Modification Agreement No. 4, the Modification Agreement No. 5 or any of the
documents executed in connection therewith or herewith or the obligations
represented or evidenced thereby or hereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Note and Line
of Credit Agreement Modification Agreement No. 6 as of the seventeenth day of
June, 1997.
FLEET BANK ENVIRONMENT-ONE CORPORATION
By:/s/Kevin P. Harrigan By: /s/Stephen V. Ardia
- ----------------------- --------------------
Kevin P. Harrigan, Name: Stephen V. Ardia
Vice President Title: Chariman, President, CEO
By: /s/Philip W. Welsh
------------------
Name: Philip W. Welsh
Title: Treasurer
STATE OF NEW YORK )
) ss.:
COUNTY OF )
On this 17th day of June, 1997, before me personally appeared Stephen
V. Ardia, to me known, who being by me duly sworn, did depose and say that he
resides at 3 West Lake Street, Skanneteles, NY 13152 that he is the Chairman,
President & CEO of ENVIRONMENT-ONE CORPORATION, the corporation described in and
which executed the above instrument; and that he signed his name thereto by
order of the Board of Directors of said corporation.
/s/Kathleen M. Goble
--------------------
Kathleen M. Goble
Notary Public
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF )
On this 17th day of June, 1997, before me personally appeared Philip W.
Welsh, to me known, who being by me duly sworn, did depose and say that he
resides at 13 Nottingham Way So. Clifton Park, NY 12065, that he is the
Treasurer of ENVIRONMENT-ONE CORPORATION, the corporation described in and which
executed the above instrument; and that he signed his name thereto by order of
the Board of Directors of said corporation.
/s/Kathleen M. Goble
--------------------
Kathleen M. Goble
Notary Public
STATE OF NEW YORK )
) ss.:
COUNTY OF ALBANY )
On this 21st day of May, 1997, before me personally appeared Kevin P.
Harrigan, to me known, who being by me duly sworn, did depose and say that he
resides at 201 Autumn Run, Schenectady, New York 12309, that he is a Vice
President of FLEET BANK, the corporation described in and which executed the
above instrument; and that he signed his name thereto by order of the Board of
Directors of said corporation.
/s/Oriana J. Farella
--------------------
Oriana J. Farella
Notary Public
<PAGE>
EXHIBIT "A"
REVOLVING LINE OF CREDIT NOTE
Albany, New York
June 17, 1997 $5,000,000.00
FOR VALUE RECEIVED, the undersigned, ENVIRONMENT-ONE CORPORATION (the
"Borrower") promises to pay to the order of FLEET BANK, a bank organized and
existing under the laws of the State of New York (herein called the "Bank"), at
the office of the Bank, 69 State Street, Albany, New York, 12201, or at any such
other place as may be designated from time to time by the Bank the sum of FIVE
MILLION DOLLARS ($5,000,000.00), or such lesser sum as may be disbursed by the
Bank to the Borrower pursuant to the terms of the Secured Revolving Line of
Credit Agreement (as hereinafter defined), lawful money of the United States of
America, plus interest on the unpaid principal balance computed from the date
hereof, at the per annum rates set forth below, based on a year of 360 days but
chargeable on actual days.
As used herein, the following terms shall have the following meanings:
Advance - Any disbursement of proceeds under this Note made by the Bank to or
for the benefit of the Borrower.
Event of Default - Any of those events defined as an Events of Default under
this Note, the Secured Revolving Line of Credit Agreement, or any other
instruments or documents executed in connection herewith.
Fleet Bank Prime Rate - That rate announced from time to time by the Bank as a
reference point for determining interest rates charged on certain loans and is
not necessarily the lowest rate at which the Bank lends. Any change in this
interest rate shall be effective on the day the change in such rate occurs,
whether or not notice has been given to the Borrower.
Floating Rate - The Fleet Bank Prime Rate, as such rate changes from time to
time.
Interest Period - The time period selected by the Borrower during which interest
is to accrue on any Advance at the Libor Fixed Rate or the Floating Rate, as
selected by the Borrower. An interest period during which interest is to accrue
at the Libor Fixed Rate shall be for a term of thirty (30), sixty (60) or ninety
(90) days, as selected by the Borrower. In no event shall any Interest Period on
any Advance extend beyond the Maturity Date.
Interest Rate Election - An election on the part of the Borrower to choose the
Libor Fixed Rate or the Floating Rate to be charged on any Advance.
Interest Rate Election Notice/Request for Advance - A written notice,
substantially in the form of Exhibit A attached to this Note, given by the
Borrower to the Bank in which the Borrower requests an Advance and indicates an
Interest Rate Election and an Interest Period for said Advance.
Libor Fixed Rate - A per annum rate fixed at the Libor Rate, plus two percent
(2.00%).
<PAGE>
Libor Rate - A rate per annum equal to the rate as determined on the basis of
the offered rates for deposit in United States dollars for a period of time
closest to the maturity of the Interest Period which appears on the Telerate
page 3750 as of 11:00 a.m. London time as of the day that is three Banking Days
preceding the first day of the Interest Period during which interest is to
accrue at the LIBOR Fixed Rate for a particular Loan Portion. If such rate does
not appear on the Telerate page, the rate for that date will be determined on
the basis of the offered rates for deposits in United States dollars for a
period of time comparable to the Interest Period which are offered by four major
banks in the London Interbank Market at approximately 11:00 a.m. London time as
of the day that is three Banking Days preceding the first day of the Interest
Period in question. The principal London office of each of the four major London
banks will be requested to provide a quotation of its United States dollar
deposit offered rate. If at least two such quotations are provided, the rate for
that date will be the arithmetic mean of the quotations. If fewer than two
quotations are provided as requested, the rate for that date will be determined
on the basis of the rates quoted for loans in United States dollars to leading
European banks for a period of time comparable to the Interest Period offered by
major banks in New York City at approximately 11:00 a.m. New York City time as
of the day that is three Banking Days preceding the first day of the Interest
Period in question. In the event the Bank is unable to obtain any such quotation
as provided above, it will be deemed that a LIBOR Rate cannot be determined. In
the event the Board of Governors of the Federal Reserve System shall impose a
reserve percentage with respect to Eurodollar deposits of the Bank, then for any
period during which such reserve percentage shall apply, the LIBOR Rate shall be
equal to the amount determined above divided by an amount equal to up to one (1)
minus such reserve percentage.
Loan - The loan of up to $5,000,000.00 by the Bank to the Borrower.
Loan Portion - Each Advance of Loan proceeds by the Bank to the Borrower, each
of which Advances will be treated separately for purposes of computing interest.
Each such Advance shall accrue interest at the LIBOR Fixed Rate or the Floating
Rate, as selected by the Borrower.
Maturity Date - April 29, 1998.
Secured Revolving Line of Credit Agreement - The Secured Revolving Line of
Credit Agreement executed by the Borrower and the Bank on October 2, 1992, as
modified by the parties pursuant to the terms of a Note and Line of Credit
Agreement Modification Agreement by and between the Borrower and the Bank dated
the 23rd day of March, 1994 and a Letter Agreement dated May 10, 1994
(collectively the "Modification Agreement"); and as further modified by the
parties pursuant to the terms of a Note and Line of Credit Agreement
Modification Agreement No. 2 by and between the Borrower and the Bank dated the
20th day of March, 1995 (the "Modification Agreement No. 2"); and as further
modified by the parties pursuant to the terms of a Note and Line of Credit
Agreement Modification Agreement No. 3 by and between the Borrower and the Bank
dated the 30th day of March, 1995 (the "Modification Agreement No. 3"); and as
further modified by the parties pursuant to the terms of a Note and Line of
Credit Agreement Modification Agreement No. 4 by and between the Borrower and
the Bank dated October 18, 1995 (the "Modification Agreement No. 4"); and as
further modified by the parties pursuant to the terms of a Note and Line of
Credit Agreement Modification Agreement No. 5 by and between the Borrower and
the Bank dated June 17, 1996 (the "Modification Agreement No. 5"); and as
further modified by the parties pursuant to the terms of a Note and Line of
Credit Agreement Modification Agreement No. 6 by and between the Borrower and
the Bank dated of even date herewith.
<PAGE>
The Bank shall make Advances to the Borrower as the Borrower may from
time to time request or as provided for in that certain Target Balance Service
Agreement between the Bank and the Borrower dated February 18, 1997; provided,
however, such Advances shall not exceed in the aggregate at any one time the
maximum principal amount of Five Million Dollars ($5,000,000.00). Interest on
each Advance shall accrue at the Libor Fixed Rate or the Floating Rate, as
selected from time to time by the Borrower. Upon requesting an Advance, the
Borrower shall deliver to the Bank a Request for Advance specifying the amount
of the Advance, an Interest Rate Election and an Interest Period for the
Advance. Each Request for Advance shall be irrevocable upon its receipt by the
Bank and in the case of a Floating Rate Interest Rate Election, shall be
effective the day of such receipt if such day is a business day and if not, the
next succeeding business day, and in the case of a Libor Fixed Rate Interest
Rate Election, shall become effective three (3) business days after the Bank
receives said Request for Advance. If an Advance is still outstanding at the end
of a selected Interest Period, the Borrower shall deliver to the Bank an
Interest Rate Election Notice specifying the next successive Interest Period and
the Interest Rate Election to apply to the Loan Portion during such Interest
Period. No Request for Advance shall be honored if an Event of Default has
occurred. In the event the Borrower fails to deliver an Interest Rate Election
Notice at the times set forth above, interest shall accrue at the Floating Rate
until the Borrower again makes an Interest Rate Election. Once chosen, the
Interest Rate Election shall remain in effect until expiration of the selected
Interest Period.
The Bank is hereby authorized to record on its internal records the
amount and date of each Advance and the amount and date of any repayment. Absent
manifest error, the information so recorded by the Bank shall be prima facie
evidence of the existence and amounts of the Borrower's obligations recorded
therein. As the Borrower makes repayments of principal, it shall be permitted to
reborrow, up to the maximum amount available hereunder. No Request for Advance
shall be honored after the Maturity Date.
If an Event of Default has occurred and is continuing, the Borrower
shall not be permitted to make any Interest Rate Election unless and until the
Event of Default is cured, and interest shall accrue at the Default Rate until
the earlier of (i) the Event of Default is cured, or (ii) this Note has been
paid in full.
Interest and principal shall be paid as follows:
(a) Interest on the outstanding principal amount of each
Advance shall accrue from the date the Advance is made and shall be
payable monthly commencing June 1, 1997, and on the same day of each
successive month during the term hereof;
(b) The entire outstanding principal balance, plus accrued
interest, shall be paid in any event on the Maturity Date.
All payments made hereunder shall be applied first to the
payment of accrued interest to the date of payment, then to costs and expenses
of the Bank, if any, then to late charges, if any and then to principal.
In the event the Borrower makes a prepayment of all or any portion of
the principal of any Advance, a yield maintenance fee will be assessed as
follows:
<PAGE>
(a) If the prepayment is made while interest is accruing at
the Floating Rate on the portion being prepaid, there shall be no yield
maintenance fee;
(b) If the prepayment is made at the expiration of an Interest
Period for the portion being prepaid, there shall be no yield
maintenance fee;
(c) If the prepayment is made during any Interest Period in
which the Libor Fixed Rate is being charged, such prepayment shall be
subject to the Bank's determination, in its sole discretion, that
current market conditions can accommodate the prepayment request. If
the Bank so determines that the prepayment can be made, the Borrower
shall pay to the Bank a yield maintenance fee in an amount computed as
follows: The current rate for United States Treasury securities (Bills
on a discounted basis shall be converted to a bond equivalent) with a
maturity date closest to the last day of the applicable Interest Period
shall be subtracted from the "cost of funds" component of the Libor
Fixed Rate in effect at the time of prepayment. If the result is zero
or a negative number, there shall be no yield maintenance fee. If the
result is a positive number, then the resulting percentage shall be
multiplied by the amount being prepaid. The resulting amount will be
divided by 360 and multiplied by the number of days remaining in the
applicable Interest Period. Said amount shall be reduced to present
value calculated by using the above referenced United States Treasury
security rate and the number of days remaining in said Interest Period
as of the date of prepayment. The resulting amount shall be the yield
maintenance fee due to the Bank upon the prepayment.
If by reason of an Event of Default the Bank elects to declare
this Note to be immediately due and payable, then any yield maintenance
fee with respect to this Note shall become due and payable in the same
manner as though the Borrower has exercised such right of prepayment.
The Borrower acknowledges that this Note is secured, in part, and is
subject to the provisions of the Secured Revolving Line of Credit Agreement.
In the event that any payment shall become overdue for a period in
excess of ten (10) days, a "Late Charge" of five cents ($0.05) for each dollar
($1.00) so overdue will be charged by the Bank for the purpose of defraying the
expense incident to handling such delinquent payment.
Upon the occurrence of one or more events of default as provided below,
the entire disbursed and unpaid principal, and the interest on this Note shall,
upon written demand of the Bank, become immediately due and payable without
presentment or protest or other notice or demand, all of which are expressly
waived by the Borrower. Any one or more of the following shall constitute an
event of default ("Event of Default"):
(a) Upon the failure of the Borrower to pay any part of the
interest or principal on this Note when due and payable and continuance
of such failure for ten (10) days;
(b) Any event of default pursuant to the terms and conditions
of the Secured Revolving Line of Credit Agreement after the expiration
of any grace periods, if applicable;
<PAGE>
(c) Any event of default pursuant to the terms and conditions
of any other loan by the Bank to the Borrower after notice and the
expiration of any grace period, if applicable.
The powers and remedies given hereby and by the Secured Revolving Line
of Credit Agreement shall not be exclusive of any other powers and remedies
available to the Bank. No course of dealings between the Borrower and the Bank
and no delay on the part of the Bank in exercising any rights with respect to
any Event of Default shall operate as a waiver of any rights of the Bank.
Failure on the part of the Bank to exercise any rights with respect to any Event
of Default shall not operate as a waiver of any rights with respect to any other
Event of Default. The Borrower agrees to pay all costs and expenses incurred by
the Bank in enforcing this Note, including, without limitation, reasonable
attorneys' fees and legal expenses.
If any provisions of this Note or the application of it to any person
or circumstance, shall be invalid or unenforceable, the remainder of this Note
or the application of those provisions to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected and
every other provision of this Note shall be valid and fully enforceable.
This Note may not be waived, changed, modified or discharged orally,
but only by agreement in writing signed by the party against whom any
enforcement of any waiver, change, modification or discharge is sought.
This Note and all rights of the Bank hereunder, may be assigned by the
Bank without notice to the Borrower, but this Note may not be assigned by the
Borrower.
The purchaser, assignee, transferee, or pledgee of this Note shall be
entitled to all rights of the Bank hereunder as if said purchaser, assignee,
transferee, or pledgee were originally named in this Note.
IN WITNESS WHEREOF, the Borrower has duly executed this Note the day
and year first above written.
ENVIRONMENT-ONE CORPORATION
BY: /s/Stephen Ardia
----------------
Stephen Ardia, Chairman,
President and Chief
Executive Officer
By: /s/Philip W. Welsh
------------------
Philip W. Welsh,
Treasurer
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF )
On this 17th day of June, 1997, before me personally appeared Stephen
Ardia, to me known, who being by me duly sworn, did depose and say that he
resides at 3 West Lake Street, Skanaeteles, NY 13152, that he is the Chairman,
President and Chief Executive Officer of ENVIRONMENT-ONE CORPORATION, the
corporation described in and which executed the above instrument; and that he
signed his name thereto by order of the Board of Directors of said corporation.
/s/Kathleen M. Goble
--------------------
Kathleen M. Goble
Notary Public
STATE OF NEW YORK )
) ss.:
COUNTY OF )
On this 17th day of June, 1997, before me personally appeared Philip W.
Welsh, to me known, who being by me duly sworn, did depose and say that he
resides at 13 Nottingham Way So. Clifton Park, NY 12065, that he is the
Treasurer of ENVIRONMENT-ONE CORPORATION, the corporation described in and which
executed the above instrument; and that he signed his name thereto by order of
the Board of Directors of said corporation.
/s/Kathleen M. Goble
--------------------
Kathleen M. Goble
Notary Public
NOTE AND LOAN AND SECURITY
AGREEMENT MODIFICATION AGREEMENT NO. 6
This Agreement dated this 17th day of June, 1997, between
ENVIRONMENT-ONE CORPORATION, a New York corporation with its principal place of
business at P. O. Box 773, 2773 Balltown Road, Schenectady, New York 12301
(hereinafter called the "Borrower"), and FLEET BANK f/k/a FLEET BANK OF NEW
YORK, a bank organized and existing under the laws of the State of New York
having its principal banking house located at 69 State Street, Albany, New York
12207 (hereinafter called the "Lender" or the "Bank").
W I T N E S S E T H:
WHEREAS, the Borrower did execute and deliver to the Lender a Three
Million and no/100 Dollar ($3,000,000.00) Business Promissory Note dated
December 30, 1992 (hereinafter called the "Note"); and
WHEREAS, the Note was subject to the terms and conditions in a Loan and
Security Agreement also dated the 30th day of December, 1992 between the
Borrower and the Lender (hereinafter called the "Loan and Security Agreement");
and
WHEREAS, the Note and the Loan and Security Agreement were modified by
the parties pursuant to the terms of a Note and Loan and Security Agreement
Modification Agreement by and between the Borrower and the Lender dated the 23rd
day of March, 1994 (the "Modification Agreement"); and
WHEREAS, the Note and the Loan and Security Agreement were modified by
the parties pursuant to the terms of a Note and Loan and Security Agreement
Modification Agreement No. 2 by and between the Borrower and the Lender dated
the 20th day of March, 1995 (the "Modification Agreement No. 2"); and
WHEREAS, the Note and the Loan and Security Agreement were modified by
the parties pursuant to the terms of a Note and Loan and Security Agreement
Modification Agreement No. 3 by and between the Borrower and the Lender dated
the 30th day of March, 1995 (the "Modification Agreement No. 3"); and
WHEREAS, the Note and the Loan and Security Agreement were modified by
the parties pursuant to the terms of a Note and Loan and Security Agreement
Modification Agreement No. 4 by and between the Borrower and the Lender dated
the 18th day of October, 1995 (the "Modification Agreement No. 4"); and
WHEREAS, the Note and the Loan and Security Agreement were modified by
the parties pursuant to the terms of a Note and Loan and Security Agreement
Modification Agreement No. 5 by and between the Borrower and the Lender dated
the 17th day of June, 1996 (the "Modification Agreement No. 5"); and
WHEREAS, the Borrower and the Lender desire to further modify certain
terms of the Note and the Loan and Security Agreement, but only pursuant to the
terms and conditions of this Note and Loan and Security Agreement Modification
Agreement No. 6.
NOW, THEREFORE, in pursuance of said agreement and in consideration of
the mutual promises, covenants and agreements herein contained and other good
and valuable consideration, receipt of which is acknowledged by the parties
hereto, the Borrower and the Lender mutually agree and covenant as follows:
<PAGE>
1. The interest rate set forth in the first paragraph of the Note is
hereby modified as follows:
"The Borrower agrees to pay interest on the disbursed, unpaid
principal from the date hereof, computed on a 360 day basis, but
chargeable on actual days, at a per annum rate equal to .50% above the
"Fleet Bank Prime Rate", adjusted as of the date said "Fleet Bank Prime
Rate" is changed at the Lender. The "Fleet Bank Prime Rate" is that
rate announced from time to time by the Lender as a reference point for
determining interest rates charged on certain loans and is not
necessarily the lowest rate at which the Lender lends. At the option of
the Borrower, the Borrower may make a one time election to choose a
fixed rate of interest equal to the thirty (30) day LIBOR Rate, plus
two hundred basis points (the "LIBOR Fixed Rate") to apply to the
outstanding principal balance due under this Note for the balance of
the term hereof. The LIBOR Rate is a rate per annum equal to the rate
as determined on the basis of the offered rates for deposit in United
States dollars for a period of time closest to the maturity of the
thirty day interest period which appears on the Telerate page 3750 as
of 11:00 a.m. London time as of the day that is three Banking Days
preceding the first day of the period during which interest is to
accrue at the LIBOR Fixed Rate (hereinafter the "Interest Period"). If
such rate does not appear on the Telerate page, the rate for that date
will be determined on the basis of the offered rates for deposits in
United States dollars for a period of time comparable to the Interest
Period which are offered by four major banks in the London Interbank
Market at approximately 11:00 a.m. London time as of the day that is
three Banking Days preceding the first day of the Interest Period in
question. The principal London office of each of the four major London
banks will be requested to provide a quotation of its United States
dollar deposit offered rate. If at least two such quotations are
provided, the rate for that date will be the arithmetic mean of the
quotations. If fewer than two quotations are provided as requested, the
rate for that date will be determined on the basis of the rates quoted
for loans in United States dollars to leading European banks for a
period of time comparable to the Interest Period offered by major banks
in New York City at approximately 11:00 a.m. New York City time as of
the day that is three Banking Days preceding the first day of the
Interest Period in question. In the event the Bank is unable to obtain
any such quotation as provided above, it will be deemed that a LIBOR
Rate cannot be determined. In the event the Board of Governors of the
Federal Reserve System shall impose a reserve percentage with respect
to Eurodollar deposits of the Bank, then for any period during which
such reserve percentage shall apply, the LIBOR Rate shall be equal to
the amount determined above divided by an amount equal to up to one (1)
minus such reserve percentage. If the Borrower elects to have the
outstanding principal balance due under this Note bear interest at the
LIBOR Fixed Rate, three days prior to the end of each thirty (30) day
Interest Period, interest on this Note shall automatically be repriced
at the then thirty day LIBOR Fixed Rate, as such LIBOR Fixed Rate
changes every thirty days. At any time that (i) the interest rate on
the Note is the LIBOR Fixed Rate and (ii) the Bank in its sole
discretion should determine that current market conditions can
accommodate a prepayment request, the Borrower shall have the right at
any time and from time to time to prepay the Note, in whole (but not in
part), and the Borrower shall pay to the Bank a yield maintenance fee
in an amount computed as follows:
<PAGE>
The current rate for United States Treasury securities (Bills on a
discounted basis shall be converted to a bond equivalent) with a
maturity date closest to the last day of the Interest Period as to
which the prepayment is made shall be subtracted from the "cost of
funds" component of the LIBOR Fixed Rate in effect at the time of
prepayment. If the result is zero or a negative number, there shall be
no yield maintenance fee. If the result is a positive number, then the
resulting percentage shall be multiplied by the amount of the principal
balance being prepaid. The resulting amount will be divided by three
hundred sixty (360) and multiplied by the number of days remaining in
the Interest Period as to which the prepayment is made. Said amount
shall be reduced to present value calculated by using the above
referenced United States Treasury security rate and the number of days
remaining in said Interest Period as to which the prepayment is made.
The resulting amount shall be the yield maintenance fee due to the Bank
upon the prepayment of the Loan. If by reason of an Event of Default
the Bank elects to declare the Note to be immediately due and payable,
than any yield maintenance fee with respect to the Note shall become
due and payable in the same manner as though the Borrower had
voluntarily exercised such right of prepayment. If an event of default
should occur under this Note and be continuing, interest shall accrue
hereunder at the Fleet Bank Prime Rate plus two and one-half of one
percent until the earlier of (i) the event of default is cured, or (ii)
this Note has been paid in full."
2. The minimum "current ratio" financial covenant set forth in Schedule
A (1) to the Loan and Security Agreement, as previously modified, is hereby
modified to read in its entirety as follows:
"(1) The Borrower must maintain a minimum "current ratio" of 1.60 to
1.00. For the purposes of this subparagraph, minimum current ratio
shall mean the ratio of the Borrower's current assets to the Borrower's
current liabilities as would be determined from the fiscal quarter and
fiscal year end financial statements of the Borrower referenced in
Schedule B hereof."
3. The minimum "working capital" financial covenant set forth in
Schedule A (2) to the Loan and Security Agreement, as previously modified, is
hereby modified to read in its entirety as follows:
"During the term of the Loan, the Borrower must maintain a minimum
working capital of at least Two Million Five Hundred Thousand and
no/100 Dollars ($2,500,000.00). For the purposes of this subparagraph,
working capital shall be defined as the amount by which the current
assets of the Borrower exceed the current liabilities of the Borrower,
as would be determined from the fiscal year end financial statements of
the Borrower referenced in Schedule B hereof."
4. The minimum "net worth" (a/k/a Total Shareholders' Equity) financial
covenant set forth in Schedule A (3) to the Loan and Security Agreement, as
previously modified, is hereby modified to read in its entirety as follows:
"During the term of the Loan, the Borrower must maintain a minimum net
worth (a/k/a Total Shareholders' Equity) of at least Five Million and
no/100 Dollars ($5,000,000.00), as would be shown on the quarterly and
fiscal year end financial statements of the Borrower referenced in
Schedule B hereof. Beginning December 31, 1997 and on each of the
Borrower's fiscal year ends thereafter during the term of this
<PAGE>
Agreement, the Borrower's aforementioned minimum net worth (a/k/a Total
Shareholders' Equity) requirement will increase by Five Hundred
Thousand and no/100 Dollars ($500,000.00) over the previous fiscal
year's net worth. For the purposes of this subparagraph, net worth
(a/k/a Total Shareholders' Equity) shall mean, as of any date of
determination thereof, the sum of the following for the Borrower as
would be determined (without duplication) on a balance sheet of the
Borrower prepared in accordance with GAAP:
(i) the amount of common stock, plus
(ii) the amount of additional paid-in capital, plus
(iii) the amount of surplus and retained earnings or, in the
case of a surplus or retained earnings deficit, minus the amount of such
deficit, less
(iv) the cost of common shares in Treasury."
5. The minimum "debt service coverage ratio" financial covenant set
forth in Schedule A (5) to the Loan and Security Agreement, as previously
modified, is hereby modified to read in its entirety as follows:
"During the term of the Loan, the Borrower must maintain a minimum debt
service coverage ratio of 1.75 to 1.00. Debt service coverage ratio
shall be defined as the sum of the Borrower's net income, plus
depreciation, plus amortization and interest less dividends divided by
the sum of the Borrower's current maturities of long term debt plus
interest expense, as would be determined from the fiscal year end
financial statements of the Borrower referenced in Schedule B hereof."
6. The requirement that the Borrower submit to the Bank quarterly
backlog reports is hereby eliminated.
7. Except as expressly modified hereunder, all the terms and conditions
of the Note, as previously modified pursuant to the terms of the Modification
Agreement, the Modification Agreement No. 2, the Modification Agreement No. 3,
the Modification Agreement No. 4 and the Modification Agreement No. 5, remain in
full force and effect, with the exception of the modifications set forth in
paragraph 1 above. All the terms and conditions of the Loan and Security
Agreement, as previously modified pursuant to the terms of the Modification
Agreement, the Modification Agreement No. 2, the Modification Agreement No. 3,
the Modification Agreement No. 4 and the Modification Agreement No. 5 and as
modified pursuant to the terms of paragraphs 2 through 6 above shall continue to
apply to the Note as further modified hereunder.
8. The Borrower hereby warrants and covenants to the Lender that as of
the date of this Agreement, there are no disputes, offsets, claims or
counterclaims of any kind or nature whatsoever under the Note, the Loan and
Security Agreement, the Modification Agreement, the Modification Agreement No.
2, the Modification Agreement No. 3, the Modification Agreement No. 4, the
Modification Agreement No. 5 or any of the documents executed in connection
therewith or herewith or the obligations represented or evidenced thereby or
hereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Note
and Loan and Security Agreement Modification Agreement No. 6 as of the 17th day
of June, 1997.
FLEET BANK ENVIRONMENT-ONE CORPORATION
By:/s/Kevin P. Harrigan By: /s/Stephen V. Ardia
-------------------- -------------------
Kevin P. Harrigan, Name: Stephen V. Ardia
Vice President Title: Chairman, President & CEO
By: /s/Philip W. Welsh
------------------
Name: Philip W. Welsh
Title: Treasurer
STATE OF NEW YORK )
) ss.:
COUNTY OF )
On this 17th day of June, 1997, before me personally appeared
Stephen V . Ardia, to me known, who being by me duly sworn, did depose and say
that he resides at e West Lake Street, Skanaeteles, NY 13152 , that he is the
Chairman, President & CEO of ENVIRONMENT-ONE CORPORATION, the corporation
described in and which executed the above instrument; and that he signed his
name thereto by order of the Board of Directors of said corporation.
/s/Kathleen M. Goble
--------------------
Kathleen M. Goble
Notary Public
STATE OF NEW YORK )
) ss.:
COUNTY OF )
On this 17th day of June, 1997, before me personally appeared
Philip W. Welsh, to me known, who being by me duly sworn, did depose and say
that he resides at 13 Nottingham Way So., Clifton Park, NY 12065 that he is the
Treasurer of ENVIRONMENT-ONE CORPORATION, the corporation described in and which
executed the above instrument; and that he signed his name thereto by order of
the Board of Directors of said corporation.
/s/Kathleen M. Goble
--------------------
Kathleen M. Goble
Notary Public
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF ALBANY )
On this 21st day of May, 1997, before me personally appeared
Kevin P. Harrigan, to me known, who being by me duly sworn, did depose and say
that he resides at 201 Autumn Run, Schenectady, New York 12309, that he is a
Vice President of FLEET BANK, the corporation described in and which executed
the above instrument; and that he signed his name thereto by order of the Board
of Directors of said corporation.
/s/Oriana J. Farella
--------------------
Oriana J. Farella
Notary Public
Exhibit 23.1
Consent of Independent Auditors
The Shareholders and Board of Directors
Environment One Corporation:
We consent to the incorporation by reference in the registration statements on
Form S-8 (Nos. 33-15221, 33-15223, 33-15225, 33-15227, 33-15229 and 333-43093)
of Environment One Corporation of our report dated February 6, 1998, except as
to note 11, which is as of February 24, 1998, relating to the consolidated
balance sheet of Environment One Corporation and subsidiary as of December 31,
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for the years ended December 31, 1997 and 1996, which report
appears in the December 31, 1997 annual report on Form 10-KSB of Environment One
Corporation.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Albany, New York
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,507,866
<SECURITIES> 0
<RECEIVABLES> 5,333,840
<ALLOWANCES> 106,981
<INVENTORY> 2,268,452
<CURRENT-ASSETS> 10,405,014
<PP&E> 8,125,847
<DEPRECIATION> 4,868,005
<TOTAL-ASSETS> 14,092,238
<CURRENT-LIABILITIES> 4,048,918
<BONDS> 0
0
0
<COMMON> 425,772
<OTHER-SE> 7,432,965
<TOTAL-LIABILITY-AND-EQUITY> 14,092,238
<SALES> 24,330,721
<TOTAL-REVENUES> 24,330,721
<CGS> 15,048,746
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<INTEREST-EXPENSE> 157,220
<INCOME-PRETAX> 3,163,945
<INCOME-TAX> 1,203,900
<INCOME-CONTINUING> 1,960,045
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<EXTRAORDINARY> 0
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<NET-INCOME> 1,960,045
<EPS-PRIMARY> .46
<EPS-DILUTED> .44
</TABLE>
