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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-14992
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(exact name of registrant as specified in its charter)
DELAWARE 38-2294876
--------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3501 JAMBOREE ROAD, SUITE 550, NEWPORT BEACH, CA 92660
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(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 737-7900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
On July 31, 1996, the registrant had 5,932,664 shares of common stock
outstanding.
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QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1996
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1: Financial Statements
Consolidated Balance Sheets as of June 30,1996
(unaudited) and September 30, 1995 3-4
Consolidated Statements of Operations (unaudited)
for the three and nine months ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended June 30, 1996 and 1995 6-7
Notes to Consolidated Financial Statements (unaudited) 8-9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 18-19
Item 3: Defaults on Senior Securities 21
Item 5: Other Information 21
Item 6: Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit 10:26 First Amendment to the Forbearance Agreement
Exhibit 10:27 Second Amendment to the Forbearance Agreement
Exhibit 10:28 Second Amended and Restated Note Purchase Agreement
Exhibit 11 Computation of earnings per share, for the
three and nine months ended June 30, 1996 (unaudited) 24
Exhibit 27 Requirements for the format and input
of financial data schedules (EDGAR version only)
</TABLE>
2
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PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 625 $ 510
Accounts receivable, less allowance for doubtful
accounts of $956 and $1,502 (Note 2) 39,639 53,379
Costs and estimated earnings on long-term
contracts in excess of billings 901 2,287
Prepaid expenses and other current assets 1,963 2,676
------- --------
Total current assets 43,128 58,852
Property and equipment:
Equipment 21,456 21,949
Land and buildings 3,962 4,007
Leasehold improvements 1,107 1,044
------- --------
Total property and equipment, at cost 26,525 27,000
Less accumulated depreciation and amortization 10,918 10,062
------- --------
Property and equipment, net (Note 2) 15,607 16,938
Other assets:
Intangible assets, net of accumulated amortization
of $1,586 and $712, respectively 15,464 16,338
Goodwill, net of accumulated amortization of $621
and $322, respectively 15,046 15,345
Investment in unconsolidated affiliate 2,002 1,502
Other assets 3,958 5,033
------- --------
TOTAL ASSETS $95,205 $114,008
======= ========
</TABLE>
See accompanying notes to consolidated financial statements
3
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and subcontracts payable $17,432 $ 24,147
Accrued expenses and other liabilities:
Compensation and related fringes 4,320 4,973
Severance and office closures 539 1,618
Other 6,923 9,343
Billings on long-term contracts in excess of
costs and estimated earnings 207 1,251
Current maturities of long-term debt and
short-term borrowings 2,744 2,110
------- --------
Total current liabilities 32,165 43,442
Long-term debt 23,812 27,403
Other long-term liabilities 3,810 6,017
Convertible Senior Subordinated Note, 10% maturing
in 2004, convertible into 4,267,778 and 3,048,780
common shares, respectively at $3.28 per share 13,998 10,000
Commitments and contingencies (Note 2)
Redeemable Preferred Stock, $0.01 par value; 78,000
shares authorized; 74,438 and 76,218
shares issued, respectively; 5% cumulative
dividend; $100 redemption value 6,804 6,857
Junior Convertible Preferred Stock; $0.01 par value;
470,000 shares authorized; none issued 0 0
Preference Stock; $0.01 par value; 1,000,000 shares
authorized; none issued 0 0
Preferred stock $0.01 par value; 550,500 shares
authorized; none issued 0 0
Common stockholders' equity:
Common stock; $0.01 par value; 20,000,000 shares
authorized; 5,901,925 and 5,850,015 shares
issued and outstanding, respectively 59 58
Additional paid in capital 17,316 17,149
(Accumulated deficit) retained earnings (2,759) 3,082
------- --------
Total common stockholders' equity 14,616 20,289
------- --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS EQUITY $95,205 $114,008
======= ========
</TABLE>
See accompanying notes to consolidated financial statements
4
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
unaudited
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
------------------ --------------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $38,011 $43,906 $119,905 $117,861
Cost of revenues 34,457 38,014 107,867 102,397
------- ------- -------- --------
Gross profit 3,554 5,892 12,038 15,464
Selling, general and administrative expenses 3,715 3,844 11,106 10,448
Amortization of intangible assets, goodwill and
deferred financing fees 490 371 1,467 1,007
Special items - - 593 -
------- ------- -------- --------
(Loss) income from operations (651) 1,677 (1,128) 4,009
Interest expense (1,103) (918) (3,286) (2,210)
-------- ------- -------- --------
(Loss) income before share in earnings of
unconsolidated affiliate, income taxes and
extraordinary charge (1,754) 759 (4,414) 1,799
Share in (loss) earnings of unconsolidated affiliate - (111) 500 165
------- ------- -------- --------
(Loss) income before income taxes and
extraordinary charge (1,754) 648 (3,914) 1,964
Income tax expense (30) (182) (80) (405)
------- ------- -------- --------
(Loss) income before extraordinary charge (1,784) 466 (3,994) 1,559
Extraordinary charge on debt refinancing - - (1,395) -
------- ------- -------- --------
Net (loss) income (1,784) 466 (5,389) 1,559
Dividends and accretion on Redeemable Preferred Stock (182) (128) (452) (389)
------- ------- -------- --------
Net (loss) income applicable to common stock $(1,966) $ 338 $ (5,841) $ 1,170
======= ======= ======== ========
Weighted average number of common and common
equivalent shares outstanding 5,911 5,991 5,890 5,975
======= ======= ======== ========
Income (loss) per common and common equivalent share:
(Loss) income before extraordinary charge $ (0.30) $ 0.08 $ (0.68) $ 0.26
Extraordinary charge - - (0.23) -
------- ------- -------- --------
Net (loss) income $ (0.30) $ 0.08 $ (0.91) $ 0.26
======= ======= ======== ========
Net (loss) income applicable to common stock $ (0.33) $ 0.06 $ (0.99) $ 0.20
======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
unaudited
<TABLE>
<CAPTION>
Nine months ended
June 30,
--------------------
1996 1995
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
- --------------------
(Loss) income before extraordinary charge $(3,994) $ 1,559
Adjustments to reconcile net (loss) income to cash provided
by (used in) operating activities:
Depreciation and amortization 3,443 3,299
(Gain) loss on disposal of equipment (260) 168
Share in earnings of affiliate (500) (165)
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable 13,740 (4,357)
Costs and estimated earnings on long-term
contracts in excess of billings 1,386 2,283
Prepaid expenses and other current assets 635 3,102
Other assets 821 (762)
Accounts and subcontracts payable (6,715) 22
Accrued expenses and other liabilities (4,111) (9,034)
Billings on long-term contracts in excess of costs
and estimated earnings (1,044) (1,909)
Other long-term liabilities (2,207) (74)
------- -------
Net cash provided by (used in) operating activities $ 1,194 $(5,868)
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
6
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
unaudited
<TABLE>
<CAPTION>
Nine months ended
June 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
INVESTING ACTIVITIES
Capital expenditures $ (1,109) $ (722)
Advances from affiliates - 1,415
Proceeds from sale of fixed assets 725 -
Purchase of RESNA - (1,500)
Purchase of Riedel Environmental Services (net of cash
acquired) - (18,336)
-------- --------
Net cash used in investing activities (384) (19,143)
-------- --------
FINANCING ACTIVITIES
Proceeds from revolving line of credit 20,649 5,053
Retirement of revolving line of credit (21,537) -
(Repayments) borrowings on revolving line of credit, net (1,171) 6,881
Proceeds from term loan 6,500 2,000
Retirement of term loan (3,400) -
Repayments on term loan (1,578) (605)
Proceeds from issuance of Convertible Senior Subordinated Note - 10,000
Proceeds from issuance of Senior Note - 2,000
Borrowings from conversion of Senior Note 1,998 -
Payment of financing fees (1,096) -
Payment of early debt extinguishment penalty (287) -
Repayments of debt (420) (1,651)
Proceeds from exercise of stock options 14 -
Repurchase of Redeemable Preferred Stock (179) (156)
Dividends paid on Redeemable Preferred Stock (188) (191)
-------- --------
Net cash (used in) provided by financing activities (695) 23,331
-------- --------
Net increase (decrease) in cash 115 (1,680)
Cash at beginning of period 510 2,793
-------- --------
Cash at end of period $ 625 $ 1,113
======== ========
Supplemental Cash Flow Information:
Issuance of Stock for Bonus Compensation $ 47 $ -
Issuance of Stock for Defined Contribution Plan $ 107 $ -
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
7
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Smith Environmental Technologies Corporation (the Company),
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes the disclosures made herein are adequate to
make the information presented not misleading. The financial statements
reflect all material adjustments which are all of a normal, recurring nature
and, in the opinion of management, necessary for a fair presentation. These
financial statements should be read in conjunction with the Company's
Transition Report on Form 10-K for the seven month transition period ended
September 30, 1995. The results of operations for the three and nine months
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 1996.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Company is currently a party to various legal actions arising in the
normal course of its business, some of which involve claims and substantial
sums. Such legal actions were previously discussed in the Company's Transition
Report on Form 10-K for the seven month transition period ended September 30,
1995.
On June 27, 1996, a Construction Industry Arbitration Tribunal formed
under the rules of the American Arbitration Association issued, with one
dissenting opinion, a binding award of $4.5 million in favor of NL Industries,
et al (the "PRP Group") against the Company. The award and an earlier decision
of the Circuit Court of the State of Oregon compelling arbitration are being
contested by the Company. The Company has also filed notice of a claim
relating to this award with its professional liability, general liability, and
property insurance carriers. The Company's liability coverage includes a
$500,000 self-insured retention requirement which has been met by the Company
through the cost of investigation and defense related to this matter.
The claims arise from the operation of a battery component recycling and
processing plant designed and operated by the Company from May 1992 to April
1994 at the Gould Superfund Site located near Portland, Oregon. The plant and
equipment, currently at the project site, was awarded to the Company in the
arbitration. The market value of the plant and equipment is unknown at this
time. The Company has approximately $2.5 million of cost for plant and
equipment and $1.5 million of accounts receivable relating to the project
recorded in the Company's financial statements.
8
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SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company is unable to predict the outcome of any legal action or
appeal of the arbitration award or the results of its claims against its
insurance carriers. The Company believes that it has substantial
possibilities to either overturn the arbitration award and post any required
appeal bond, realize coverage by its insurance carriers for the recovery of any
lost amounts, or reach a satisfactory resolution to the dispute with the PRP
Group. No liability or asset reserve has been established in the third quarter
financial statements as the Company does not believe the loss is probable
and/or reasonably estimable at this time. The Company is currently unable to
pay the arbitration award, and the failure to overturn the award, realize
recovery from its insurance carriers of any lost amount, or achieve an
acceptable settlement with the PRP Group will have a material adverse impact on
the financial condition of the Company.
An agreement in principle has been reached by the plaintiff and the
professional liability carrier of one of the Company's subsidiaries to resolve
all claims in Transcontinental Realty Investors, Inc. vs. Mt. Laurel
Associates, BCM Engineers Inc., et al. The $8.0 million claim by
Transcontinental Realty Investors, Inc. was settled for $1.5 million. The
insurance carrier will pay the agreed settlement directly to the plaintiff, and
the Company will be required to reimburse the insurance carrier the unexpended
portion of a self-insured retention of approximately $210,000. Final
settlement documents and agreement between BCM and its carrier on the schedule
of reimbursement of the Company's portion of settlement proceeds are currently
being negotiated.
The Company is a party to litigation described in its Transition Report
on Form 10-K for the seven month transition period ended September 30, 1995,
and other claims and litigation related to its business. The Company believes
that appropriate reserves have been established with respect to such litigation
and that other litigation will not have a material adverse effect on the
current financial condition or results of operations of the Company.
NOTE 3 - INDUSTRY SEGMENT
The Company operates within a single industry segment. Revenues
generated outside the United States were approximately $1.9 million and $5.8
million for the three and nine months ended June 30, 1996 respectively.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages which certain items from the consolidated statements of operations
bear to the revenues of the Company. This table and the Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the consolidated financial statements and the notes
to the consolidated financial statements of the Company included herein and the
Company's Transition Report on Form 10-K for the seven month transition period
ended September 30, 1995.
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues 90.6 86.6 89.9 86.9
----- ----- ----- -----
Gross profit (loss) 9.4 13.4 10.1 13.1
Selling, general and administrative expenses 9.8 8.8 9.3 8.9
Amortization of intangible assets, goodwill and
deferred financing fees 1.3 0.8 1.2 0.8
Special items - - 0.5 -
----- ----- ----- -----
(Loss) income from operations (1.7) 3.8 (0.9) 3.4
Interest expense (2.9) (2.1) (2.7) (1.9)
----- ----- ----- -----
(Loss) income before share in earnings of
unconsolidated affiliate, income taxes and
extraordinary charge (4.6) 1.7 (3.6) 1.5
Share in (losses) earnings of unconsolidated affiliate - (0.3) 0.4 0.1
----- ----- ----- -----
(Loss) income before income taxes and
extraordinary charge (4.6) 1.4 (3.2) 1.6
Income tax expense (0.1) (0.4) (0.1) (0.3)
----- ----- ----- -----
(Loss) income before extraordinary charge (4.7) 1.0 (3.3) 1.3
Extraordinary charge on debt refinancing - - (1.2) -
----- ----- ----- -----
Net (loss) income (4.7)% 1.0 % (4.5)% 1.3%
===== ===== ===== =====
</TABLE>
10
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GENERAL
The Company provides a broad range of comprehensive environmental
consulting, engineering, remediation and construction services principally to
clients throughout the United States including various federal, state and local
government agencies with sites contaminated with hazardous materials. The
timing of the Company's revenues is primarily dependent on its backlog,
contract awards and the performance requirements of each contract. The
Company's revenues are also affected by the timing of its clients' activities.
Due to these changes in demand, the Company's quarterly and annual revenues
fluctuate. Accordingly, quarterly or other interim results should not be
considered indicative of results to be expected for any other quarter or full
fiscal year.
The Company's consolidated financial statements at June 30, 1996 and for
the three and nine months then ended include the results of operations for BCM
Engineers Inc. ("BCM"), Riedel Environmental Services, Inc. ("RES") and RESNA
Industries, Inc. ("RESNA"). The consolidated financial statements for the same
period in 1995 only include the results of RES from November 21, 1994 and RESNA
from January 1, 1995.
Certain amounts from prior periods have been reclassified to conform to
current period presentation.
COMPARISON OF QUARTER ENDED JUNE 30, 1996 AND 1995
Revenues for the quarter ended June 30, 1996 were $38.0 million compared
with $43.9 million for the same quarter in 1995, a decrease of $5.9 million or
13.4 percent. Revenues from construction services contracts were negatively
impacted by adjustments of approximately $1.0 million due to the cancellation
of a major construction contract during the quarter and an adjustment resulting
from a contract settlement. Remediation and engineering services revenues
decreased due to lower commercial revenues, partially offset by higher
government revenues.
Gross profit for the quarter ended June 30, 1996 was $3.6 million or 9.4
percent of revenues compared with $5.9 million or 13.4 percent of revenues for
the quarter ended June 30, 1995, a decrease of approximately $2.3 million. The
decrease in gross profit is due primarily to the aforementioned contract
settlement and contract cancellation and to a lesser extent, lower engineering
services margins. Margins on engineering services revenues decreased compared
to the prior period due to a higher portion of engineering revenues during the
period from government contracts. Revenues generated from government contracts
traditionally result in lower gross profit margins.
Selling, general and administrative expenses (SG&A) for the quarter ended
June 30, 1996 were $3.7 million and were slightly lower when compared with $3.8
million for the same quarter last year. As a percentage of revenues for the
quarter ended June 30, 1996, however, SG&A was 9.8 percent compared with 8.8
percent for the same quarter in 1995. The increase in percentage is primarily
attributable to lower revenues and increased marketing and sales costs which
were partially offset by reductions in administrative costs derived from
consolidating the acquired companies.
Amortization of intangible assets, goodwill and deferred financing fees
for the quarter ended June 30, 1996 was $490,000 compared with $371,000 for the
same period in 1995. The increase is primarily a result of the finalization in
September 1995 of the allocation of the purchase prices for the acquired
subsidiaries.
11
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Interest expense for the quarter ended June 30, 1996 was $1.1 million
compared with $918,000 for the same quarter in 1995. The increase in interest
expense is primarily due to increased bank borrowings and higher interest
rates.
The Company's share of losses from an unconsolidated affiliate in the
quarter ended June 30, 1995 was $111,000, and was the result of overhead costs
associated with the affiliate's operations which were eliminated in the current
fiscal year.
In the quarter ended June 30, 1996, the Company provided for income taxes
of $30,000 which represents a provision for state income taxes. The Company
has not provided for federal taxes as a result of the current quarter and year
to date operating loss. The Company has significant net operating loss
carryforwards to offset future federal tax liabilities. A valuation allowance
has been recorded to reduce the deferred tax asset related to these
carryforwards and other deferred tax assets to zero since the realization of
such benefit is not assured. Due to a greater than 50 percent change in
ownership of the Company in December 1993, use of carryforwards to reduce
future taxable income will be limited to approximately $900,000 annually.
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues for the nine months ended June 30, 1996 were $119.9 million
compared with $117.9 million for the same period in 1995, an increase of $2.0
million or 1.7 percent. The increase in revenues was primarily attributable to
the acquisition of RES in November 1994. Revenues for the nine months ended
June 30, 1996, exclusive of revenues attributable to RES, were approximately
$69.6 million compared with $77.8 for the same period in 1995, a 10.5 percent
decrease. Lower revenues, exclusive of RES, were due to various factors
including construction services contract adjustment, lower commercial revenues
in engineering services and severe winter weather conditions primarily in the
Company's second quarter which impeded contract work.
Gross profit for the nine months ended June 30, 1996 was $12.0 million or
10.1 percent of revenues compared with $15.5 million or 13.1 percent of
revenues for the nine months ended June 30, 1995, a decrease of approximately
$3.5 million. Remediation services gross profit decrease of approximately
$1.0 million resulted from a combination of lower revenues and profits due
primarily to the suspension of funding for the EPA's Emergency Response
Contract Services, ("ERCS") during the Federal Government's shutdown and the
fixed cost of government compliance associated with ERCS contained within the
cost of revenues. Gross profit, exclusive of operating results attributable to
RES, was approximately $10.3 million during the nine months ended June 30,
1996, compared with $12.6 million for the same period in 1995, a decrease of
approximately $2.3 million. Engineering services revenues have decreased from
the prior period primarily due to lower commercial revenues offset slightly
with higher government revenues. Revenues generated from government contracts
traditionally result in lower gross profit margins.
Selling, general and administrative expenses (SG&A) for the nine months
ended June 30, 1996 were $11.1 million compared with $10.4 million for the same
period last year, an increase of approximately $700,000. SG&A as a percentage
of revenues for the nine months ended June 30, 1996 was 9.3 percent compared
with 8.9 percent for the same period in 1995. The increase in percentage is
12
<PAGE> 13
primarily attributable to lower revenues and increased marketing and sales
costs partly offset by reductions in administrative costs derived from
consolidating the acquired companies.
Amortization of intangible assets, goodwill and deferred financing fees
for the nine months ended June 30, 1996 was $1.5 million compared with $1.0
million in the same period in 1995. The increase is primarily a result of the
finalization in September 1995 of the allocation of the purchase prices for
the acquired subsidiaries.
Special items were $593,000 for the nine months ended June 30, 1996 and
included severance and relocation costs in connection with additional office
closings and consolidations.
Interest expense for the nine months ended June 30, 1996 was $3.3 million
compared with $2.2 million for the same period in 1995. The increase in
interest expense is primarily due to increased bank borrowings and higher
interest rates.
The Company's share of earnings from an unconsolidated affiliate for the
nine months ended June 30, 1996 was $500,000 compared with $165,000 for the
same period in 1995 and was a result of the favorable resolution of a contract
dispute.
In the nine months ended June 30, 1996, the Company provided for income
taxes of $80,000 which represents a provision for state income taxes. The
Company has not provided for federal taxes as a result of the current quarter
and year to date operating loss. The Company has significant net operating
loss carryforwards to offset future federal tax liabilities. A valuation
allowance has been recorded to reduce the deferred tax asset related to these
carryforwards and other deferred tax assets to zero since the realization of
such benefit is not assured. Due to a greater than 50 percent change in
ownership or the Company in December, 1993, use of carryforwards to reduce
future taxable income will be limited to approximately $900,000 annually.
The Company recorded an extraordinary charge of approximately $1.4
million during the nine months ended June 30, 1996 as a result of refinancing
its senior credit facility. The charge includes unamortized financing fees and
a prepayment penalty in connection with the refinancing.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company is engaged in a business which at times requires substantial
working capital for remediation and engineering services contracts that require
investments of personnel and equipment by the Company before the Company is
permitted to invoice the client. In addition, many of the Company's contracts
provide for progress or monthly invoices as certain benchmarks of performance
are reached or costs have been incurred. The Company's working capital and
cash have been significantly impacted by the amount of debt incurred in
connection with the acquisition of BCM, RES and the assets of RESNA and by
costs associated with consolidating the acquired companies' operations into
those of the Company. As a result of these factors and current market
conditions for the environmental industry which reflects lower government
spending and lessened regulatory enforcement, the Company is experiencing
liquidity problems.
On October 18, 1995, the Company executed a three year $35 million credit
facility with Chemical Bank and BTM Capital Corporation (the "Senior Lenders").
The facility (the "Chemical Facility"), which replaced the LaSalle Loan
Agreement (the "LaSalle Loan Agreement") consists of a $6.5 million term loan
and a $28.5 million revolving line of credit (the "Revolver"). The calculation
of the borrowing base for the Chemical Facility is based on eligible accounts
receivable, as defined in the credit agreement. The Chemical Facility includes
a $5 million unbilled account subline providing that unbilled receivables,
subject to limitations, are included in the calculation of the borrowing base.
Changes in the borrowing base occur as a result of the magnitude and timing of
the Company's billings for services.
The principal sources of liquidity for the Company's business and
operating needs are internally generated funds from operations and available
revolving credit borrowings under the Chemical Facility. For the nine months
ended June 30, 1996, operating activities provided net cash of approximately
$1.2 million, primarily due to accelerated client billings and increased
collections of accounts receivable. Investing activities used approximately
$384,000 in net cash principally for capital expenditures. Net cash of
$695,000 used in financing activities resulted primarily from repayments on the
Chemical Facility and financing and prepayment fees. Cash generated from the
collection of accounts receivable is used to repay the Revolver and results in
an increase of available borrowings under the Revolver. The Company was able
to reduce cash used in financing activities by the conversion of certain
interest payments to long term debt and increased borrowings (see discussion of
Amended Agreements below).
As of June 30, 1996, long term debt, including current maturities
of $2.7 million, was approximately $40.5 million, the components of which were
borrowings of $20.0 million under the Revolver and $5.0 million of the term
loan under the Chemical Facility, $14.0 million of Convertible Subordinated
Notes and $1.5 million of other notes and capital leases. The available
borrowing capacity as of July 31, 1996 under the Chemical Facility was
approximately $240,000.
The Company and its Senior Lenders executed the Third Amendment, Waiver
and Consent (the "Third Amendment") effective as of May 15, 1996 to the
existing Loan and Security Agreement dated October 18, 1995 between the Company
and its Senior Lenders (referred to as the "Loan Agreement"). The Third
Amendment waived and consented to certain conditions and actions related to (1)
the BCM Engineers Employee Stock Ownership plan and (2) financial covenant
violations under the Loan Agreement. The effective period of the amendment was
from March 31, 1996 through June 29, 1996. However, the waivers, consents and
amendments provided in this Third Amendment were contingent upon certain
conditions precedent which the Company has not met. Subsequently, the Company
and its Senior Lenders executed a Forbearance Agreement for the period of June
7, 1996 through June 28, 1996 in connection with an overdraft condition which
resulted from the establishment by the Senior
14
<PAGE> 15
Lenders of a reserve against the Company's borrowing base. The requirement for
the reserve, which reduced the Company's available borrowing base and caused
the overdraft condition, resulted from the cancellation by a client of the
Company of a major contract and the Senior Lenders' concerns regarding the
collectibility of the accounts receivable related to that contract. The
Lenders permitted the overdraft condition to continue with scheduled reductions
through the forbearance period. The issues relating to the contract and the
associated accounts receivable have subsequently been resolved and the reserve
requirement has been terminated.
The Company executed an amendment to the Forbearance Agreement as of June
28, 1996 extending the forbearance period through August 14, 1996 permitting
the Company to continue an overdraft condition of $500,000, reducing to
$250,000 on August 9th and to zero on August 14, 1996. On August 13, 1996, the
Senior Lenders and the Company executed a Second Amendment extending the
forbearance period without an overdraft condition, through September 6, 1996.
The Company and its Senior Lenders are currently negotiating additional
amendments to the Loan Agreement which would bring the Company in compliance
with renegotiated financial covenants.
The Company also executed an Amended and Restated Note Purchase Agreement
(the "Amended Agreement") effective as of May 15, 1996 with the holders of
notes payable to 399 Venture Partners Inc., an affiliate of Citicorp Venture
Capital, Ltd. and to various individual distributees of promissory notes
formerly held by 399 Venture Partners, Inc. (the "Holders"), in the aggregate
principal amount of $2.0 million in Convertible Subordinated Notes and $10.0
million in Senior Subordinated Notes (collectively referred to as the
"Notes"). The Holders previously agreed to defer the payment of interest due
May 21, 1995 and November 21, 1996, and have also agreed to defer the payment
of interest due May 21, 1996 and the interest which will accrue and become due
on November 21, 1996 and May 21, 1997. The Amended Agreement provides for the
issuance of additional notes (maturing on November 21, 2004) in lieu of all
such deferred interest payments. The effect as of June 30, 1996 of this
deferral was to reclassify approximately $1.8 million of accrued interest
expenses to long-term debt under the Notes, which is reflected in the Company's
financial statements. All of the interest converted to principal will be
subject to conversion rights on the same terms and conditions as the original
principal amount of the Notes.
During the nine months ended June 30, 1996, management of the Company
continued its focus on consolidating the acquired companies by resolving
operational issues, taking actions to increase the efficiency of the Company's
operations and improving the management of its working capital by implementing
programs to accelerate the collection of its accounts receivable. During the
fiscal year, the Company was able to reduce its accounts receivable by
approximately $13.7 million, and accounts payable and other liabilities by
approximately $10.8 million. Nevertheless, the Company continues to experience
a liquidity problem.
The arbitration award in favor of the PRP Group discussed in Note 2,
Commitments and Contingencies and in Part II, Item I, Legal Proceedings,
represents a significant matter potentially affecting the liquidity of the
Company. In the event the Company fails to reach a satisfactory resolution to
the arbitration award and improve its operating results and generate or obtain
additional working capital, which it continues to seek, its liquidity and
financial position will be materially adversely affected.
15
<PAGE> 16
BACKLOG
As of June 30, 1996, the Company had a contract backlog of orders of
approximately $104 million compared with approximately $125 million and $111
million at September 30, 1995 and June 30, 1995, respectively. The value of
unfunded or indefinite delivery order contracts ("IDO") was approximately $141
million as of June 30, 1996 compared with approximately $141 million and $159
million at September 30, 1995 and June 30, 1995, respectively. The combined
contract backlog as of June 30, 1996 was approximately $245 million compared
with approximately $266 million and $270 million at September 30, 1995 and June
30, 1995, respectively. The ultimate value of the backlog is subject to change
as the scope of work on projects change. Customers often retain the right to
change the scope of work with an appropriate increase or decrease in contract
price.
OTHER ITEMS AFFECTING OPERATING RESULTS
The Company generates a substantial portion of revenues under its ERCS
contracts from the Environmental Protection Agency ("EPA"). The Company is the
prime contractor for removal of hazardous substances in ERCS Zone 4A,
comprising Regions 6, 7 and 8, and ERCS Region 5. The ERCS Zone 4A contract
was extended in February 1996 for a period of nine months and was recently
extended through February 1997. The ERCS Region 5 contract has been renewed
for a one year period through September 1997.
On July 12, 1996, the Company received notice that its proposal did not
qualify for the competitive range for proposals as a clean-up contractor in the
EPA ERRS-West contract comprising regions 6, 8 and 9. The Company has
submitted a letter of protest to the U.S. General Accounting Office and has
requested that the EPA withhold making any contract award pending the
resolution of the Company's protest. The protest requests the re-evaluation of
the Company's proposal, the inclusion of the Company's proposal in the
competitive range and the allowance of the Company to submit a best and final
offer. The Company is unable to predict the outcome of this protest and will
continue to vigorously pursue this contract.
The Company intends to actively seek the award of future EPA remediation
contracts as they arise.
Revenues from EPA contracts for the three and nine months ended June
30, 1996 were approximately $11.5 million and $31.5 million, respectively. The
federal Government's shutdown in the Company's second quarter severely affected
the operating results for that period.
FORWARD LOOKING STATEMENTS AND INFORMATION
This report and other reports and statements filed by the Company from
time to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward-looking statements and
information that are based on information available to the Company's management
and various estimates, assumptions and predictions made by the Company's
management.
16
<PAGE> 17
When used in SEC Filings, the words "anticipate," "contemplate," "estimate,"
"expect," "future," "intend," "plan," "predict" and similar expressions are
intended to identify forward-looking statements. Such statements are subject
to inherent uncertainties, including, in addition to any uncertainties
specifically identified in the text surrounding such statements, uncertainties
with respect to changes or developments in social, economic, business,
industry, market, legal and regulatory circumstances and conditions and actions
taken or omitted to be taken by third parties, including the Company's
stockholders, customers, suppliers, business partners and competitors, and
legislative, regulatory, judicial and other governmental authorities and
officials. Consequently, actual events, circumstances, consequences, effects
and results may vary significantly from those described in or contemplated by
such forward-looking statements or information.
17
<PAGE> 18
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CANONIE ENVIRONMENTAL SERVICES CORP. VS. NL INDUSTRIES, INC., ET AL.
The Company (previously known as Canonie Environmental Services Corp.)
filed suit in the Circuit Court, Mulnomah County, Oregon in February 1995
against NL Industries, Inc., Gould, Inc., Johnson Controls, Inc., Exide, Inc.,
AT&T Technologies, Inc., Rhone-Poulenc AG Co., and Burlington Northern Railroad
Co. (the "PRPs") for breach of contract dated May 28, 1992 for the remediation
of soil on property located near Portland, Oregon (the "Contract").
In the suit, the Company sought recovery for amounts due as a result of
services performed under the Contract, including $1.5 million in accounts
receivable, $2.5 million of plant and equipment at the site, and other damages
resulting in a total claim of $8.5 million. Prior to the Company filing suit,
activity at the site had been suspended pending EPA approval of changes in the
remedial activities proposed by the PRPs and supported by independent
engineering reports which indicated significant differences in the waste
materials at the site from the materials specified in the EPA Record of
Decision and in the initial remedial investigation performed by others at the
site. The PRPs alleged the Contract required the dispute be arbitrated. The
Company objected to the arbitration denying it was required under the terms of
the Contract and alleging that the time for asserting such claims had expired.
The Company's objections were overruled by the court and the court action was
abated pending arbitration before the American Arbitration Association. In the
arbitration, the PRPs sought reimbursement from the Company for amounts ranging
from $3.4 million to $17.0 million, under various damage theories relating to
work performed by the Company under the Contract alleging negligent performance
and breach of contract. The Company filed a counterclaim in the arbitration to
recover the damages claimed in the court action.
On June 27, 1996 a Construction Industry Arbitration Tribunal of the
American Arbitration Association issued, with one dissenting opinion, a
binding award in favor of the PRPs in the amount of $4.5 million against the
Company. The counterclaim of the Company was denied; however, the Company's
plant and equipment at the site was awarded to the Company.
The arbitration award and the earlier decision of the court compelling
the arbitration is being contested by the Company. At the same time, the
Company has filed notice of a claim relating to the award with its professional
liability, general liability, and property insurance carriers. The Company's
liability coverage includes a $500,000 self-insured retention requirement which
has been met by the Company through the costs of investigation and defense
related to this matter. The Company believes that it has significant
possibilities to either overturn the arbitration award and post any required
appeal bond, realize coverage by its insurance carriers for the recovery of any
lost amounts, or reach a satisfactory resolution to the dispute with the PRP
Group. No liability or asset reserve has been established in the third quarter
financial statement as the Company does not believe the loss is probable
18
<PAGE> 19
and/or reasonably estimable at this time. The Company has approximately $4
million of accounts receivable and plant equipment relating to the project
recorded in its financial statements.
The Company is currently unable to pay the arbitration award, and the
failure to overturn the arbitration award, recover lost amounts from its
insurance carriers, or achieve a satisfactory resolution to the dispute with
the PRPs will have a material adverse impact on the financial condition of the
Company.
TRANSCONTINENTAL REALTY INVESTORS, INC. VS. MT. LAUREL ASSOCIATES, ET AL.
An agreement in principle has been reached by the plaintiff and the
professional liability carrier of the Company's subsidiary, BCM Engineers Inc.
("BCM") to resolve all claims, in Transcontinental Realty Investors, Inc. vs.
Mt. Laurel Associates, BCM Engineers Inc., et al. The $8.0 million claim by
Transcontinental Realty Investors, Inc., was settled for $1.5 million. The
insurance carrier will pay the agreed settlement directly to the plaintiff and
BCM will be required to reimburse the insurance carrier the balance of the
unexpended portion of a self-insured retention of approximately $210,000.
Final settlement documents and agreement between BCM and its carrier on the
schedule of reimbursement of the Company's portion of settlement proceeds are
currently being negotiated.
19
<PAGE> 20
ITEM 3. DEFAULTS ON SENIOR SECURITIES
The BCM Stock Repurchase Agreement provides that certain shares of the
Company's redeemable preferred stock, put back to the Company, be repurchased
within 30 days of receiving the stock. To date, there have been 3,245.32 shares
of redeemable preferred stock with a value of $324,532.04, which have been
received but not repurchased by the Company. The agreement provides that the
repurchase be made in cash and notes. The cash payment required to repurchase
the redeemable preferred stock is approximately $190,000. The Stock Repurchase
Agreement also requires the Company to be in compliance with its Senior Lenders
prior to the payment of any dividend or the redemption of any securities of the
Company. The Company was not in compliance with certain financial covenants of
the Chemical Facility in the second quarter and therefore was prohibited from
repurchasing shares of redeemable preferred stock which had been put back to
the Company.
The payment of quarterly dividends is also prohibited by the Chemical Facility
while an event of default exists with its Senior Lenders. The Company has not
made the second quarter 1996 5 percent payment of the second quarter 1996 five
percent preferred stock dividend of approximately $95,000 due on June 30,
1996. The terms of the preferred stock provide that a non-payment condition
increases the dividend rate 7.5 percent.
The Company anticipates that it will resolve these issures prior to September
30, 1996.
ITEM 5. OTHER INFORMATION
The Company executed a Forbearance Agreement with its Senior Lenders for
the period of June 7, 1996 through June 28, 1996 in connection with an
overdraft condition which resulted from the establishment by the Senior Lenders
of a reserve against the Company's borrowing base.
The Company executed the First Amendment to the Forbearance Agreement as
of June 28, 1996 extending the forbearance period through August 14, 1996
permitting the Company to continue an overdraft condition of $500,000, reducing
to $250,000 on August 9, 1996 and zero on August 14, 1996.
The Company executed the Second Amendment to the Forbearance Agreement on
August 13, 1996 extending the forbearance period to September 6, 1996 without
an overdraft condition.
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
10.26 First Amendment to the Forbearance Agreement
10.27 Second Amendment to the Forbearance Agreement
10.28 The Second Amended and Restated Note Purchase Agreement effective as of
May 15, 1996 with the holders of notes payable to 399 Venture Partners, Inc.,
an affiliate of Citicorp Venture, Ltd.
11 Statement regarding computation of earnings per share.
27 Requirements for the format and input of financial data schedules (EDGAR
version only).
</TABLE>
(b) Reports on Form 8-K
Form 8-K dated May 15, 1996 filed on July 24, 1996 in connection
with (i) the execution of the Third Amendment, Waiver and Consent
effective as of May 15, 1996 to the existing Loan & Security
Agreement dated October 18, 1995 by and among the Registrant, BCM
Engineers Inc. and Riedel Environmental Services, Inc., and
Chemical Bank and BTM Capital Corporation; (ii) the execution of
an Amended and Restated Note Purchase Agreement effective as of
May 15, 1996 with the Holders of note payable to 399 Venture
Partners, Inc., and affiliate of Citicorp Venture, Ltd.
and to various individual distributees of promissory notes
formerly held by 399 Venture Partners, Inc. , in the aggregate
principal amount of $2.0 million in convertible subordinated notes
and $10.0 million in Senior Subordinated Notes; and (iii) the
notification on June 27, 1996 of the award by an arbitration panel
acting pursuant to the rules of the American Arbitration
Association of $4.5 million against the Company.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Smith Environmental Technologies Corporation
(Registrant)
By: /s/ William T. Campbell
---------------------------------------
William T. Campbell
Vice President - Finance
Date: August 14, 1996
22
<PAGE> 1
EXHIBIT 10.26
EXECUTION COPY
FIRST AMENDMENT made as of June 28, 1996 (the "Amendment") to FORBEARANCE
AGREEMENT made as of June 7, 1996 (the "Forbearance Agreement") among SMITH
ENVIRONMENTAL TECHNOLOGIES CORPORATION, BCM ENGINEERS INC., a Pennsylvania
corporation, BCM ENGINEERS INC., an Alabama corporation, RIEDEL ENVIRONMENTAL
SERVICES INC., each of the Lenders which are parties to the Loan Agreement, and
CHEMICAL BANK, as Agent for the Lenders. Terms which are capitalized herein
and not otherwise defined shall have the meanings ascribed to them in the
Forbearance Agreement.
WHEREAS, the Forbearance Agreement provides that the Forbearance Period shall
automatically terminate on June 28, 1996, at which time the Overadvance must be
reduced to zero; and
WHEREAS, the Borrowers have been unable to reduce the Overadvance to zero on
June 28, 1996 and have requested the Lenders to consider extending the
Forbearance Period until August 14, 1996, and the Lenders have so agreed, on
the terms and subject to the fulfillment of the conditions contained in this
Amendment.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. AFFIRMATION OF INDEBTEDNESS AND OTHER LIABILITIES; ACKNOWLEDGEMENT
OF EVENTS OF DEFAULT.
(a) Each of the Borrowers acknowledges, agrees and certifies to the Agent
and the Lenders that as of the close of business on June 28, 1996, the
aggregate outstanding and unpaid principal amount of (i) the Revolving Loans
equals $19,958,835.42, (ii) the Term Loans equals $4,942,637.76, and (iii) the
Overadvance equals $324,137.40. Each of the Borrowers (i) represents and
warrants to the Lenders that with respect to the Liabilities there is no
offset, defense, claim or counterclaim of any nature whatsoever (whether known
or unknown) as of the date hereof, including without limitation any offset,
defense, claim or counterclaim arising under the U.S. Bankruptcy Code (the
"Code") and (ii) waives any such offset, defense, claim or counterclaim to the
extent the same may exist as of the date hereof, whether known or unknown;
(b) Each of the Borrowers acknowledges and agrees that the prompt payment
and performance when due of all Liabilities is guaranteed by each Borrower
pursuant to an instrument of Continuing Unconditional Guaranty dated as of
October 18, 1995 (each such instrument a "Guaranty") executed in favor of the
Agent and the Lenders by such Borrower (in such capacity, a "Guarantor") and
each Borrower acknowledges and agrees that the Guaranty executed by it
continues to be valid, binding and enforceable against it;
(c) Each of the Borrowers acknowledges and agrees that the lien and security
interest held by the Agent for the ratable benefit of the Lenders in and to the
Collateral continues
<PAGE> 2
to be a perfected lien against the Collateral, subject to no other liens or
encumbrances thereon except for Permitted Liens; and
(d) Each of the Borrowers acknowledges and agrees that: (i) its failure to
repay the Overadvance in full upon the creation thereof, which failure
continues without cure through the date hereof, constitutes an Event of Default
under paragraph 16(a) of the Loan Agreement (such Event of Default, the
"Designated Default"); (ii) the rendering of the arbitration award (the "Gould
Award") in the amount of $4,500,000 on or about June 27, 1996 in favor of NL
Industries, Inc. et. al. against Canonie Environmental Services Corp., now
known as Smith Environmental Technologies Corporation, constitutes the
occurrence of an event (the "Gould Event") which has had or could reasonably be
expected to have a Material Adverse Effect and (iii) because of the occurrence
of each of the Designated Default and the Gould Event, pursuant to Paragraph
15(b)(ii) and (iii) of the Loan Agreement, effective as of the date of
occurrence of the Designated Default, no Lender has had, and no Lender
continues to have, any obligation to make any requested Revolving Loan.
SECTION 2. FORBEARANCE. This Amendment does not constitute a waiver of any
Event of Default (including the Designated Default), whether or not known to
the Agent or the Lenders, or any Event of Default or other Default now or
hereafter existing, and all Events of Default or Defaults shall remain in
effect and shall be deemed to be continuing (and are in fact continuing) unless
and until they are cured in accordance with the Loan Agreement. In addition,
this Amendment does not constitute a waiver of any condition precedent which
must first occur (or which may not occur, as in the case of an event having a
Material Adverse Effect, such as the Gould Event) before the Lenders shall be
obligated to make any requested Revolving Loan, as more fully set forth in
paragraph 15(b) of the Loan Agreement. However, for the period commencing on
the date hereof and terminating on August 14, 1996 (the "Current Forbearance
Period"), so long as none of the events described in the following clauses (a),
(b) or (c) shall have occurred during the Current Forbearance Period, the
Lenders shall not demand payment of the Liabilities, nor shall the Lenders
otherwise seek to exercise any of their rights or remedies under the Loan
Agreement, any of the Other Agreements or applicable law with respect to the
Designated Default (and the Forbearance Agreement is hereby amended to so
provide): (a) any Event of Default (other than the Designated Default) shall
have occurred or other event which, with the giving of notice or passage of
time would constitute an Event of Default shall have arisen, (b) the Gould
Award shall have been paid by any Borrower in whole or in part or shall have
been entered as a judgment in any court of competent jurisdiction and the
enforcement of such judgment shall not have been stayed or (c) any default by
any Borrower in the performance of the terms of this Agreement shall have
occurred. Upon the occurrence during the Current Forbearance Period of any
event described in clauses (a), (b) or (c) of the preceding sentence, the
Current Forbearance Period shall thereupon automatically terminate and the
Agent and the Lenders may immediately exercise all rights and remedies they may
have, whether under the Loan Agreement, the Other Agreements, at law, in equity
or otherwise.
SECTION 3. MANDATORY REDUCTIONS OF OVERADVANCE; PAYMENTS OF INTEREST. The
Borrowers jointly and severally agree to reduce the Overadvance to zero no
later than August 14, 1996, and further jointly and severally agree that prior
to such date, the maximum amount of the Overadvance shall not exceed the
following amounts during each of the following periods
-2-
<PAGE> 3
(collectively the "Overadvance Period") and the Forbearance Agreement is hereby
amended to so provide:
<TABLE>
<CAPTION>
Overadvance Period Maximum Overadvance
<S> <C>
June 28 - July 4, 1996 $1,000,000
July 5 - July 11, 1996 $925,000
July 12 - July 18, 1996 $825,000
July 19 - July 25, 1996 $675,000
July 26 - August 8, 1996 $500,000
August 9 - August 13, 1996 $250,000
August 14, 1996 and at all
time thereafter $ -0-
</TABLE>
In addition, the maximum amount of the Overadvance which may be outstanding
during the Overadvance Period shall be automatically and permanently reduced
by, and the Borrowers shall make mandatory payments of principal of the
Revolving Loans in amounts equal to, the amount of all of cash, checks and
other remittances ("Collections") received from time to time by the Borrowers
in payment of any Account which is no longer an Eligible Account and for which
the Agent has maintained or will institute a reserve (or additional reserve)
against availability, including without limitation Accounts owing by
Groundwater Technology, Inc. with respect to environmental remediation services
performed for its benefit by any of the Borrowers. All such payments shall be
made, and the maximum amount of the Overadvance which may be outstanding during
the Overadvance Period shall be automatically and permanently reduced, as and
when such Collections are received. Interest on that portion of the Revolving
Loans which, as of any date of determination, exceeds the amount of the
Consolidated Borrowing Base, as of such date, shall continue to accrue at an
annual rate equal to five percent (5%) plus the ABR, as determined and adjusted
in the manner set forth in the Loan Agreement, as provided in Section 3 of the
Forbearance Agreement.
SECTION 4. ADDITIONAL RESERVES. Without limiting the generality of the terms
and provisions contained in paragraph 2(b) of the Loan Agreement or contained
elsewhere in this Amendment, each of the Borrowers confirms its understanding
and agreement that under the terms of the Loan Agreement, the Agent has the
right, exercised in a commercially reasonable manner, at any time and from time
to time, to maintain reserves and/or establish additional reserves against
availability and has no obligation to provide notice thereof or to obtain the
consent thereto of any other Person, including the Borrowers.
SECTION 5. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENT. This Amendment
shall not be effective unless and until each of the following conditions shall
have been satisfied in the sole discretion of the Lenders or waived by the
Lenders, for whose sole benefit such conditions exist:
-3-
<PAGE> 4
(a) The Agent and each of the Lenders shall have received a fully executed
counterpart or original of this Amendment.
(b) Upon the effectiveness of this Amendment, all representations and
warranties set forth in the Loan Agreement shall be true and correct in all
material respects on and as of the effective date hereof, except for (x) such
inducing representations and warranties that were only required to be true and
correct as of a prior date, (y) such representations and warranties as relate
to the defaults described in clause (ii) hereof and (z) such representations
and warranties as relate to the occurrence of an event which has had or is
reasonably likely to have a Material Adverse Effect, but only to the extent
that such event constitutes the Gould Event, and no Default or Event of Default
shall have occurred and be continuing, other than (i) the Designated Default
and (ii) defaults under agreements made in the ordinary course of business
between or among any of the Borrowers and Persons other than the Agent, the
Lenders, or any Affiliate of the Borrowers, such as lease agreements, none of
which agreements is material to the business of such Borrower and none of which
defaults, singly or in the aggregate, has had or is reasonably likely to have,
a Material Adverse Effect.
(c) Except for the collectibility of the Referenced Account and the
occurrence of the Gould Event, no event or development shall have occurred
since the date of delivery to the Lenders of the Borrowers' most recent
financial statements which event or development has had or is reasonably likely
to have a Material Adverse Effect.
(d) The Agent shall have received a certificate from Smith Environmental,
executed by its Chief Executive Officer or other authorized officer, as to the
accuracy and completeness of the representations and warranties contained in
Section 10 hereof.
(e) All corporate and legal proceedings and all documents and instruments
executed or delivered in connection with this Amendment shall be satisfactory
in form and substance satisfactory to the Lenders and their counsel, and the
Lenders and their counsel shall have received all information and copies of all
documents which the Lenders and their counsel may have requested in connection
herewith and the matters contemplated hereunder, such documents, when requested
by them, to be certified by appropriate corporate authorities.
(f) The Lenders shall have received such further agreements, consents,
instruments and documents as may be necessary or proper in the reasonable
opinion of the Lenders, the Agent and their counsel to carry out the provisions
and purposes of this Amendment.
(g) The Agent shall have received from Smith Environmental, for the pro
rata benefit of the Lenders, a non-refundable fee, in cash, in the amount of
$10,000. Smith Environmental hereby authorizes the Agent to debit Smith
Environmental's loan account by the amount of $10,000 in payment of such fee.
SECTION 6. EVENTS OF DEFAULT. The Forbearance Agreement is further amended to
provide that the occurrence at any time of the event described in clause (b) of
Section 2 of this
-4-
<PAGE> 5
Amendment shall constitute an Event of Default under the Forbearance Agreement,
the Loan Agreement and the Other Agreements.
SECTION 7. RELEASE. For and in consideration of the mutual covenants and
obligations set forth herein, each of the Borrowers (collectively the
"Releasors") hereby releases and discharges each of the Lenders and the Agent,
and each of their respective officers, directors, partners, agents, employees,
attorneys and other professionals, affiliates, successors and assigns
(collectively the "Releasee") from all actions, causes of action, claims for
contribution or indemnification that may be brought by the Releasors or any
third party, suits, debts, dues, sums of money, accounts, reckonings, bonds,
bills, specialties, covenants, contracts, controversies, agreements, premisses,
variances, trespasses, damages, judgments, extents, executions, claims, and
demands whatsoever, in law, admiralty or equity (including, without limitation,
any action under 11 U.S.C. Sections 542-553) (all of the foregoing being
collectively, "Claims"), which against the Releasee, the Releasors or the
Releasors' partners, agents, employees, attorneys, affiliates, heirs, executors,
administrators, successors or assigns ever had, now have or hereafter can, shall
or may, have for, upon, or by reason of any matter, cause or thing whatsoever
from the beginning of the world to the date of the delivery of this Amendment by
reason or on account of or in any way related to any acts, omissions or
circumstances (whether known or unknown) occurring prior to or as of the date
hereof in connection with or arising out of or referring or relating in any way
to (a) any and all Claims based upon, relating to or arising from any and all
transactions, relationships or dealings relating to loans or other financial
accommodations made by the Releasee to or for the account of Releasors; and (b)
all documentation underlying the indebtedness of the Releasors to the Releasee,
provided, however, that the Releasee shall not be released from any Claim
arising from the Releasee's gross negligence or willful misconduct.
SECTION 8. CONSENT TO RELIEF FROM AUTOMATIC STAY. Each of the Borrowers
hereby agrees that if any of them shall (i) file with any bankruptcy court of
competent jurisdiction or be the subject of any petition under the Code, (ii)
be the subject of any order for relief under the Code, (iii) file or be the
subject of any petition seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under any present or
future federal or state act or law relating to bankruptcy, insolvency, or other
relief for debtors, (iv) seek, consent to or acquiesce in the appointment of
any trustee, receiver, conservator or liquidator, (v) be the subject of any
order judgement or decree entered by any court of competent jurisdiction
approving a petition filed against any of them for any reorganization,
arrangement, composition, readjustment, liquidation, dissolution, or similar
relief under any present or future federal or state act or law relating to
bankruptcy, insolvency, or relief for debtors, the Agent and the Lenders shall
thereupon be entitled to relief from any automatic stay imposed by Section 362
of the Code or from any other stay or suspension of remedies imposed in any
other manner with respect to the exercise of the rights and remedies otherwise
available to the Agent and the Lenders under the Loan Agreement, any of the
Other Agreements, hereunder or under any documents delivered in connection
therewith.
SECTION 9. INDEMNITY. Each of the Borrowers jointly and severally agrees to
defend and hold the Agent and each of the Lenders harmless from and against any
and all claims, charges, actions, suits, proceedings, lawsuits, obligations,
liabilities, fines, penalties, costs and expenses, including, but not limited
to reasonable attorneys' fees, in connection with the breach of any
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<PAGE> 6
representation or warranty of such Borrower, the breach or default by such
Borrower of any term, covenant or condition hereunder, the collection or
recovery of any portion of the Liabilities or the Agent's or any of the
Lenders' enforcement of its rights under this Amendment, the Loan Agreement or
any of the Other Agreements. The obligations and provisions contained in this
Section shall continue and remain in full force and effect after the
Liabilities have been paid and discharged in full.
SECTION 10. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders
and the Agent to enter into this Amendment, Smith Environmental and each other
Borrower makes the following representations and warranties in favor of each of
the Lenders and the Agent (which representations and warranties shall survive
the execution and delivery of this Amendment) as of the date hereof:
(a) Smith Environmental and each other Borrower has the corporate power,
authority and legal right to execute, deliver and perform this Amendment, and
the instruments, agreements, documents and transactions contemplated hereby,
and has taken all actions necessary to authorize the execution, delivery and
performance of this Amendment, and the instruments, agreements, documents and
transactions contemplated hereby;
(b) No consent of any Person (including, without limitation, shareholders
or creditors of Smith Environmental, as the case may be) other than the
Lenders, and no consent, permit, approval or authorization of, exemption by,
notice or report to, or registration, filing or declaration with, any
governmental authority, is required in connection with the execution, delivery,
performance, validity or enforceability of this Amendment, and the instruments,
agreements, documents and transactions contemplated hereby;
(c) This Amendment has been duly executed and delivered on behalf of Smith
Environmental and each other Borrower by its duly authorized officer, and
constitutes the legal, valid and binding obligation of Smith Environmental and
each such Borrower, enforceable in accordance with its terms;
(d) Except for the Designated Default and except as otherwise described in
Section 5(b)(ii) hereof, neither Smith Environmental nor any other Borrower is
in default under any indenture, mortgage, deed of trust, agreement or other
instrument to which it is a party or by which it may be bound. Neither the
execution and delivery of this Amendment, nor the consummation of the
transactions herein contemplated, nor compliance with the provisions hereof or
thereof will (i) violate any law or regulation, (ii) result in or cause a
violation by Smith Environmental or by any other Borrower of any order or
decree of any court or government instrumentality, (iii) conflict with, or
result in the breach of, or constitute a default under, any indenture,
mortgage, deed of trust, agreement or other instrument to which Smith
Environmental or any other Borrower is a party or by which it may be bound,
(iv) result in the creation or imposition of any lien, charge, or encumbrance
upon any of the property of Smith Environmental or of any other Borrower,
except in favor of the Agent for the benefit of the Lenders, to secure the
Liabilities, or (v) violate any provision of the Articles or Certificate of
Incorporation, By-Laws or any capital stock provisions of Smith Environmental
or of any other Borrower;
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<PAGE> 7
(e) No Default or Event of Default has occurred and is continuing, except
(i) as otherwise described in Section 5(b)(ii) hereof and (ii) for the
Designated Default;
(f) Since the date of the Agent's receipt of Smith Environmental's
consolidated and consolidating financial statements for the period ended April
30, 1996, no change or event has occurred which has had or is reasonably likely
to have a Material Adverse Effect, except for the collectibility of the
Referenced Account and the occurrence of the Gould Event;
(g) The recitals contained in this Amendment are true and correct in all
respects; and
(h) The Borrowers have consulted with counsel and with such other experts
and advisors as they have deemed necessary in connection with the negotiation,
execution and delivery of this Amendment.
SECTION 11. NO PARTNERSHIP. Nothing contained in this Amendment shall be
deemed to create any rights or obligations of partnership, joint venture or
similar association between any of the Lenders and the Agent, on the one hand,
and any of the Borrowers, on the other hand, nor cause the Agent or any Lender
to be responsible in any way for the debts or obligations of the Borrowers or
any Person.
SECTION 12. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
heirs, executors, administrators, successors and assigns.
SECTION 13. NO WAIVER. No failure or delay of any party hereto in the
exercise of any right given to such party hereunder shall be deemed to be a
waiver thereof. No waiver by any party hereto of any condition hereunder for
its benefit (unless the time specified herein for exercise of such right, or
satisfaction of such condition, has expired), shall constitute a waiver of any
other or further right, nor shall any single or partial exercise of any right
preclude other or further exercise thereof or of any other rights. The waiver
of any breach hereunder shall not be deemed to be a waiver of any other or
subsequent breach hereof. No extensions of time for the performance of any
obligation shall be deemed or construed as an extension of time for the
performance of any other obligation.
SECTION 14. FURTHER ASSURANCES. Each party shall, from time to time,
execute, acknowledge and deliver such further instruments, and perform such
additional acts, as any other party may reasonably request in order to
consummate the transactions contemplated by this Amendment.
SECTION 15. SEVERABILITY. If any term or provisions of this Amendment or
the application thereof to any person or entity or circumstance shall to any
extent be invalid or unenforceable, the remainder of this Amendment, or the
application of such term or provision to such person or entity or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term and provision of this Amendment shall be valid
and be enforced to the fullest extent permitted by law.
-7-
<PAGE> 8
SECTION 16. SUBMISSION TO JURISDICTION.
(a) Any legal action or proceeding with respect to this Amendment may be
brought in the courts of the State of New York or, if requisites of
jurisdiction obtain, of the United States of America for the Southern District
of New York, and, by execution and delivery hereof, each Borrower hereby
accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts. Nothing contained
herein, however, shall affect the right of the Agent or the Lenders to commence
legal proceedings or otherwise proceed against any of the Borrowers in any
other jurisdiction. Each of the Borrowers waives (i) the right to trial by
jury in the event of any litigation to which any of the Agent, the Lenders and
such Borrower are parties in respect of any matter arising under or in
connection with this Amendment, whether or not such litigation has been
commenced in respect of the Loan Agreement or this Amendment and whether or not
other persons are also parties thereto, (ii) any claim that New York County,
New York is an inconvenient forum and (iii) any claim against any of the
Lenders for consequential or special damages respecting any loan documents or
the transactions contemplated thereunder or hereunder. Execution of this
Amendment by the Lenders shall be deemed to constitute a waiver by the Lenders
of the right to trial by jury in the event of any litigation in respect of
which a Borrower has waived its right to trial by jury hereunder; and
(b) No delay on the part of the Agent or any of the Lenders in exercising
any of its options, powers or rights, or partial or single exercise thereof,
whether arising hereunder and the Loan Agreement, under any of the Other
Agreements or otherwise, shall constitute a waiver thereof or affect any right
hereunder or thereunder. No waiver of any of such rights under this Amendment
shall be deemed to be made unless the same shall be in writing, duly signed by
the Agent, the Lenders and the Borrowers. Each such waiver (if any) shall
apply only with respect to the specific instance involved and shall in no way
impair the rights of the Agent, the Lenders or the obligations of the Borrowers
hereunder in any other respect at any other time.
SECTION 17. THE GUARANTORS. Each Guarantor (i) has signed below to indicate
its consent to the terms and provisions of this Amendment and all documents and
agreements to be executed or delivered in connection herewith and (ii)
reaffirms, ratifies and confirms the continuing validity and enforceability of
the Guaranty executed by it in accordance with its terms and acknowledges that
its liability, and the rights of the Agent and the Lenders under such Guaranty,
shall be unaffected by the terms of this Amendment and shall remain in full
force and effect through the final and indefeasible payment of all sums owed to
the Lenders under this Amendment and the Loan Agreement.
SECTION 18. GENERAL PROVISIONS.
(a) Nothing contained in this Amendment shall be deemed to be a waiver of
any Defaults or Events of Default, whether or not the Agent or any of the
Lenders
-8-
<PAGE> 9
shall have any knowledge thereof, nor shall anything contained in this
Amendment be deemed to be a waiver of any future Default or Event of Default
whatsoever.
(b) Except as herein expressly amended, the Forbearance Agreement and the
Loan Agreement and all other agreements, documents, instruments and
certificates executed in connection therewith, are ratified and confirmed in
all respects and shall remain in full force and effect in accordance with their
respective terms.
(c) All references in any document or agreement to the Forbearance
Agreement shall mean the Forbearance Agreement as amended as of the effective
date hereof.
(d) This Amendment may be executed by the parties hereto individually or
in combination, in one or more counterparts, each of which shall be an original
and all which shall constitute one and the same agreement.
(e) The Third Amendment is hereby modified by deleting the date "June 28,
1996" set forth in Section 7(a) thereof and by substituting in lieu thereof the
date "August 14, 1996".
(f) This Amendment shall be governed and controlled by the laws of the
State of New York without reference to its choice of law principles.
IN WITNESS WHEREOF, each of the Borrowers, BCM-Alabama, the Lenders and the
Agent have caused this Amendment to be duly executed by their respective
officers thereunto duly authorized as of the day and year first above written.
SMITH ENVIRONMENTAL TECHNOLOGIES RIEDEL ENVIRONMENTAL SERVICES INC.
CORPORATION
By: /SIG/ By: /SIG/
---------------------------------- ---------------------------------
(Title) V.P. Treasurer (Title) VP
BCM ENGINEERS INC., CHEMICAL BANK, as a Lender and as
a Pennsylvania corporation Agent
By: /SIG/ By: /SIG/
---------------------------------- ---------------------------------
(Title) V.P. Treasurer (Title) Vice President
BCM ENGINEERS INC., BTM CAPITAL CORPORATION, formerly
Alabama corporation known as BOT Financial Corporation
By: /SIG/ By: /SIG/
---------------------------------- ---------------------------------
(Title) V.P. Treasurer (Title)
-9-
<PAGE> 1
EXHIBIT 10.27
EXECUTION COPY
SECOND AMENDMENT made as of August 13, 1996 (the "Amendment")
to FORBEARANCE AGREEMENT made as of June 7, 1996, as amended by the First
Amendment thereto, dated as of June 28, 1996 (the "First Amendment) (as so
amended and as amended through the date hereof, the "Forbearance Agreement")
among SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION, BCM ENGINEERS INC., a
Pennsylvania corporation, BCM ENGINEERS INC., an Alabama corporation, RIEDEL
ENVIRONMENTAL SERVICES INC., each of the Lenders which are parties to the Loan
Agreement, and CHEMICAL BANK, as Agent for the Lenders. Terms which are
capitalized herein and not otherwise defined shall have the meanings ascribed
to them in the Forbearance Agreement.
WHEREAS, pursuant to the First Amendment, the Current
Forbearance Period automatically terminates on August 14, 1996; and
WHEREAS, the Borrowers have requested the Lenders to consider
extending the Current Forbearance Period to September 6, 1996 and the Lenders
have so agreed, on the terms and subject to the fulfillment of the conditions
contained in this Agreement.
NOW, THEREFORE, in consideration of the foregoing, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. EXTENSION OF CURRENT FORBEARANCE PERIOD. The Current
Forbearance Period is hereby extended to September 6, 1996. Accordingly, the
First Amendment is hereby modified by deleting the third sentence of Section 2
thereof and by substituting the following in lieu thereof:
"However, for the period commencing on the date hereof and
terminating on September 6, 1996 (the "Current Forbearance
Period"), so long as none of the events described in the
following clauses (a), (b) or (c) shall have occurred during
the Current Forbearance Period, the Lenders shall not demand
payment of the Liabilities, nor shall the Lenders otherwise
seek to exercise any of their rights or remedies under the
Loan Agreement, any of the Other Agreements or applicable law
with respect to the Designated Default (and the Forbearance
Agreement is hereby amended to so provide): (a) any Event of
Default (other than the Designated Default) shall have
occurred or other event which, with the giving of notice or
passage of time would constitute an Event of Default shall
have arisen, (b) the Gould Award shall have been paid by any
Borrower in whole or in part or shall have been entered as a
judgment in any court of competent jurisdiction and the
enforcement of such judgment shall not have been stayed or (c)
any default by any Borrower in the performance of the terms of
this Agreement shall have occurred."
<PAGE> 2
SECTION 2. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENT. This
Amendment shall not be effective unless and until each of the following
conditions shall have been satisfied in the sole discretion of the Lenders or
waived by the Lenders, for whose sole benefit such conditions exist:
(a) The Agent and each of the Lenders shall have
received a fully executed counterpart or original of this Amendment.
(b) Upon the effectiveness of this Amendment, all
representations and warranties set forth in the Loan Agreement shall be true
and correct in all material respects on and as of the effective date hereof,
except for (x) such inducing representations and warranties that were only
required to be true and correct as of a prior date, (y) such representations
and warranties as relate to the defaults described in clause (ii) hereof and
(z) such representations and warranties as relate to the occurrence of an event
which has had or is reasonably likely to have a Material Adverse Effect, but
only to the extent that such event constitutes the Gould Event, and no Default
or Event of Default shall have occurred and be continuing, other than (i) the
Designated Default and (ii) defaults under agreements made in the ordinary
course of business between or among any of the Borrowers and Persons other than
the Agent, the Lenders, or any Affiliate of the Borrowers, such as lease
agreements, none of which agreements is material to the business of such
Borrower and none of which defaults, singly or in the aggregate, has had or is
reasonably likely to have, a Material Adverse Effect.
(c) Except for the collectibility of the
Referenced Account and the occurrence of the Gould Event, no event or
development shall have occurred since the date of delivery to the Lenders of
the Borrowers' most recent financial statements which event or development has
had or is reasonably likely to have a Material Adverse Effect.
(d) All corporate and legal proceedings and all
documents and instruments executed or delivered in connection with this
Amendment shall be satisfactory in form and substance satisfactory to the
Lenders and their counsel, and the Lenders and their counsel shall have
received all information and copies of all documents which the Lenders and
their counsel may have requested in connection herewith and the matters
contemplated hereunder, such documents, when requested by them, to be certified
by appropriate corporate authorities.
(e) The Lenders shall have received such further
agreements, consents, instruments and documents as may be necessary or proper
in the reasonable opinion of the Lenders, the Agent and their counsel to carry
out the provisions and purposes of this Amendment.
SECTION 3. GENERAL PROVISIONS.
(a) Nothing contained in this Amendment shall be
deemed to be a waiver of any Defaults or Events of Default, whether or not the
Agent or any of the Lenders shall have any knowledge thereof, nor shall
anything contained in this Amendment be deemed to be a waiver of any future
Default or Event of Default whatsoever.
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<PAGE> 3
(b) Except as herein expressly amended, the
Forbearance Agreement, the First Amendment and the Loan Agreement and all other
agreements, documents, instruments and certificates executed in connection
therewith, are ratified and confirmed in all respects and shall remain in full
force and effect in accordance with their respective terms.
(c) All references in any document or agreement
to the Forbearance Agreement shall mean the Forbearance Agreement as amended as
of the effective date hereof.
(d) This Amendment may be executed by the parties
hereto individually or in combination, in one or more counterparts, each of
which shall be an original and all which shall constitute one and the same
agreement.
(e) The Third Amendment is hereby modified by
deleting the date "June 28, 1996" set forth in Section 7(a) thereof and by
substituting in lieu thereof the date "September 6, 1996".
(f) This Amendment shall be governed and
controlled by the laws of the State of New York without reference to its choice
of law principles.
IN WITNESS WHEREOF, each of the Borrowers, BCM-Alabama, the
Lenders and the Agent have caused this Amendment to be duly executed by their
respective officers thereunto duly authorized as of the day and year first
above written.
SMITH ENVIRONMENTAL TECHNOLOGIES RIEDEL ENVIRONMENTAL SERVICES INC.
CORPORATION
By: /SIG/ By: /SIG/
---------------------------------- ---------------------------------
(Title) V.P. (Title) VP
BCM ENGINEERS INC., CHEMICAL BANK, as a Lender and as
a Pennsylvania corporation Agent
By: /SIG/ By: /SIG/
---------------------------------- ---------------------------------
(Title) V.P. (Title)
BCM ENGINEERS INC., BTM CAPITAL CORPORATION, formerly
Alabama corporation known as BOT Financial Corporation
By: /SIG/ By: /SIG/
---------------------------------- ---------------------------------
(Title) V.P. (Title)
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<PAGE> 1
EXIHIBIT 10.28
AMENDMENT NO. 2 TO AMENDED AND RESTATED NOTE PURCHASE AGREEMENT
Amendment No. 2, dated as of May 15, 1996 ("Amendment"), among
Smith Environmental Technologies Corporation (formerly Canonie Environmental
Services Corp.), a Delaware corporation (the "Company"), and 399 Venture
Partners, Inc., a Delaware corporation ("399"), to Amended and Restated Note
Purchase Agreement dated November 15, 1995 between the foregoing parties (the
"Note Agreement"). Capitalized terms used but not otherwise defined herein
shall have the meanings given to them in the Note Agreement.
RECITALS
WHEREAS, the parties hereto desire to amend the Note Agreement
as provided for herein in connection with the modification of interest payments
on the Notes originally issued under the Note Agreement as evidenced by amended
and restated Notes to be issued in replacement thereof pursuant to this
Amendment (the "Amended and Restated Notes").
THEREFORE, the parties hereto hereby agree that the Note
Agreement is amended as follows:
Section 1. Amendment. The Note Agreement is hereby amended
as follows:
(a) The fourth recital of the Note Agreement is hereby
amended (i) by deleting the words "Company's Convertible Senior Notes" and
substituting in lieu thereof the words "the Company's Amended and Restated
Convertible Senior Notes" and (ii) by deleting the words "Company's Convertible
Senior Subordinated Notes" and substituting in lieu thereof the words
"Company's Amended and Restated Senior Subordinated Notes."
(b) Exhibits A and B to the Note Agreement are hereby amended
as of the date hereof by deleting such Exhibits A and B in their entirety and
replacing the form of Notes constituting
<PAGE> 2
such Exhibits A and B with the form of Amended and Restated Notes attached
hereto as Exhibits A and B.
(c) Section 6.2 of the Note Agreement is hereby amended by
adding the words and punctuation "PIK Notes," within the first parentheticals
appearing in subsections (i), (ii) and (iii) thereof immediately following the
word "excluding."
(d) Section 6.3 of the Note Agreement is hereby amended by
adding the parenthetical phrase "(other than payments made by the issuance of
PIK Notes)" in clause (ii) thereof immediately following the words and
punctuation "(a "Blockage Notice"), then no payment."
(e) Section 12.1 of the Note Agreement is hereby amended (i)
by adding thereto in alphabetical order the following defined term:
""PIK Notes" has the meaning ascribed thereto in the Notes.";
(ii) by adding the words and punctuation ",together with any
PIK Notes" after the word "Agreement" in the definition of "Note" or "Notes"
contained therein; and
(iii) by deleting the words "and the Senior Note Indebtedness"
from the text of the defined term "Senior Indebtedness."
Section 2. Conditions to Effectiveness of Amendment. This
Amendment shall become effective on the date (the "Effective Date") on which
the following conditions precedent shall have been satisfied:
2.1 Delivered Documents. On the Effective Date, the
Registered Holders shall have received the following documents, each of which
shall be satisfactory to such holders in form and substance:
(a) This Amendment, executed and delivered by a duly authorized officer of the
Company.
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<PAGE> 3
(b) For the account of each Registered Holder
replacement Notes substantially in the respective forms attached hereto as
Exhibits A and B having respective principal amounts equal to those on each
Note outstanding immediately prior to the effectiveness of this Amendment.
(c) A copy which shall been certified by the
Secretary or Assistant Secretary of the Company to be true, complete and
correct in ever particular of (i) the Certificate of Incorporation of the
Company, certified by the Secretary of State of the State of Delaware, (ii) the
By-laws of the Company; (iii) the resolutions of the Board of Directors
providing for the approval of this Amendment and the issuance of the Amended
and Restated Notes, amendment of the Certificate of Incorporation of the
Company as required to effect the transactions contemplated by this Amendment;
and (iv) certified copies of all documents evidencing other necessary corporate
or other action and governmental approvals, if any, required to be obtained at
or prior to the Effective Date with respect to this Amendment and the issuance
of the Amended and Restated Notes.
(d) A certificate of the Secretary or an Assistant Secretary
of the Company which shall certify the names of the officers of the Company
authorized to sign this Amendment, the Amended and Restated Notes and the other
documents, instruments or certificates to be delivered pursuant to this
Amendment by the Company or any of its officers, together with the true
signatures of such officers.
(e) The Company shall have taken all corporate and other
action, made any governmental filings and obtained any consents or waivers
necessary to carry out the transactions contemplated hereby and each shall be
in full force and effect on the Effective Date.
(f) A Certificate of the Secretary of State of the State of
its incorporation as to the due incorporation and good sanding of each of the
Company and its Subsidiaries shall have been delivered to counsel to Registered
Holders.
2.2 Amendment of Existing Credit Agreement. On the Effective
Date, each Registered Holder shall receive satisfactory evidence that the Third
Amendment, Waiver and Consent dated as of
- 3 -
<PAGE> 4
May 15, 1996 to Loan and Security Agreement among the Company, BCM, RES and
Chemical Bank, as Agent, substantially in the form attached hereto as Exhibit
C, shall have been entered into by the parties thereto and shall be in effect.
2.3 No Default. On the Effective Date the Company shall be
in compliance with all of the terms and provisions set forth in the Note
Agreement on its part to be observed or performed and the representations and
warranties made and restated by the Company pursuant to Section 3 of this
Amendment shall be true and correct on and as of such date with the same force
in effect as if made on an as of such date.
2.4 Waiver. Each Registered Holder that is a party hereto
may, at its sole option, waive any one or more of the above stated conditions
to such party's obligation to close at or prior to the Effective Date.
Section 3. Representations and Warranties. The Company
hereby confirms and reaffirms the representations and warranties contained in
Section 2.1 of the Note Agreement; provided, however, that the reference to
this Agreement and the Notes shall be deemed to include the Note Agreement and
the Notes as amended and/or restated hereby.
Section 4. Limited Effect. Except as expressly amended and
modified by this Amendment, the Note Agreement shall continue to be and shall
remain, in full force in effect in accordance with its terms.
Section 5. Counterparts. This Amendment may be executed by
one or both of the parties hereto on any number of separate counterparts, each
of which shall be an original and all of which taken together shall constitute
one and the same instrument.
Section 6. Governing Law. This Amendment shall be governed
by, and construed in accordance with, the internal laws of the State of New
York without regard to principles of conflicts of law.
[signature pages to follow]
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their duly authorized officers, all as of the
day and year first above written.
COMPANY:
SMITH ENVIRONMENTAL TECHNOLOGIES
CORPORATION (formerly Canonie
Environmental Services Corp.)
By: /SIG/
----------------------------------
Name:
Title: CEO
399 VENTURE PARTNERS, INC.
By: /SIG/
----------------------------------
Name:
Title: President
- 5 -
<PAGE> 6
Exhibit A
THIS SECURITY WAS SOLD IN A PRIVATE PLACEMENT, WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AND MAY BE
OFFERED OR SOLD ONLY IF REGISTERED UNDER THE SECURITIES ACT OF
1933 OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
THIS CONVERTIBLE SENIOR NOTE IS SUBJECT TO THE TERMS AND
CONDITIONS OF THAT CERTAIN AMENDED AND RESTATED NOTE PURCHASE
AGREEMENT, DATED AS OF NOVEMBER 15, 1994, BY AND BETWEEN SMITH
ENVIRONMENTAL TECHNOLOGIES CORPORATION (FORMERLY CANONIE
ENVIRONMENTAL SERVICES CORP.) AND 399 VENTURE PARTNERS, INC.
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.)
Amended and Restated Convertible Senior Note Due 2004
November 21, 1994 No. __
New York, New York Original Principal Amount: $___________(1)
FOR VALUE RECEIVED, SMITH ENVIRONMENTAL TECHNOLOGIES
CORPORATION (FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.), a Delaware
corporation (the "Company"), hereby promises to pay to the order of 399 Venture
Partners, Inc., a Delaware corporation, or its registered assigns (the
"Registered Holder"), One Million Five Hundred Seventy-two Thousand Two Hundred
Eighty-two Dollars (the "Original Principal Amount") on November 21, 2004 (the
"Maturity Date") in accordance with the provisions of this Senior Note. This
Senior Note is issued by the Company pursuant to the Amended and Restated Note
Purchase Agreement, dated as of November 15, 1994, between the Company and 399
Venture Partners, Inc., as amended and restated from time to time (the
"Agreement").
____________________
(1) For each existing Note, the original principal amount.
<PAGE> 7
1. Interest. (a) Interest will accrue on the unpaid
principal amount of this Senior Note at a rate per annum equal to the higher of
10% or the Base Rate plus 1-3/4%. In the event that the Original Principal
Amount of this Senior Note is not repaid in full, with interest, on or before
October 21, 1995, interest will accrue, and the Company will thereafter pay
interest in cash, on an amount equal to the then outstanding principal amount
hereof plus the amount of accrued and unpaid interest on this Senior Note
through October 21, 1995 (the "Increased Principal Amount") semi-annually in
arrears on May 21st and November 21st of each year, beginning May 21, 1996.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. Upon the occurrence and during the continuance of an Event of Default,
interest will accrue on the unpaid principal amount of this Senior Note, all
unpaid interest on this Senior Note and any other amounts payable hereunder, to
the extent permitted by applicable law, at a rate per annum equal to the
applicable interest rate plus 2%. In no event shall any interest payable under
this Senior Note exceed the maximum rate of interest permissible under (i) any
applicable usury law or (ii) the Small Business Act of 1953, as amended, the
Small Business Investment Act of 1958, as amended, and the rules and
regulations of the Small Business Administration promulgated thereunder (13 CFR
107 et. seq.; and 13 CFR 121 et. seq.) or any similar laws, rules or
regulations.
(b) The Company may on each scheduled interest payment date
from and including May 21, 1996 to and including May 21, 1997, in lieu of the
payment in whole or in part of interest in cash on this Senior Note, pay
interest hereon through the issuance of aditional Senior Notes in the form of
this Senior Note ("PIK Notes") in an aggregate principal amount equal to the
amount of interst that would be payable with respect to this Senior Note if
such interest were paid in cash. In the event that PIK Notes are issued by the
Company in lieu of interest paid in cash, the Company shall present to the
Registered Holder, on the relevant interest payment date, PIK Notes, dated the
date of such interest payment date, in an aggregate principal amount equal to
the amount of cash interest not paid to such holder on such interest payment
date.
- 2 -
<PAGE> 8
2. Method of Payment. The Company will pay the interest
on this Senior Note provided for in Section 1 on the relevant interest payment
date to the Registered Holder of record as of the close of business on the
fifth day preceding the relevant interest payment date, notwithstanding any
cancellation of this Senior Note after such date and on or before such interest
payment date. The Company will pay principal, premium, if any, and cash
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. The Company shall pay
principal, premium, if any, and cash interest on this Senior Note by wire
transfer of immediately available funds to the account specified by the
Registered Holder in a written notice to the Company delivered at least two
Business Days prior to such payment date.
3. Prepayment. At its option, the Company may, from
time to time, prepay all or any portion of the principal amount of this Senior
Note in cash without any prepayment penalty or charge except as provided for
below. Written notice of prepayment under this Section 3 shall be given at
least 10 days but not more than 30 days before the prepayment date set forth in
such notice to the Registered Holder at the address provided in or pursuant to
Section 10. Any such prepayment shall be in an amount of at least $50,000 and
in integrals of $1,000, or such lesser amount as equals the then outstanding
principal amount of this Senior Note being prepaid, and shall be accompanied by
the cash payment of all accrued and unpaid interest on the portion of the
principal then being prepaid plus, if any such prepayment is made after October
21, 1995 but prior to November 21, 1999 and prior to the later of (x) November
21, 1996 and (y) the Positive Development Trading Date, a premium equal to the
applicable percentage of the principal amount being prepaid, determined as
follows:
<TABLE>
<CAPTION>
Applicable
During the Period of Percentage
-------------------- ----------
<S> <C>
October 21, 1995 through November 20, 1996 4%
November 21, 1996 through November 20, 1997 3%
November 21, 1997 through November 20, 1998 2%
November 21, 1998 through November 20, 1999 1%
</TABLE>
- 3 -
<PAGE> 9
Subject to the Registered Holder's exercise rights provided for in Section 5
below and right of conversion provided for in Section 6(a) below, once due
notice of prepayment is given, the principal amount of this Senior Note (or
applicable portion thereof) shall become due and payable on the prepayment
date.
4. Repayment. The Company will repay this Senior Note
in full in cash on the Final Maturity Date at 100% of the outstanding principal
amount of this Senior Note plus accrued but unpaid interest thereon to such
date.
5. Exercise of Additional Rights.
(a) Exercise Right. In the event that all or any portion
of the principal amount of this Senior Note is repaid (a "Discretionary
Payment") on any date after October 21, 1995 but prior to the later of (i)
November 21, 1996 and (ii) the Positive Development Trading Date (any such
Discretionary Payment date being a "Trigger Date", and the period beginning on
the day next succeeding the Original Payment Date and ending on the later of
the dates set forth in clauses (i) and (ii) above being the "Section 5 Rights
Period"), then the Company hereby grants to the Registered Holder the right,
and the Registered Holder is hereby entitled to purchase from the Company up to
the Specified Number of shares of Preferred Stock as shall be designated by the
Registered Holder at a price per share equal to the then current Exercise
Price. The amount and kind of securities purchasable pursuant to the rights
granted hereunder and the purchase price for such securities are subject to
adjustment pursuant to this Senior Note.
(b) Exercise Period. The Registered Holder may exercise, in
whole or in part the purchase rights represented by this Section 5 ("Section 5
Rights") at any time and from time to time on and after any Trigger Date to and
including 5:00 p.m., New York City time, on the first anniversary of the
redemption or repayment in full of the Senior Notes (the "Exercise Period");
provided, however, that if the Company shall not have given the Registered
Holder written notice of the expiration of the Exercise Period at least 60 days
but not more than 90 days prior to the expiration of the Exercise Period, the
Exercise Period shall be extended until the 60th day following the receipt by
the Registered Holder of such a notice.
- 4 -
<PAGE> 10
(c) Exercise Procedure.
(i) The Section 5 Rights shall be deemed to have been
exercised when all of the following items have been delivered to the Company
(the "Exercise Time"):
(A) a completed Exercise Agreement, as described in
Section 5(d) below, executed by the Person exercising all or part of
the Section 5 Rights (the "Purchaser");
(B) this Senior Note;
(C) if this Senior Note is not registered in the name of
the Purchaser, an Assignment or Assignments in the form set forth in
Exhibit II hereto evidencing the assignment of this Senior Note to the
Purchaser, in which case the Registered Holder shall have complied
with the provisions set forth in Section 8 hereof; and
(D) either (x) a check payable to the Company in an
amount equal to the product of the Exercise Price multiplied by the
number of shares of Preferred Stock being purchased upon such exercise
(the "Aggregate Exercise Price"), (y) the surrender to the Company of
securities of the Company having a value equal to the Aggregate
Exercise Price of the number of shares of Preferred Stock being
purchased upon such exercise (which value in the case of debt
securities shall be the principal amount thereof and in the case of
shares of Preferred Stock or Common Stock shall be the Market Price
thereof), or (z) the delivery of a notice to the Company that the
Purchaser is exercising its Section 5 Rights by authorizing the
Company to reduce the number of shares of Preferred Stock subject to
such Section 5 Rights by the number of shares having an aggregate
Market Price equal to the Aggregate Exercise Price.
- 5 -
<PAGE> 11
(ii) Certificates for shares of Preferred Stock purchased
upon exercise of Section 5 Rights shall be delivered by the Company to the
Purchaser within five days after the date of the Exercise Time together with
any cash payable in lieu of a fraction of a share pursuant to Section 6(j)
hereof. Unless the rights granted under this Section 5 expired or all of the
purchase rights represented by this Section 5 have been exercised, in
accordance with Section 8 hereof, the Company shall prepare a new Senior Note,
substantially identical hereto, representing the rights formerly represented by
this Senior Note which have not expired or been exercised and shall, within
such five- day period, deliver such new Senior Note to the Person designated
for delivery in the Exercise Agreement.
(iii) The Preferred Stock issuable upon the exercise of
Section 5 Rights shall be deemed to have been issued to the Purchaser at the
Exercise Time, and the Purchaser shall be deemed for all purposes to have
become the record holder of such Preferred Stock at the Exercise Time.
(iv) The Company shall not close its books against the
transfer of this Senior Note or of any shares of Preferred Stock issued or
issuable upon the exercise of Section 5 Rights in any manner which interferes
with the timely exercise of Section 5 Rights. The Company shall from time to
time take all such action as may be necessary to assure that the par value per
share of the unissued Preferred Stock acquirable upon exercise of the Section 5
Rights is at all times equal to or less than the Exercise Price then in effect.
In the event that the Company fails to comply with its obligations set forth in
the foregoing sentence, the Purchaser may (but shall not be obligated to)
purchase shares of Preferred Stock hereunder at par value, and the Company
shall be obligated to reimburse the Purchaser for the aggregate amount of
consideration paid in connection with such exercise in excess of the Exercise
Price then in effect.
(v) The Company shall assist and cooperate with the
Registered Holder or any Purchaser required to make any governmental filings or
obtain any governmental approvals prior to or in connection with any exercise
of Section 5 Rights.
(vi) Notwithstanding any other provision hereof, if an
exercise of Section 5 Rights is to be made in connection with
- 6 -
<PAGE> 12
a public offering or sale of the Company, the exercise of any portion of
Section 5 Rights may, at the election of the Registered Holder hereof, be
conditioned upon the consummation of the public offering or sale of the Company
in which case such exercise shall not be deemed to be effective until the
consummation of such transaction.
- 7 -
<PAGE> 13
(vii) All shares of Preferred Stock which are issuable
upon exercise of Section 5 Rights shall, when issued and, if applicable, upon
the payment of the Exercise Price therefor, be duly and validly issued, fully
paid and nonassessable and free from all Taxes (subject to the provisions of
Section 6(h)), liens and charges. The Company shall take all such actions as
may be necessary to assure that all such shares of Preferred Stock may be so
issued without violation of any applicable law or governmental regulation or
any requirements of any domestic securities exchange or quotation system upon
which shares of Common Stock or Preferred Stock may be listed (except for
official notice of issuance which shall be immediately delivered by the Company
upon each such issuance). The Company will use its best efforts to cause the
shares of Common Stock issued upon conversion of shares of Preferred Stock,
immediately upon such conversion, to be listed on any domestic securities
exchange upon which shares of such class of Common Stock are listed at the time
of issuance.
(d) Exercise Agreement. Upon any exercise of Section 5
Rights, the Exercise Agreement shall be substantially in the form set forth in
Exhibit I hereto, except that if the shares of Preferred Stock issued in
connection therewith are not to be issued in the name of the Registered Holder,
the Exercise Agreement shall also state the name of the Person to whom the
certificates for the shares of Preferred Stock are to be issued, and if the
number of shares of Preferred Stock to be issued does not include all shares of
Preferred Stock purchasable hereunder, it shall also state the name of the
Person to whom a new Senior Note for the unexercised portion of the rights
hereunder is to be delivered. Such Exercise Agreement shall be dated the
actual date of execution thereof.
(e) Cash Gross-Up For Certain Taxes. In the event that
all or any portion of the principal amount of the Senior Notes are prepaid
during the Section 5 Rights Period and, as a result thereof, the Registered
Holder becomes entitled to purchase from the Company up to the Specified
Number, the Company shall pay, on a Grossed Up Basis, to the Registered Holder
within 30 days of the Trigger Date an amount equal to the Taxes imposed on such
Registered Holder by reason of the prepayment giving rise to the realization of
the Section 5 Rights. For purposes of this Section 5(e), the Registered Holder
shall be presumed to be
- 8 -
<PAGE> 14
liable for Taxes in an amount equal to the product of (x) the highest
applicable marginal tax rates in effect for the taxable period that includes
the Trigger Date and (y) the fair market value of the Specified Number on the
Trigger Date.
- 9 -
<PAGE> 15
(f) Survival. The Section 5 Rights granted hereunder
shall survive prepayment, in whole or in part, of this Senior Note.
Notwithstanding the foregoing, upon prepayment in full of the Senior Notes in a
manner giving rise to Section 5 Rights, such Section 5 Rights must be exercised
within six years from prepayment in full of the Senior Notes.
6. Conversion of Senior Notes.
(a) Right of Conversion. At any time and from time to
time after October 21, 1995, the Registered Holder may, at its option, convert
all or any portion of the Increased Principal Amount of this Senior Note into
fully paid and nonassessable shares of Preferred Stock at the rate of 30.4878
shares of Preferred Stock for each $1,000 in the Increased Principal Amount
(the "Conversion Rate"). Upon such conversion, all accrued and unpaid interest
on the portion of this Senior Note being converted shall be paid in cash to the
Registered Holder. Notwithstanding the foregoing, if the Company gives the
Registered Holder written notice of prepayment as provided in Section 3, the
Registered Holder's right to convert the principal amount of this Senior Note
being so prepaid shall terminate on the close of business on the fifth Business
Day prior to the date fixed for prepayment.
The Registered Holder shall exercise its right to convert by
surrendering this Senior Note at the principal office of the Company and shall
give written notice to the Company at such office stating that the Registered
Holder elects to convert this Senior Note and setting forth the name or names
in which such Registered Holder wishes the certificate or certificates for
Preferred Stock to be issued. Each such notice of election to convert shall
constitute a contract between the Registered Holder and the Company, whereby
the Registered Holder shall be deemed to subscribe for the amount of Preferred
Stock which such Registered Holder shall be entitled to receive upon such
conversion and, in satisfaction of such subscription, to deposit so much of
this Senior Note as is to be converted and, upon delivery of the shares
deliverable and payment of accrued interest and other amounts payable upon
conversion hereof, to release the Company from all liability hereunder to such
extent, and the Company shall be deemed to agree that to the extent this Senior
Note is converted and liability hereon extinguished, it shall constitute
- 10 -
<PAGE> 16
full payment of such subscription for the Preferred Stock to be delivered upon
such conversion.
The Company will, as soon as practicable after such deposit of
this Senior Note accompanied by the written notice, deliver at such address to
the Registered Holder, or to such Person's nominee or nominees, certificates
for the number of full shares of Preferred Stock to which such person shall be
entitled as aforesaid, together with a cash adjustment of any fraction of a
Senior Note as hereafter provided, if not evenly convertible. Subject to the
following provisions of this paragraph, such conversion shall be deemed to have
been made as of the date of such surrender of this Senior Note for conversion
and the Person or Persons entitled to receive the Preferred Stock deliverable
upon conversion of this Senior Note shall be treated for all purposes as the
record holder or holders of such Preferred Stock on such date. The Company
shall not close its books against the transfer of this Senior Note or of any
shares of Preferred Stock issued or issuable upon conversion of this Senior
Note in any manner which interferes with the timely exercise of this Senior
Note.
(b) Adjustment of Conversion Rate. If and whenever the
Company issues or sells, or in accordance with Section 6(c) is deemed to have
issued or sold, any shares of Common Stock (other than pursuant to a Permitted
Issuance) for a consideration per share less than the Market Price of Common
Stock then in effect, then immediately upon such issuance or sale the
Conversion Rate shall be increased to equal the amount determined by
multiplying the Conversion Rate in effect immediately prior to such issuance or
sale by a fraction, the denominator of which will be the sum of (x) the number
of shares of Common Stock Deemed Outstanding immediately prior to such issuance
or sale multiplied by the Market Price per share of Common Stock determined as
of the date of such issuance or sale, plus (y) the consideration, if any,
received by the Company upon such issuance or sale, and the numerator of which
will be the product derived by multiplying such Market Price per share by the
number of shares of Common Stock Deemed Outstanding immediately after such
issuance or sale. For purposes of this Section 6(b), the calculation of the
number of shares of Common Stock Deemed Outstanding shall exclude the shares of
Common Stock issuable upon
- 11 -
<PAGE> 17
conversion of the shares of Preferred Stock issuable upon conversion of or
exercise of Section 5 Rights under this Senior Note.
(c) Effect on Conversion Rate of Certain Events. For
purposes of determining the adjusted Conversion Rate under Section 6(b), the
following shall be applicable:
(i) Issuance of Rights or Options. If the Company in any
manner grants any rights or options to subscribe for or to purchase Common
Stock or any stock or other securities convertible into or exchangeable for
Common Stock (such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein called
"Convertible Securities") and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon conversion or exchange of
such Convertible Securities is less than the Market Price then in effect, then
the total maximum number of shares of Common Stock issuable upon the exercise
of such Options or upon conversion or exchange of the total maximum amount of
such Convertible Securities issuable upon the exercise of such Options shall be
deemed to be outstanding and to have been issued and sold by the Company for
such price per share, unless the issuance of such shares of Common Stock upon
such exercise, conversion or exchange constitutes a Permitted Issuance. For
purposes of this paragraph, the "price per share for which Common Stock is
issuable upon exercise of such Options or upon conversion or exchange of such
Convertible Securities" is determined by dividing (A) the total amount, if any,
received or receivable by the Company as consideration for the granting of all
such Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in the case
of such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable to the Company upon the
issuance or sale of all such Convertible Securities and the conversion or
exchange thereof, by (B) the total maximum number of shares of Common Stock
issuable upon exercise of all such Options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such Options.
No adjustment of the Conversion Rate shall be made upon the actual issuance of
such Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities.
- 12 -
<PAGE> 18
(ii) Issuance of Convertible Securities. If the Company
in any manner issues or sells any Convertible Securities and the price per
share for which Common Stock is issuable upon such conversion or exchange is
less than the Market Price then in effect, then the maximum number of shares of
Common Stock issuable upon conversion or exchange or such Convertible
Securities shall be deemed to be outstanding and to have been issued and sold
by the Company for such price per share, unless the issuance of such shares of
Common Stock upon such exercise, conversion or exchange constitutes a Permitted
Issuance. For the purposes of this paragraph, the "price per share for which
Common Stock is issuable upon such conversion or exchange" is determined by
dividing (A) the total amount received or receivable by the Company as
consideration for the issuance or sale of all such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable to
the Company upon the conversion or exchange thereof, by (B) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of
all such Convertible Securities. No further adjustment of the Conversion Rate
shall be made upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities, and if any such issuance or sale of
such Convertible Securities is made upon exercise of any Options for which
adjustments of the Conversion Rate had been or are to be made pursuant to other
provisions of this Section 6(c), no further adjustment of the Conversion Rate
shall be made by reason of such issuance or sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, the Conversion Rate
in effect at the time of such change shall be readjusted to the Conversion Rate
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the
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<PAGE> 19
termination of any right to convert or exchange any Convertible Securities
without the exercise of such Option or right, the Conversion Rate then in
effect shall be adjusted to the Conversion Rate which would have been in effect
at the time of such expiration or termination had such Option or Convertible
Securities never been issued.
(v) Calculation of Consideration Received. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received thereof shall be
deemed to be the net amount received by the Company thereof. In case any
Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company shall be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company shall be the Market Price thereof as of
the date of receipt. In case any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity the amount of
consideration therefor shall be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities shall be
determined jointly by the Company and the Registered Holders representing a
majority of the shares of Preferred Stock obtainable upon conversion of the
Senior Notes. If such parties are unable to reach agreement within a
reasonable period of time, such fair value shall be determined by an appraiser
jointly selected by the Company and the Registered Holders of Senior Notes
representing a majority of the shares of Preferred Stock obtainable upon
exercise of such Senior Notes. The determination of such appraiser shall be
final and binding on the Company and the Registered Holder, and the fees and
expenses of such appraiser shall be paid by the Company.
(vi) Integrated Transactions. In case any Option is issued
in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
shall be deemed to have been
- 14 -
<PAGE> 20
issued for no consideration; provided, if such other securities are debt
securities (such debt securities so issued are herein referred to as the
"Debt") of the Company or any of its Subsidiaries, the Option shall be deemed
to have been issued for consideration equal to the excess, if any, of (a) the
aggregate face amount (the "Estimated Face Amount") of debt securities with
terms identical to the terms of the Debt (other than the increase to face value
described in this proviso) which the Company or such Subsidiary would have had
to issue had no Option been issued in connection therewith, given the
prevailing market conditions at the time of the issuance of the Debt, in order
to receive the same aggregate net proceeds as is actually received from the
issuance of the Debt, over (b) the aggregate face amount of the Debt. The
Estimated Face Amount shall be as mutually agreed between the Company and the
Registered Holder or, if no such mutual agreement is reached, as set forth in
the written opinion, addressed to the Registered Holder, of an investment bank
of national recognition, retained by the Company and reasonably acceptable to
the Registered Holder; provided, that if no such mutual agreement is reached or
written opinion is received, the Estimated Face Amount shall be deemed to be
zero (0); and provided, further, that the fees and expenses of such investment
bank shall be borne by the Company.
Example: If the Company issues $20 million aggregate
principal amount of 10% subordinated debentures with
a 10-year maturity (and receives aggregate net
proceeds of $20 million), and in connection therewith
issues warrants, and in accordance with the
provisions of Section 6(c)(vi), the Company and the
Registered Holder mutually agree or an investment
bank determines that the Estimated Face Amount of the
subordinated debentures (with terms otherwise
identical to the securities issued) would have been
$21 million (i.e., to yield aggregate net proceeds of
$20 million to the Company), had the warrants not
been issued, then the warrants would be deemed to
have been issued for $1 million.
- 15 -
<PAGE> 21
(vii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time does not include shares owned or held by or for
the account of the Company or any Subsidiary, and the disposition of any shares
so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (B) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(d) Reorganization, Reclassification, Consolidation,
Merger or Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person or other transaction which is effected in such a way that
holders of Preferred Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Preferred Stock is referred to herein as a "Company Sale." Prior
to the consummation of any Company Sale, the Company shall make appropriate
provision (in form and substance satisfactory to the Registered Holders of the
Senior Notes representing a majority of the Preferred Stock obtainable upon
conversion of all Senior Notes then outstanding) to insure that each of the
Registered Holders of the Senior Notes shall thereafter have the right to
acquire and receive in lieu of or addition to (as the case may be) the shares
of Preferred Stock immediately theretofore acquirable and receivable upon the
conversion of such Registered Holder's Senior Note, such shares of stock,
securities or assets as may be issuable or payable with respect to or in
exchange for the number of shares of Common Stock issuable upon conversion of
such shares of Preferred Stock immediately theretofore acquirable and
receivable upon conversion of such Registered Holder's Senior Note had such
Company Sale not taken place. In any such case, the Company shall make
appropriate provision (in form and substance satisfactory to the Registered
Holders of the Senior Notes representing a majority of
- 16 -
<PAGE> 22
the Preferred Stock obtainable upon conversion of all Senior Notes then
outstanding) with respect to such Registered Holder's rights and interests to
insure that the provisions of this Section 6 hereof shall thereafter be
applicable to the Senior Notes (including, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing
entity is other than the Company, an immediate adjustment of the Conversion
Rate to reflect the value for the Preferred Stock reflected by the terms of
such consolidation, merger or sale, if the value so reflected would cause an
increase to the Conversion Rate in effect immediately prior to such
consolidation, merger or sale). The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Company) resulting from consolidation or
merger or the corporation purchasing such assets assumes by written instrument
(in form and substance satisfactory to the Registered Holders of Senior Notes
representing a majority of the Preferred Stock obtainable upon conversion of
all of the Senior Notes then outstanding), the obligation to deliver to each
such Registered Holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such Registered Holder may be
entitled to acquire.
(e) Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 6 but not expressly provided for
by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features
but excluding any Permitted Issuance), then the Company's Board of Directors
shall make an appropriate adjustment in the Conversion Rate so as to protect
the rights of the Registered Holders of the Senior Notes.
(f) Notices.
(i) Immediately upon adjustment of the Conversion Rate or
the Exercise Price, which results in an aggregate change in the Conversion Rate
or Exercise Price in excess of 1% since the last written notice delivered
hereunder, the Company shall give written notice thereof to the Registered
Holder, setting forth in reasonable detail and certifying the calculation of
such adjustment.
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<PAGE> 23
(ii) The Company shall give written notice to the
Registered Holder at least 30 days prior to the date on which the Company
closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Company Sale, dissolution or liquidation.
(iii) The Company shall also give written notice to the
Registered Holder at least 20 days prior to the date on which any Company Sale,
dissolution or liquidation shall take place.
(g) Shares to be Reserved. The Company shall at all
times reserve and keep available, out of its authorized and unissued stock,
solely for the purpose of effecting the conversion of the Senior Notes and
exercise of Section 5 Rights, such number of shares of Preferred Stock as shall
from time to time be sufficient to effect the conversion of all of the Senior
Notes from time to time outstanding and exercise of Section 5 Rights
thereunder. The Company shall from time to time, in accordance with the laws
of the State of Delaware, increase the authorized number of shares of Preferred
Stock if at any time the number of shares of Preferred Stock and Common Stock
not then outstanding shall be insufficient to permit the conversion of this
Senior Note and exercise of Section 5 Rights.
(h) Taxes and Charges. The Company will pay any and all
issue or other Taxes that may be payable in respect of any issuance or delivery
of shares of Preferred Stock on conversion of the Senior Notes or exercise of
Section 5 Rights. The Company shall not, however, be required to pay any Tax
which may be payable in respect of any transfer involved in the issuance or
delivery of Preferred Stock in a name other than that of the Registered Holder,
and no such issuance or delivery shall be made unless and until the Person
requesting such issuance has paid to the Company the amount of such Tax or has
established, to the satisfaction of the Company, that such Tax has been paid.
(i) Actions to Maintain Conversion Price Above Par Value.
Before taking any action which would cause an adjustment in the Conversion Rate
or Exercise Price such that, upon conversion of the shares of Preferred Stock,
would be deemed to be issued below the then par value of the Preferred Stock,
the
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<PAGE> 24
Company will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable shares of Preferred Stock at the Conversion Rate
as so adjusted.
(j) No Fractional Interests. No fractional interests in
Preferred Stock shall be issued upon the conversion of Senior Notes or exercise
of Section 5 Rights. If more than one Senior Note is to be converted at one
time by the same Registered Holder, the number of full shares issuable upon
such conversion shall be computed on the basis of the aggregate principal
amount of the Senior Notes or exercise of Section 5 Rights (or specified
portions thereof) to be so converted or the Section 5 Rights to be so
exercised. Instead of any fractional shares of Preferred Stock which would
otherwise be issuable upon conversion of any Senior Note or Senior Notes or
exercise of Section 5 Rights (or specified portions thereof), the Company will
pay a cash adjustment in respect of such fractional interest in an amount equal
to the same fraction of the Market Price per share of Common Stock at the close
of business on the day of conversion or exercise which such fractional share of
Preferred Stock would be convertible or exercisable into on such date.
7. Definitions. Capitalized terms used and not
defined herein have the respective meanings ascribed thereto in the Agreement.
In addition, the following terms have the respective meanings set forth below:
"Base Rate" shall mean, for any applicable day, the rate of
interest from time to time announced by Chemical Bank at its principal office
located in New York, New York as its prime commercial lending rate as publicly
announced from time to time. Each change in any interest rate provided for
herein based upon the Base Rate resulting from a change in the Base Rate shall
take effect at the time of such change in the Base Rate.
"Common Stock" means, collectively, the Common Stock, par
value $.01 per share, of the Company, and any capital stock of any class of the
Company hereafter authorized which is not limited to a fixed sum or percentage
of par or stated value in respect to the rights of the holders thereof to
participate in dividends or in the distribution of assets upon any liquidation,
dissolution or winding up of the Company; provided that if there
- 19 -
<PAGE> 25
is a change such that the securities issuable upon conversion of the Notes,
exercise of Section 5 Rights or conversion of the Preferred Stock are issued by
an entity other than the Company or there is a change in the class of
securities so issuable, then the term "Common Stock" shall mean one share of
the security issuable upon conversion of the Preferred Stock issuable upon
conversion of the Notes or exercise of Section 5 Rights if such security is
issuable in shares, or shall mean the smallest unit in which such security is
issuable if such security is not issuable in shares.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus
the number of shares of Common Stock deemed to be outstanding pursuant to
Section 6 hereof and of the Senior Subordinated Notes, plus the number of
shares of Common Stock issuable upon conversion of shares of Preferred Stock
issuable upon exercise of all Section 5 Rights and of the Senior Subordinated
Notes.
"Exercise Price" with respect to the exercise of any Section 5
Rights hereunder means the dollar amount representing the quotient of (i)
$1,000 divided by (ii) the Conversion Rate in effect on the earlier of (x) the
applicable Exercise Time and (y) the last day of the Section 5 Rights Period.
"Grossed-Up Basis" means, when used to describe the basis on
which the payment of a specified sum is to be made, a basis such that the
amount of such payment, after being reduced by the amount of all Taxes imposed
on the recipient of such payment as a result of the receipt or accrual of such
payment, will equal the specified sum.
"Market Price" means as to any security the average of the
closing prices of such security's sales on all domestic securities exchanges on
which such security may at the time be listed, or, if there have been no sales
on any such exchange on any day, the average of the highest bid and lowest
asked prices on all such exchanges at the end of such day, or, if on any day
such security is not so listed, the average of the representative bid and asked
prices quoted on Nasdaq as of 4:00 P.M., New York time, on such day, or, if on
any day such security is not quoted on Nasdaq, the average of the highest bid
and lowest asked prices
- 20 -
<PAGE> 26
on such day in the domestic over-the-counter market as reported by the National
Quotation Bureau, Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
"Market Price" is being determined and the 20 consecutive Business Days prior
to such day; provided that if such security is listed on any domestic
securities exchange the term "Business Days" as used in this sentence means
business days on which such exchange is open for trading. If at any time such
security is not listed on any domestic securities exchange or quoted on Nasdaq
or the domestic over-the-counter market, the "Market Price" shall be the fair
value thereof as determined in good faith by the Board of Directors of the
Company (determined without giving effect to any discount for minority
interest, any restrictions on transferability or any lack of liquidity of the
Common Stock or to the fact that the Company has no class of equity registered
under the Exchange Act), such fair value to be determined by reference to the
cash price that would be paid between a fully informed buyer and seller under
no compulsion to buy or sell; provided, however, (i) in the event that
Registered Holders of the Notes representing a majority of the Preferred Stock
purchasable upon the conversion of all the Notes then outstanding and upon
exercise of all Section 5 Rights thereunder disagree with the Board of
Directors' determination of the fair value or (ii) if such fair value is being
determined in connection with an issuance of shares of Common Stock, options or
convertible securities solely to one or more Affiliates, then in each such case
if so required by such Registered Holders, such fair value shall be determined
by an independent nationally recognized investment bank jointly selected by the
Company and such Registered Holders. The determination of such investment bank
shall be final and binding on the Company and the Registered Holders of the
Notes, and the fees and expenses of such investment bank shall be paid by the
Company.
"Permitted Issuance" means the issuance by the Company of
shares of Common Stock (a) upon conversion of the Preferred Stock issued upon
conversion of Notes or exercise of Section 5 Rights under any Notes, (b) in
connection with any dividend or distribution to the holders of Common Stock or
(c) to employees or members of the respective boards of directors of the
Company and its Subsidiaries pursuant to a duly authorized stock option plan of
the Company in an aggregate share amount not exceeding 5%
- 21 -
<PAGE> 27
of the Common Stock Deemed Outstanding as of the Date of Issuance (without
giving effect to the last clause of the first sentence of Section 6(c)(i) of
this Senior Note).
"Preferred Stock" means the Company's Junior Convertible
Preferred Stock, par value $.01 per share; provided that if there is a change
such that the securities issuable upon conversion of Notes or exercise of
Section 5 Rights under any Notes are issued by an entity other than the Company
or there is a change in the class of securities so issuable, then the term
"Preferred Stock" shall mean, as to each share thereof, one share of the
security issuable upon conversion of the Notes or exercise of Section 5 Rights
if such security is issuable in shares, or shall mean the smallest unit in
which such security is issuable if such security is not issuable in shares.
"Section 5 Rights Period" shall have the meaning ascribed
thereto in Section 5(a) of this Senior Note.
"Specified Number" means, with respect to any exercise of
Section 5 Rights hereunder, that number of shares of Preferred Stock which
would have been issuable upon conversion of the Increased Principal Amount of
the Senior Notes as to which the Discretionary Prepayment has been made giving
rise to such exercise of Section 5 Rights on the earlier of (i) the Exercise
Date applicable to such exercise of Section 5 Rights and (ii) the last day of
the Section 5 Rights Period (without giving effect to last sentence of the
first paragraph of Section 6(a) hereof).
"Trigger Date" shall have the meaning ascribed thereto in
Section 5(a) of this Senior Note.
8. Senior Note Exchangeable for Different Denominations.
This Senior Note is exchangeable, upon the surrender hereof by the Registered
Holder at the principal office of the Company, without expense to the
Registered Holder, for a Senior Note or Senior Notes, dated as of the date to
which interest has been paid on the unpaid principal amount of the Senior Note
or Senior Notes so exchanged, or, if no interest has been paid thereon, then
dated as of the date of the Senior Note or Senior Notes so exchanged, each (i)
in the principal amount $1,000 or any multiple thereof, for the same aggregate
unpaid principal amount as the Senior Note or Senior Notes so surrendered for
- 22 -
<PAGE> 28
exchange and each payable to such Person or Persons, or order, as may be
designated by such Registered Holder, and (ii) representing such portion of
such Section 5 Rights as is designated by the Registered Holder at the time of
such surrender; provided, however, that upon any such exchange there shall be
filed with the Company the name and address for all purposes hereof of the
payee of each Senior Note delivered in the exchange for this Senior Note and
such exchanged Senior Note shall in all other respects be in the same form and
have the same terms as this Senior Note. For purposes of Section 5 hereof, the
date the Company initially issues this Note shall be deemed to be the "Date of
Issuance" hereof regardless of the number of times new Senior Notes
representing the unexpired and unexercised Section 5 Rights formerly
represented by this Senior Note shall be issued. All Notes representing
portions of Section 5 Rights are referred to herein as the Senior Notes.
9. Replacement. Upon receipt of evidence reasonable
satisfactory to the Company (an affidavit of the Registered Holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation
of this Senior Note, and in the case of any such loss, theft or destruction,
upon receipt of indemnity reasonably satisfactory to the Company (provided that
if the Registered Holder is a financial institution or other institutional
investor its own agreement shall be satisfactory) or, in the case of any such
mutilation upon surrender of this Senior Note, the Company shall (at its
expense) execute and deliver in lieu of such Senior Note, a Senior Note of like
kind representing the same rights represented by such lost, stolen, destroyed
or mutilated Senior Note and dated as of the date to which interest has been
paid on the unpaid principal amount of the Senior Note so lost, stolen,
destroyed or mutilated, or, if no interest has been paid thereon, then dated as
of the date of the Senior Note so lost, stolen, destroyed or mutilated.
10. Place of Payment. Payments of principal, premium, if
any, and cash interest and other amounts payable hereunder are to be delivered
at the following address:
399 Venture Partners, Inc.
399 Park Avenue, 14th Floor
New York, New York 10043
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<PAGE> 29
or to such other address or to the attention of such other Person as specified
by prior written notice to the Company.
11. No Voting Rights; Limitations of Liability. This Senior
Note shall not entitle the Registered Holder hereof to any voting rights or
other rights as a stockholder of the Company. No provision hereof, in the
absence of affirmative action by the Registered Holder to purchase Preferred
Stock, and no enumeration herein of the rights or privileges of the Registered
Holder shall give rise to any liability of such Registered Holder for the
Exercise Price of Preferred Stock acquirable by exercise of Section 5 Rights or
as a stockholder of the Company.
12. Notices. Except as otherwise expressly provided herein,
all notices, demands or other communications to be given or delivered under or
by reason of the provisions of this Senior Note shall be in writing and shall
be delivered personally, mailed by certified or registered mail, return receipt
requested and postage prepaid or sent via a nationally recognized overnight
courier, or via facsimile. Any such communication shall be deemed to have been
received (i) when delivered, if personally delivered, or sent by nationally
recognized overnight courier or sent via facsimile or (ii) on the third
Business Day following the date on which the piece of mail containing such
communication is posted if sent by certified or registered mail to (a) the
Company, at its principal executive offices and (b) to the Registered Holder of
this Senior Note, at such Registered Holder's address as it appears in the
records of the Company (unless otherwise indicated by any such Registered
Holder).
13. Descriptive Headings; Governing Law. The descriptive
headings of the several Sections and paragraphs of this Senior Note are
inserted for convenience only and do not constitute a part of this Senior Note.
This Senior Note shall be governed and construed in accordance with the laws of
the State of New York applicable to a contract executed and performed in such
state without giving effect to the conflicts of laws principles thereof.
14. Senior Note Register. The Company shall maintain at
its principal executive offices books for the registration and the registration
of transfer of this Senior Note. The Company may deem and treat the Registered
Holder as the absolute owner
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<PAGE> 30
hereof (notwithstanding any notation of ownership or other writing thereon made
by anyone) for all purposes and shall not be affected by any notice to the
contrary.
[SIGNATURE PAGE TO FOLLOW]
- 25 -
<PAGE> 31
IN WITNESS WHEREOF, the Company has executed and delivered
this Senior Note as of the date first above written.
SMITH ENVIRONMENTAL TECHNOLOGIES
CORPORATION (FORMERLY CANONIE
ENVIRONMENTAL SERVICES CORP.)
By: _______________________________
Name: E. Brian Smith
Title: Chairman of the Board and
Chief Executive Officer
- 26 -
<PAGE> 32
EXHIBIT I
EXERCISE AGREEMENT
To: Dated:
The undersigned, pursuant to the provisions set forth
in the attached Senior Note, hereby agrees to subscribe for the purchase of
______ shares of Junior Convertible Preferred Stock covered by Section 5 of
such Senior Note and makes payment herewith in full therefor at the price per
share provided by such Senior Note.
Signature __________________
Address_____________________
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<PAGE> 33
EXHIBIT II
ASSIGNMENT
FOR VALUE RECEIVED,_______________________ hereby sells,
assigns and transfers all the rights of the undersigned under Section 5 of the
attached Senior Note with respect to the number of shares of Junior Convertible
Preferred Stock covered thereby set forth below, unto:
Names of Assignees Address No. of Shares
- ------------------ ------- -------------
Dated: Signature _________________________
Witness____________________________
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<PAGE> 34
Exhibit B
THIS SECURITY WAS SOLD IN A PRIVATE PLACEMENT, WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AND MAY BE
OFFERED OR SOLD ONLY IF REGISTERED UNDER THE SECURITIES ACT OF
1933 OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
THIS CONVERTIBLE SENIOR SUBORDINATED NOTE IS SUBJECT TO THE
TERMS AND CONDITIONS OF THAT CERTAIN AMENDED AND RESTATED NOTE
PURCHASE AGREEMENT, DATED AS OF NOVEMBER 15, 1994, BY AND
BETWEEN SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION (FORMERLY
CANONIE ENVIRONMENTAL SERVICES CORP.) AND 399 VENTURE
PARTNERS, INC.
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.)
Amended and Restated Convertible Senior Subordinated Note
Due 2004
November 21, 1994 No. __
New York, New York Original Principal Amount $_________(1)
FOR VALUE RECEIVED, SMITH ENVIRONMENTAL TECHNOLOGIES
CORPORATION (FORMERLY CANONIE ENVIRONMENTAL SERVICES CORP.), a Delaware
corporation (the "Company"), hereby promises to pay to the order of 399 Venture
Partners, Inc., a Delaware corporation, or its registered assigns (the
"Registered Holder"), Seven Million Eight Hundred Sixty-one Thousand Four
Hundred Ten Dollars (the "Original Principal Amount") on November 21, 2004 (the
"Maturity Date") in accordance with the provisions of this Senior Subordinated
Note. This Senior Subordinated Note is issued by the Company pursuant to the
Amended and Restated Note Purchase
____________________
(1) For each existing Note, the original principal amount.
<PAGE> 35
Agreement, dated as of November 15, 1994, between the Company and 399 Venture
Partners, Inc. (the "Agreement").
1. Interest. (a) Interest will accrue on the unpaid
principal amount of this Senior Subordinated Note at a rate of 10% per annum.
In the event that the Original Principal Amount of this Senior Subordinated
Note is not repaid in full, with interest, on or before October 21, 1995,
interest will accrue, and the Company will thereafter pay interest in cash, on
an amount equal to the then outstanding principal amount hereof plus the amount
of accrued and unpaid interest on this Senior Note through October 21, 1995
(the "Increased Principal Amount") semi-annually in arrears on May 21st and
November 21st of each year, beginning May 21, 1996. Interest will be computed
on the basis of a 360-day year of twelve 30-day months. Upon the occurrence
and during the continuance of an Event of Default, interest will accrue on the
unpaid principal amount of this Senior Subordinated Note, all unpaid interest
on this Senior Subordinated Note and any other amounts payable hereunder, to
the extent permitted by applicable law, at 12% per annum. In no event shall
any interest payable under this Senior Subordinated Note exceed the maximum
rate of interest permissible under any applicable usury law.
(b) The Company (i) may, on each scheduled interest
payment date from and including May 21, 1996 to and including May 21, 1997, and
(ii) shall, to the extent that Article VI of the Agreement then prohibits the
payment of cash interest, on each scheduled interest payment date through the
Maturity Date, in each case in lieu of the payment in whole or in part of
interest in cash on this Senior Subordinated Note, pay interest hereon through
the issuance of additional Senior Subordinated Notes in the form of this Senior
Subordinated Note ("PIK Notes") in an aggregate principal amount equal to the
amount of interest that would be payable with respect to this Senior
Subordinated Note if such interest were paid in cash. In the event that PIK
Notes are issued by the Company in lieu of interest paid in cash, the Company
shall present to the Registered Holder, on the relevant interest payment date,
PIK Notes, dated the date of such interest payment date, in an aggregate
principal amount equal to the amount of cash interest not paid to such holder on
such interest payment date.
- 2 -
<PAGE> 36
2. Method of Payment. The Company will pay the interest
on this Senior Subordinated Note provided for in Section 1 on the relevant
interest payment date to the Registered Holder of record as of the close of
business on the fifth day preceding the relevant interest payment date,
notwithstanding any cancellation of this Senior Subordinated Note after such
date and on or before such interest payment date. The Company will pay
principal, premium, if any, and cash interest in money of the United States
that at the time of payment is legal tender for payment of public and private
debts. The Company shall pay principal, premium, if any, and cash interest on
this Senior Subordinated Note by wire transfer of immediately available funds
to the account specified by the Registered Holder in a written notice to the
Company delivered at least two Business Days prior to such payment date.
3. Prepayment. Subject to Article VI of the Agreement,
at its option, the Company may, from time to time, prepay all or any portion of
the principal amount of this Senior Subordinated Note in cash without any
prepayment penalty or charge except as provided for below. Written notice of
prepayment under this Section 3 shall be given at least 30 days but not more
than 60 days before the prepayment date set forth in such notice to the
Registered Holder at the address provided in or pursuant to Section 10. Any
such prepayment shall be in an amount of at least $50,000 and in integrals of
$1,000, or such lesser amount as equals the then outstanding principal amount
of this Senior Subordinated Note being prepaid, and shall be accompanied by the
cash payment of all accrued and unpaid interest on the portion of the principal
then being prepaid plus, if any such prepayment is made prior to November 21,
1999 and prior to the later of (x) November 21, 1996 and (y) the Positive
Development Trading Date, a premium equal to the applicable percentage of the
principal amount being prepaid, determined as follows:
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<PAGE> 37
<TABLE>
<CAPTION>
During the 12-Month Period
Beginning November 21st Applicable Percentage
-------------------------- ---------------------
<S> <C>
1994 5%
1995 4%
1996 3%
1997 2%
1998 1%
</TABLE>
Subject to the Registered Holder's exercise rights provided for in Section 5
below and right of conversion provided for in Section 6(a) below, once due
notice of prepayment is given, the principal amount of this Senior Subordinated
Note (or applicable portion thereof) shall become due and payable on the
prepayment date.
4. Repayment. The Company will repay this Senior
Subordinated Note in full, in cash on the Maturity Date at 100% of the
outstanding principal amount of this Senior Subordinated Note plus accrued but
unpaid interest thereon to such date.
5. Exercise of Additional Rights.
(a) Exercise Right. In the event that all or any portion
of the principal amount of this Senior Subordinated Note is repaid (a
"Discretionary Prepayment") on any date prior to the later of (i) November 21,
1996 and (ii) the Positive Development Trading Date (any such Discretionary
Payment date being a "Trigger Date", and the period beginning on the date
hereof and ending on the later of the dates set forth in clauses (i) and (ii)
hereof being the "Section 5 Rights Period"), then the Company hereby grants to
the Registered Holder the right, and the Registered Holder is hereby entitled
to purchase from the Company up to the Specified Number of shares of Preferred
Stock as shall be designated by the Registered Holder at a price per share
equal to the then current Exercise Price. The amount and kind of securities
purchasable pursuant to the rights granted hereunder and the purchase price for
such securities are subject to adjustment pursuant to this Senior Subordinated
Note.
(b) Exercise Period. The Registered Holder may exercise,
in whole or in part the purchase rights represented by
- 4 -
<PAGE> 38
this Section 5 ("Section 5 Rights") at any time and from time to time on and
after any Trigger Date to and including 5:00 p.m., New York City time, on the
first anniversary of the redemption or repayment in full of the Senior
Subordinated Notes (the "Exercise Period"); provided, however, that if the
Company shall not have given the Registered Holder written notice of the
expiration of the Exercise Period at least 60 days but not more than 90 days
prior to the expiration of the Exercise Period, the Exercise Period shall be
extended until the 60th day following the receipt by the Registered Holder of
such a notice.
(c) Exercise Procedure.
(i) The Section 5 Rights shall be deemed to have been
exercised when all of the following items have been delivered to the Company
(the "Exercise Time"):
(A) a completed Exercise Agreement, as described in
Section 5(d) below, executed by the Person exercising all or part of
the Section 5 Rights (the "Purchaser");
(B) this Senior Subordinated Note;
(C) if this Senior Subordinated Note is not registered in
the name of the Purchaser, an Assignment or Assignments in the form
set forth in Exhibit II hereto evidencing the assignment of this
Senior Subordinated Note to the Purchaser, in which case the
Registered Holder shall have complied with the provisions set forth in
Section 8 hereof; and
(D) either (x) a check payable to the Company in an
amount equal to the product of the Exercise Price multiplied by the
number of shares of Preferred Stock being purchased upon such exercise
(the "Aggregate Exercise Price"), (y) the surrender to the Company of
securities of the Company having a value equal to the Aggregate
Exercise Price of the number of shares of Preferred Stock being
purchased upon such exercise (which value in the case of debt
securities shall be the principal amount thereof and in the case of
shares of Preferred Stock or Common Stock shall be the Market Price
thereof), or (z) the delivery of a notice to the Company that the
Purchaser is exercising its Section 5 Rights by
- 5 -
<PAGE> 39
authorizing the Company to reduce the number of shares of Preferred
Stock subject to such Section 5 Rights by the number of shares having
an aggregate Market Price equal to the Aggregate Exercise Price.
(ii) Certificates for shares of Preferred Stock purchased
upon exercise of Section 5 Rights shall be delivered by the Company to the
Purchaser within five days after the date of the Exercise Time together with
any cash payable in lieu of a fraction of a share pursuant to Section 6(j)
hereof. Unless the rights granted under this Section 5 expired or all of the
purchase rights represented by this Section 5 have been exercised, in
accordance with Section 8 hereof, the Company shall prepare a new Senior
Subordinated Note, substantially identical hereto, representing the rights
formerly represented by this Senior Subordinated Note which have not expired or
been exercised and shall, within such five-day period, deliver such new Senior
Subordinated Note to the Person designated for delivery in the Exercise
Agreement.
(iii) The Preferred Stock issuable upon the exercise of
Section 5 Rights shall be deemed to have been issued to the Purchaser at the
Exercise Time, and the Purchaser shall be deemed for all purposes to have
become the record holder of such Preferred Stock at the Exercise Time.
(iv) The Company shall not close its books against the
transfer of this Senior Subordinated Note or of any shares of Preferred Stock
issued or issuable upon the exercise of Section 5 Rights in any manner which
interferes with the timely exercise of Section 5 Rights. The Company shall
from time to time take all such action as may be necessary to assure that the
par value per share of the unissued Preferred Stock acquirable upon exercise of
the Section 5 Rights is at all times equal to or less than the Exercise Price
then in effect. In the event that the Company fails to comply with its
obligations set forth in the foregoing sentence, the Purchaser may (but shall
not be obligated to) purchase shares of Preferred Stock hereunder at par value,
and the Company shall be obligated to reimburse the Purchaser for the aggregate
amount of consideration paid in connection with such exercise in excess of the
Exercise Price then in effect.
- 6 -
<PAGE> 40
(v) The Company shall assist and cooperate with the
Registered Holder or any Purchaser required to make any governmental filings or
obtain any governmental approvals prior to or in connection with any exercise
of Section 5 Rights.
(vi) Notwithstanding any other provision hereof, if an
exercise of Section 5 Rights is to be made in connection with a public offering
or sale of the Company, the exercise of any portion of Section 5 Rights may, at
the election of the Registered Holder hereof, be conditioned upon the
consummation of the public offering or sale of the Company in which case such
exercise shall not be deemed to be effective until the consummation of such
transaction.
(vii) All shares of Preferred Stock which are issuable
upon exercise of Section 5 Rights shall, when issued and, if applicable, upon
the payment of the Exercise Price therefor, be duly and validly issued, fully
paid and nonassessable and free from all Taxes (subject to the provisions of
Section 6(h)), liens and charges. The Company shall take all such actions as
may be necessary to assure that all such shares of Preferred Stock may be so
issued without violation of any applicable law or governmental regulation or
any requirements of any domestic securities exchange or quotation system upon
which shares of Common Stock or Preferred Stock may be listed (except for
official notice of issuance which shall be immediately delivered by the Company
upon each such issuance). The Company will use its best efforts to cause the
shares of Common Stock issued upon conversion of shares of Preferred Stock,
immediately upon such conversion, to be listed on any domestic securities
exchange upon which shares of such class of Common Stock are listed at the time
of issuance.
(d) Exercise Agreement. Upon any exercise of Section 5
Rights, the Exercise Agreement shall be substantially in the form set forth in
Exhibit I hereto, except that if the shares of Preferred Stock issued in
connection therewith are not to be issued in the name of the Registered Holder,
the Exercise Agreement shall also state the name of the Person to whom the
certificates for the shares of Preferred Stock are to be issued, and if the
number of shares of Preferred Stock to be issued does not include all shares of
Preferred Stock purchasable hereunder, it shall also state the name of the
Person to whom a new Senior
- 7 -
<PAGE> 41
Subordinated Note for the unexercised portion of the rights hereunder is to be
delivered. Such Exercise Agreement shall be dated the actual date of execution
thereof.
(e) Cash Gross-Up For Certain Taxes. In the event that
all or any portion of the principal amount of the Senior Subordinated Notes are
prepaid during the Section 5 Rights Period and, as a result thereof, the
Registered Holder becomes entitled to purchase from the Company up to the
Specified Number, the Company shall pay, on a Grossed Up Basis, to the
Registered Holder within 30 days of the Trigger Date an amount equal to the
Taxes imposed on such Registered Holder by reason of the prepayment giving rise
to the realization of the Section 5 Rights. For purposes of this Section 5(e),
the Registered Holder shall be presumed to be liable for Taxes in an amount
equal to the product of (x) the highest applicable marginal tax rates in effect
for the taxable period that includes the Trigger Date and (y) the fair market
value of the Specified Number on the Trigger Date.
(f) Survival. The Section 5 Rights granted hereunder
shall survive prepayment, in whole or in part, of this Senior Subordinated
Note. Notwithstanding the foregoing, upon prepayment in full of the Senior
Subordinated Notes in a manner giving rise to Section 5 Rights, such Section 5
Rights must be exercised within six years from prepayment in full of the Senior
Subordinated Notes.
6. Conversion of Senior Subordinated Note.
(a) Right of Conversion. At any time and from time to
time prior to the Maturity Date, the Registered Holder may, at its option,
convert all or any portion of this Senior Subordinated Note into fully paid and
nonassessable shares of Preferred Stock at the rate of 30.4878 shares of
Preferred Stock for each $1,000 in the Increased Principal Amount (the
"Conversion Rate"). Upon such conversion, all accrued and unpaid interest on
the portion of this Senior Subordinated Note being converted shall be paid in
cash to the Registered Holder. Notwithstanding the foregoing, if the Company
gives the Registered Holder written notice of prepayment as provided in Section
3, the Registered Holder's right to convert the principal amount of this Senior
Subordinated Note being so prepaid shall
- 8 -
<PAGE> 42
terminate on the close of business on the fifth Business Day prior to the date
fixed for prepayment.
The Registered Holder shall exercise its right to convert by
surrendering this Senior Subordinated Note at the principal office of the
Company and shall give written notice to the Company at such office stating
that the Registered Holder elects to convert this Senior Subordinated Note and
setting forth the name or names in which such Registered Holder wishes the
certificate or certificates for Preferred Stock to be issued. Each such notice
of election to convert shall constitute a contract between the Registered
Holder and the Company, whereby the Registered Holder shall be deemed to
subscribe for the amount of Preferred Stock which such Registered Holder shall
be entitled to receive upon such conversion and, in satisfaction of such
subscription, to deposit so much of this Senior Subordinated Note as is to be
converted and, upon delivery of the shares deliverable and payment of accrued
interest and other amounts payable upon conversion hereof, to release the
Company from all liability hereunder to such extent, and the Company shall be
deemed to agree that to the extent this Senior Subordinated Note is converted
and liability hereon extinguished, it shall constitute full payment of such
subscription for the Preferred Stock to be delivered upon such conversion.
The Company will, as soon as practicable after such deposit of
this Senior Subordinated Note accompanied by the written notice, deliver at
such address to the Registered Holder, or to such Person's nominee or nominees,
certificates for the number of full shares of Preferred Stock to which such
person shall be entitled as aforesaid, together with a cash adjustment of any
fraction of a Senior Subordinated Note as hereafter provided, if not evenly
convertible. Subject to the following provisions of this paragraph, such
conversion shall be deemed to have been made as of the date of such surrender
of this Senior Subordinated Note for conversion and the Person or Persons
entitled to receive the Preferred Stock deliverable upon conversion of this
Senior Subordinated Note shall be treated for all purposes as the record holder
or holders of such Preferred Stock on such date. The Company shall not close
its books against the transfer of this Senior Subordinated Note or of any
shares of Preferred Stock issued or issuable upon conversion of
- 9 -
<PAGE> 43
this Senior Subordinated Note in any manner which interferes with the timely
exercise of this Senior Subordinated Note.
(b) Adjustment of Conversion Rate. If and whenever the
Company issues or sells, or in accordance with Section 6(c) is deemed to have
issued or sold, any shares of Common Stock (other than pursuant to a Permitted
Issuance) for a consideration per share less than the Market Price of Common
Stock then in effect, then immediately upon such issuance or sale the
Conversion Rate shall be increased to equal the amount determined by
multiplying the Conversion Rate in effect immediately prior to such issuance or
sale by a fraction, the denominator of which will be the sum of (x) the number
of shares of Common Stock Deemed Outstanding immediately prior to such issuance
or sale multiplied by the Market Price per share of Common Stock determined as
of the date of such issuance or sale, plus (y) the consideration, if any,
received by the Company upon such issuance or sale, and the numerator of which
will be the product derived by multiplying such Market Price per share by the
number of shares of Common Stock Deemed Outstanding immediately after such
issuance or sale. For purposes of this Section 6(b), the calculation of the
number of shares of Common Stock Deemed Outstanding shall exclude the shares of
Common Stock issuable upon conversion of the shares of Preferred Stock issuable
upon conversion of or exercise of Section 5 Rights under this Senior
Subordinated Note.
(c) Effect on Conversion Rate of Certain Events. For
purposes of determining the adjusted Conversion Rate under Section 6(b), the
following shall be applicable:
(i) Issuance of Rights or Options. If the Company in any
manner grants any rights or options to subscribe for or to purchase Common
Stock or any stock or other securities convertible into or exchangeable for
Common Stock (such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein called
"Convertible Securities") and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon conversion or exchange of
such Convertible Securities is less than the Market Price then in effect, then
the total maximum number of shares of Common Stock issuable upon the exercise
of such Options or upon conversion or exchange of the total maximum amount of
such
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<PAGE> 44
Convertible Securities issuable upon the exercise of such Options shall be
deemed to be outstanding and to have been issued and sold by the Company for
such price per share, unless the issuance of such shares of Common Stock upon
such exercise, conversion or exchange constitutes a Permitted Issuance. For
purposes of this paragraph, the "price per share for which Common Stock is
issuable upon exercise of such Options or upon conversion or exchange of such
Convertible Securities" is determined by dividing (A) the total amount, if any,
received or receivable by the Company as consideration for the granting of all
such Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in the case
of such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable to the Company upon the
issuance or sale of all such Convertible Securities and the conversion or
exchange thereof, by (B) the total maximum number of shares of Common Stock
issuable upon exercise of all such Options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such Options.
No adjustment of the Conversion Rate shall be made upon the actual issuance of
such Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company
in any manner issues or sells any Convertible Securities and the price per
share for which Common Stock is issuable upon such conversion or exchange is
less than the Market Price then in effect, then the maximum number of shares of
Common Stock issuable upon conversion or exchange or such Convertible
Securities shall be deemed to be outstanding and to have been issued and sold
by the Company for such price per share, unless the issuance of such shares of
Common Stock upon such exercise, conversion or exchange constitutes a Permitted
Issuance. For the purposes of this paragraph, the "price per share for which
Common Stock is issuable upon such conversion or exchange" is determined by
dividing (A) the total amount received or receivable by the Company as
consideration for the issuance or sale of all such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable to
the Company upon the conversion or exchange thereof, by (B) the total maximum
number of shares of Common Stock issuable upon the conversion or
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<PAGE> 45
exchange of all such Convertible Securities. No further adjustment of the
Conversion Rate shall be made upon the actual issuance of such Common Stock
upon conversion or exchange of such Convertible Securities, and if any such
issuance or sale of such Convertible Securities is made upon exercise of any
Options for which adjustments of the Conversion Rate had been or are to be made
pursuant to other provisions of this Section 6(c), no further adjustment of the
Conversion Rate shall be made by reason of such issuance or sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, the Conversion Rate
in effect at the time of such change shall be readjusted to the Conversion Rate
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the termination of any right
to convert or exchange any Convertible Securities without the exercise of such
Option or right, the Conversion Rate then in effect shall be adjusted to the
Conversion Rate which would have been in effect at the time of such expiration
or termination had such Option or Convertible Securities never been issued.
(v) Calculation of Consideration Received. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received thereof shall be
deemed to be the net amount received by the Company thereof. In case any
Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company shall be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company shall be the Market Price thereof as of
the date
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<PAGE> 46
of receipt. In case any Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any merger
in which the Company is the surviving entity the amount of consideration
therefor shall be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be. The fair value
of any consideration other than cash or securities shall be determined jointly
by the Company and the Registered Holders representing a majority of the shares
of Preferred Stock obtainable upon conversion of the Senior Subordinated Notes.
If such parties are unable to reach agreement within a reasonable period of
time, such fair value shall be determined by an appraiser jointly selected by
the Company and the Registered Holders of Senior Subordinated Notes
representing a majority of the shares of Preferred Stock obtainable upon
exercise of such Senior Subordinated Notes. The determination of such
appraiser shall be final and binding on the Company and the Registered Holder,
and the fees and expenses of such appraiser shall be paid by the Company.
(vi) Integrated Transactions. In case any Option is issued
in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
shall be deemed to have been issued for no consideration; provided, if such
other securities are debt securities (such debt securities so issued are herein
referred to as the "Debt") of the Company or any of its Subsidiaries, the
Option shall be deemed to have been issued for consideration equal to the
excess, if any, of (a) the aggregate face amount (the "Estimated Face Amount")
of debt securities with terms identical to the terms of the Debt (other than
the increase to face value described in this proviso) which the Company or such
Subsidiary would have had to issue had no Option been issued in connection
therewith, given the prevailing market conditions at the time of the issuance
of the Debt, in order to receive the same aggregate net proceeds as is actually
received from the issuance of the Debt, over (b) the aggregate face amount of
the Debt. The Estimated Face Amount shall be as mutually agreed between the
Company and the Registered Holder or, if no such mutual agreement is reached,
as set forth in the written opinion, addressed to the Registered Holder, of an
investment bank of
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<PAGE> 47
national recognition, retained by the Company and reasonably acceptable to the
Registered Holder; provided, that if no such mutual agreement is reached or
written opinion is received, the Estimated Face Amount shall be deemed to be
zero (0); and provided, further, that the fees and expenses of such investment
bank shall be borne by the Company.
Example: If the Company issues $20 million aggregate
principal amount of 10% subordinated debentures with
a 10-year maturity (and receives aggregate net
proceeds of $20 million), and in connection therewith
issues warrants, and in accordance with the
provisions of Section 6(c)(vi), the Company and the
Registered Holder mutually agree or an investment
bank determines that the Estimated Face Amount of the
subordinated debentures (with terms otherwise
identical to the securities issued) would have been
$21 million (i.e., to yield aggregate net proceeds of
$20 million to the Company), had the warrants not
been issued, then the warrants would be deemed to
have been issued for $1 million.
(vii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time does not include shares owned or held by or for
the account of the Company or any Subsidiary, and the disposition of any shares
so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (B) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(d) Reorganization, Reclassification, Consolidation,
Merger or Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all
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<PAGE> 48
of the Company's assets to another Person or other transaction which is
effected in such a way that holders of Preferred Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for Preferred Stock is referred to herein as a
"Company Sale." Prior to the consummation of any Company Sale, the Company
shall make appropriate provision (in form and substance satisfactory to the
Registered Holders of the Senior Subordinated Notes representing a majority of
the Preferred Stock obtainable upon conversion of all Senior Subordinated Notes
then outstanding) to insure that each of the Registered Holders of the Senior
Subordinated Notes shall thereafter have the right to acquire and receive in
lieu of or addition to (as the case may be) the shares of Preferred Stock
immediately theretofore acquirable and receivable upon the conversion of such
Registered Holder's Senior Subordinated Note, such shares of stock, securities
or assets as may be issuable or payable with respect to or in exchange for the
number of shares of Common Stock issuable upon conversion of such shares of
Preferred Stock immediately theretofore acquirable and receivable upon
conversion of such Registered Holder's Senior Subordinated Note had such
Company Sale not taken place. In any such case, the Company shall make
appropriate provision (in form and substance satisfactory to the Registered
Holders of the Senior Subordinated Notes representing a majority of the
Preferred Stock obtainable upon conversion of all Senior Subordinated Notes
then outstanding) with respect to such Registered Holder's rights and
interests to insure that the provisions of this Section 6 hereof shall
thereafter be applicable to the Senior Subordinated Notes (including, in the
case of any such consolidation, merger or sale in which the successor entity
or purchasing entity is other than the Company, an immediate adjustment of the
Conversion Rate to reflect the value for the Preferred Stock reflected by
the terms of such consolidation, merger or sale, if the value so reflected
would cause an increase to the Conversion Rate in effect immediately prior to
such consolidation, merger or sale). The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Company) resulting from consolidation or
merger or the corporation purchasing such assets assumes by written instrument
(in form and substance satisfactory to the Registered Holders of Senior
Subordinated Notes representing a majority of the Preferred Stock obtainable
upon conversion of all
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<PAGE> 49
of the Senior Subordinated Notes then outstanding), the obligation to deliver
to each such Registered Holder such shares of stock, securities or assets as,
in accordance with the foregoing provisions, such Registered Holder may be
entitled to acquire.
(e) Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 6 but not expressly provided for
by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features
but excluding any Permitted Issuance), then the Company's Board of Directors
shall make an appropriate adjustment in the Conversion Rate so as to protect
the rights of the Registered Holders of the Senior Subordinated Notes.
(f) Notices.
(i) Immediately upon adjustment of the Conversion Rate or
the Exercise Price, which results in an aggregate change in the Conversion Rate
or Exercise Price in excess of 1% since the last written notice delivered
hereunder, the Company shall give written notice thereof to the Registered
Holder, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Company shall give written notice to the
Registered Holder at least 30 days prior to the date on which the Company
closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Company Sale, dissolution or liquidation.
(iii) The Company shall also give written notice to the
Registered Holder at least 20 days prior to the date on which any Company Sale,
dissolution or liquidation shall take place.
(g) Shares to be Reserved. The Company shall at all
times reserve and keep available, out of its authorized and unissued stock,
solely for the purpose of effecting the conversion of the Senior Subordinated
Notes and exercise of Section 5 Rights, such number of shares of Preferred
Stock as
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<PAGE> 50
shall from time to time be sufficient to effect the conversion of all of the
Senior Subordinated Notes from time to time outstanding and exercise of Section
5 Rights thereunder. The Company shall from time to time, in accordance with
the laws of the State of Delaware, increase the authorized number of shares of
Preferred Stock if at any time the number of shares of Preferred Stock and
Common Stock not then outstanding shall be insufficient to permit the
conversion of this Senior Subordinated Note and exercise of Section 5 Rights.
(h) Taxes and Charges. The Company will pay any and all
issue or other Taxes that may be payable in respect of any issuance or delivery
of shares of Preferred Stock on conversion of the Senior Subordinated Notes or
exercise of Section 5 Rights. The Company shall not, however, be required to
pay any Tax which may be payable in respect of any transfer involved in the
issuance or delivery of Preferred Stock in a name other than that of the
Registered Holder, and no such issuance or delivery shall be made unless and
until the Person requesting such issuance has paid to the Company the amount of
such Tax or has established, to the satisfaction of the Company, that such Tax
has been paid.
(i) Actions to Maintain Conversion Price Above Par Value.
Before taking any action which would cause an adjustment in the Conversion Rate
or Exercise Price such that, upon conversion of the shares of Preferred Stock,
would be deemed to be issued below the then par value of the Preferred Stock,
the Company will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable shares of Preferred Stock at the Conversion Rate
as so adjusted.
(j) No Fractional Interests. No fractional interests in
Preferred Stock shall be issued upon the conversion of Senior Subordinated
Notes or exercise of Section 5 Rights. If more than one Senior Subordinated
Note is to be converted at one time by the same Registered Holder, the number
of full shares issuable upon such conversion shall be computed on the basis of
the aggregate principal amount of the Senior Subordinated Notes or exercise of
Section 5 Rights (or specified portions thereof) to be so converted or the
Section 5 Rights to be so exercised. Instead of any fractional shares of
Preferred Stock which would otherwise be issuable upon conversion of any Senior
Subordinated
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<PAGE> 51
Note or Senior Subordinated Notes or exercise of Section 5 Rights (or specified
portions thereof), the Company will pay a cash adjustment in respect of such
fractional interest in an amount equal to the same fraction of the Market Price
per share of Common Stock at the close of business on the day of conversion or
exercise which such fractional share of Preferred Stock would be convertible or
exercisable into on such date.
7. Definitions. Capitalized terms used and not
defined herein have the respective meanings ascribed thereto in the Agreement.
In addition, the following terms have the respective meanings set forth below:
"Common Stock" means, collectively, the Common Stock, par
value $.01 per share, of the Company, and any capital stock of any class of the
Company hereafter authorized which is not limited to a fixed sum or percentage
of par or stated value in respect to the rights of the holders thereof to
participate in dividends or in the distribution of assets upon any liquidation,
dissolution or winding up of the Company; provided that if there is a change
such that the securities issuable upon conversion of the Notes, exercise of
Section 5 Rights or conversion of the Preferred Stock are issued by an entity
other than the Company or there is a change in the class of securities so
issuable, then the term "Common Stock" shall mean one share of the security
issuable upon conversion of the Preferred Stock issuable upon conversion of the
Notes or exercise of Section 5 Rights if such security is issuable in shares,
or shall mean the smallest unit in which such security is issuable if such
security is not issuable in shares.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus
the number of shares of Common Stock deemed to be outstanding pursuant to
Section 6 hereof and of the Senior Notes, plus the number of shares of Common
Stock issuable upon conversion of shares of Preferred Stock issuable upon
exercise of all Section 5 Rights and of the Senior Notes.
"Exercise Price" with respect to the exercise of any Section 5
Rights hereunder means the dollar amount representing the quotient of (i)
$1,000 divided by (ii) the Conversion Rate in
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<PAGE> 52
effect on the earlier of (x) the applicable Exercise Time and (y) the last day
of the Section 5 Rights Period.
"Grossed-Up Basis" means, when used to describe the basis on
which the payment of a specified sum is to be made, a basis such that the
amount of such payment, after being reduced by the amount of all Taxes imposed
on the recipient of such payment as a result of the receipt or accrual of such
payment, will equal the specified sum.
"Market Price" means as to any security the average of the
closing prices of such security's sales on all domestic securities exchanges on
which such security may at the time be listed, or, if there have been no sales
on any such exchange on any day, the average of the highest bid and lowest
asked prices on all such exchanges at the end of such day, or, if on any day
such security is not so listed, the average of the representative bid and asked
prices quoted on Nasdaq as of 4:00 P.M., New York time, on such day, or, if on
any day such security is not quoted on Nasdaq, the average of the highest bid
and lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which "Market Price" is being determined and the 20
consecutive Business Days prior to such day; provided that if such security is
listed on any domestic securities exchange the term "Business Days" as used in
this sentence means business days on which such exchange is open for trading.
If at any time such security is not listed on any domestic securities exchange
or quoted on Nasdaq or the domestic over-the-counter market, the "Market Price"
shall be the fair value thereof as determined in good faith by the Board of
Directors of the Company (determined without giving effect to any discount for
minority interest, any restrictions on transferability or any lack of liquidity
of the Common Stock or to the fact that the Company has no class of equity
registered under the Exchange Act), such fair value to be determined by
reference to the cash price that would be paid between a fully informed buyer
and seller under no compulsion to buy or sell; provided, however, (i) in the
event that Registered Holders of the Notes representing a majority of the
Preferred Stock purchasable upon the conversion of all the Notes then
outstanding and upon exercise of all Section 5 Rights thereunder disagree
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<PAGE> 53
with the Board of Directors' determination of the fair value or (ii) if such
fair value is being determined in connection with an issuance of shares of
Common Stock, options or convertible securities solely to one or more
Affiliates, then in each such case if so required by such Registered Holders,
such fair value shall be determined by an independent nationally recognized
investment bank jointly selected by the Company and such Registered Holders.
The determination of such investment bank shall be final and binding on the
Company and the Registered Holders of the Notes, and the fees and expenses of
such investment bank shall be paid by the Company.
"Permitted Issuance" means the issuance by the Company of
shares of Common Stock (a) upon conversion of the Preferred Stock issued upon
conversion of Notes or exercise of Section 5 Rights under any Notes, (b) in
connection with any dividend or distribution to the holders of Common Stock or
(c) to employees or members of the respective boards of directors of the
Company and its Subsidiaries pursuant to a duly authorized stock option plan of
the Company in an aggregate share amount not exceeding 5% of the Common Stock
Deemed Outstanding as of the Date of Issuance (without giving effect to the
last clause of the first sentence of Section 6(c)(i) of this Senior
Subordinated Note).
"Preferred Stock" means the Company's Junior Convertible
Preferred Stock, par value $.01 per share; provided that if there is a change
such that the securities issuable upon conversion of Notes or exercise of
Section 5 Rights under any Notes are issued by an entity other than the Company
or there is a change in the class of securities so issuable, then the term
"Preferred Stock" shall mean one share of the security issuable upon conversion
of the Notes or exercise of Section 5 Rights if such security is issuable in
shares, or shall mean the smallest unit in which such security is issuable if
such security is not issuable in shares.
"Section 5 Rights Period" shall have the meaning ascribed
thereto in Section 5(a) of this Senior Subordinated Note.
"Specified Number" means, with respect to any exercise of
Section 5 Rights hereunder, that number of shares of Preferred Stock which
would have been issuable upon conversion of the
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<PAGE> 54
principal amount of the Senior Subordinated Notes as to which the Discretionary
Prepayment has been made giving rise to such exercise of Section 5 Rights on
the earlier of (i) the Exercise Date applicable to such exercise of Section 5
Rights and (ii) the last day of the Section 5 Rights Period (without giving
effect to last sentence of the first paragraph of Section 6(a) hereof).
"Trigger Date" shall have the meaning ascribed thereto in
Section 5(a) of this Senior Subordinated Note.
8. Senior Subordinated Note Exchangeable for Different
Denominations. This Senior Subordinated Note is exchangeable, upon the
surrender hereof by the Registered Holder at the principal office of the
Company, without expense to the Registered Holder, for a Senior Subordinated
Note or Senior Subordinated Notes, dated as of the date to which interest has
been paid on the unpaid principal amount of the Senior Subordinated Note or
Senior Subordinated Notes so exchanged, or, if no interest has been paid
thereon, then dated as of the date of the Senior Subordinated Note or Senior
Subordinated Notes so exchanged, each (i) in the principal amount $1,000 or any
multiple thereof, for the same aggregate unpaid principal amount as the Senior
Subordinated Note or Senior Subordinated Notes so surrendered for exchange and
each payable to such Person or Persons, or order, as may be designated by such
Registered Holder, and (ii) representing such portion of such Section 5 Rights
as is designated by the Registered Holder at the time of such surrender;
provided, however, that upon any such exchange there shall be filed with the
Company the name and address for all purposes hereof of the payee of each
Senior Subordinated Note delivered in the exchange for this Senior Subordinated
Note and such exchanged Senior Subordinated Note shall in all other respects be
in the same form and have the same terms as this Senior Subordinated Note. For
purposes of Section 5 hereof, the date the Company initially issues this Senior
Subordinated Note shall be deemed to be the "Date of Issuance" hereof
regardless of the number of times new Senior Subordinated Notes representing
the unexpired and unexercised Section 5 Rights formerly represented by this
Senior Subordinated Note shall be issued. All Notes representing portions of
Section 5 Rights are referred to herein as the Senior Subordinated Notes.
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<PAGE> 55
9. Replacement. Upon receipt of evidence reasonable
satisfactory to the Company (an affidavit of the Registered Holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation
of this Senior Subordinated Note, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the Company
(provided that if the Registered Holder is a financial institution or other
institutional investor its own agreement shall be satisfactory) or, in the case
of any such mutilation upon surrender of this Senior Subordinated Note, the
Company shall (at its expense) execute and deliver in lieu of such Senior
Subordinated Note, a Senior Subordinated Note of like kind representing the
same rights represented by such lost, stolen, destroyed or mutilated Senior
Subordinated Note and dated as of the date to which interest has been paid on
the unpaid principal amount of the Senior Subordinated Note so lost, stolen,
destroyed or mutilated, or, if no interest has been paid thereon, then dated as
of the date of the Senior Subordinated Note so lost, stolen, destroyed or
mutilated.
10. Place of Payment. Payments of principal, premium, if
any, and cash interest and other amounts payable hereunder are to be delivered
at the following address:
399 Venture Partners, Inc.
399 Park Avenue, 14th Floor
New York, New York 10043
or to such other address or to the attention of such other Person as specified
by prior written notice to the Company.
11. No Voting Rights; Limitations of Liability. This
Senior Subordinated Note shall not entitle the Registered Holder hereof to any
voting rights or other rights as a stockholder of the Company. No provision
hereof, in the absence of affirmative action by the Registered Holder to
purchase Preferred Stock, and no enumeration herein of the rights or privileges
of the Registered Holder shall give rise to any liability of such Registered
Holder for the Exercise Price of Preferred Stock acquirable by exercise of
Section 5 Rights or as a stockholder of the Company.
12. Notices. Except as otherwise expressly provided herein,
all notices, demands or other communications to be given or delivered under or
by reason of the provisions of this Senior
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<PAGE> 56
Subordinated Note shall be in writing and shall be delivered personally, mailed
by certified or registered mail, return receipt requested and postage prepaid
or sent via a nationally recognized overnight courier, or via facsimile. Any
such communication shall be deemed to have been received (i) when delivered, if
personally delivered, or sent by nationally recognized overnight courier or
sent via facsimile or (ii) on the third Business Day following the date on
which the piece of mail containing such communication is posted if sent by
certified or registered mail to (a) the Company, at its principal executive
offices and (b) to the Registered Holder of this Senior Subordinated Note, at
such Registered Holder's address as it appears in the records of the Company
(unless otherwise indicated by any such Registered Holder).
13. Descriptive Headings; Governing Law. The descriptive
headings of the several Sections and paragraphs of this Senior Subordinated
Note are inserted for convenience only and do not constitute a part of this
Senior Subordinated Note. This Senior Subordinated Note shall be governed and
construed in accordance with the laws of the State of New York applicable to a
contract executed and performed in such state without giving effect to the
conflicts of laws principles thereof.
14. Senior Subordinated Note Register. The Company shall
maintain at its principal executive offices books for the registration and the
registration of transfer of this Senior Subordinated Note. The Company may
deem and treat the Registered Holder as the absolute owner hereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone) for all purposes and shall not be affected by any notice to the
contrary.
[SIGNATURE PAGE TO FOLLOW]
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<PAGE> 57
IN WITNESS WHEREOF, the Company has executed and delivered
this Senior Subordinated Note as of the date first above written.
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
(FORMERLY CANONIE ENVIRONMENTAL SERVICES
CORP.)
By: /s/ E. BRIAN SMITH
---------------------------------
Name: E. Brian Smith
Title: Chairman of the Board and
Chief Executive Officer
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<PAGE> 58
EXHIBIT I
EXERCISE AGREEMENT
To: Dated:
The undersigned, pursuant to the provisions set forth
in the attached Senior Subordinated Note, hereby agrees to subscribe for the
purchase of ______ shares of Junior Convertible Preferred Stock covered by
Section 5 of such Senior Subordinated Note and makes payment herewith in full
therefor at the price per share provided by such Senior Subordinated Note.
Signature __________________
Address_____________________
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<PAGE> 59
EXHIBIT II
ASSIGNMENT
FOR VALUE RECEIVED,_______________________ hereby sells,
assigns and transfers all the rights of the undersigned under Section 5 of the
attached Senior Subordinated Note with respect to the number of shares of
Junior Convertible Preferred Stock covered thereby set forth below, unto:
Names of Assignees Address No. of Shares
- ------------------ ------- -------------
Dated: Signature _________________________
Witness____________________________
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<PAGE> 1
EXHIBIT 11
SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION
COMPUTATION OF (LOSS) EARNINGS PER SHARE
(In thousands, except per share data)
unaudited
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1996 1995 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares of common
stock outstanding 5,902 5,817 5,872 5,786
Incremental shares applicable to assumed
exercise of stock options 9 174 18 189
------- ------ ------- ------
Weighted average number of common and
common equivalent shares outstanding 5,911 5,991 5,890 5,975
======= ====== ======= ======
Income before extraordinary charge $(1,784) $ 466 $(3,994) $1,559
Extraordinary charge - - (1,395) -
------- ------ ------- ------
Net (loss) income $(1,784) $ 466 $(5,389) $1,559
======= ====== ======= ======
Net (loss) income applicable to common stock $(1,966) $ 338 $(5,841) $1,170
======= ====== ======= ======
Income (loss) per common and common
equivalent share:
(Loss) Income before extraordinary charge $ (0.30) $ 0.08 $ (0.68) $ 0.26
Extraordinary charge - - (0.23) -
------- ------ ------- ------
Net (loss) income $ (0.30) $ 0.08 $ (0.91) $ 0.26
======= ====== ======= ======
Net (loss) income applicable to common stock $ (0.33) $ 0.06 $ (0.99) $ 0.20
======= ====== ======= ======
</TABLE>
The computation of income (loss) per common equivalent share on a fully diluted
basis does not materially differ from the amounts calculated on a primary basis.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS ON THE COMPANY'S FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS ON THE COMPANY'S FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 625
<SECURITIES> 0
<RECEIVABLES> 40,595
<ALLOWANCES> 956
<INVENTORY> 0
<CURRENT-ASSETS> 43,128
<PP&E> 26,525
<DEPRECIATION> 10,918
<TOTAL-ASSETS> 95,205
<CURRENT-LIABILITIES> 32,165
<BONDS> 37,810
6,804
0
<COMMON> 59
<OTHER-SE> 14,557
<TOTAL-LIABILITY-AND-EQUITY> 95,205
<SALES> 0
<TOTAL-REVENUES> 38,011
<CGS> 0
<TOTAL-COSTS> 34,457
<OTHER-EXPENSES> 4,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,103
<INCOME-PRETAX> (1,754)
<INCOME-TAX> 30
<INCOME-CONTINUING> (1,784)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,966)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
