UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1996 COMMISSION FILE NO. 1-5276
PROLER INTERNATIONAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0494529
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4265 SAN FELIPE, SUITE 900 77027
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 627-3737
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, $1.00 par value per share ON WHICH REGISTERED
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant 60 days prior to the date of filing.
Based on last sale on April 29, 1996: $ 32,443,000
Indicate the shares outstanding of each of the registrant's classes of
common stock, as of the close of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 4,717,356
(TITLE OF CLASS) (NUMBER OF SHARES OUTSTANDING)
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy statement for the Company's 1996 Annual Meeting of Stockholders
is incorporated by reference into Part III of this report.
P A R T I
ITEM 1. BUSINESS.
(A) CURRENT DEVELOPMENTS
Proler International Corp. ("Proler" or the "Company") is an
environmental services, technology and industrial energy company primarily
involved in the recovery, recycling and processing of metals and industrial
wastes for use worldwide. From 20 operating locations, owned either through
wholly-owned subsidiaries or through joint ventures, Proler provides
high-quality raw materials, recycling and energy services to industrial
customers.
Proler's principal business, the purchase, sale and processing of scrap
metals, is conducted through 50% or less-owned incorporated and unincorporated
joint operations ("joint operations"), which primarily make export sales. Proler
Recycling, Inc. ("Proler Recycling"), a subsidiary of the Company, operates
three plants which collectively sell precipitation iron, low residual steel,
copper, tin and specialty chemicals in the domestic market. Proler Environmental
Services, Inc. ("Proler Environmental"), another subsidiary, is actively
marketing its patented gasification technology.
For the fiscal year ended January 31, 1996, the Company reported a
consolidated net loss of $9,044,000 as compared with consolidated net income of
$303,000 in fiscal 1995. For the fourth quarter ended January 31, 1996, the
Company reported a consolidated net loss of $10,880,000 as compared with
consolidated net income of $2,381,000 for the fourth quarter of fiscal 1995.
Asset write-downs and other charges of $6.5 million recorded in the fourth
quarter contributed to the fiscal 1996 net loss. See Note 4 to the Consolidated
Financial Statements. The fiscal 1996 fourth quarter results also include a $2.7
million pretax loss from joint operations compared to $2.8 million of pretax
earnings in the fiscal 1995 fourth quarter. Due to continuing losses in the
Company's wholly-owned operations and continued lower sales volumes and prices
at its joint operations, the Company expects to report a net loss in the first
quarter of fiscal 1997. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In general, the Company's joint operations are structured so that
policy decisions require the unanimous consent of the participants. As a result,
the Company's control over the joint operations is limited and must be exercised
in concert with its partners in those operations. The Company regularly makes
advances to the joint operations, primarily for the purchase of inventory and
for operating costs, and receives periodic distributions, primarily from the
sales proceeds of export shipments. Recently, the joint operations have
experienced increased accumulations of inventory which could adversely affect
the Company's liquidity position. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations Liquidity, Financing
and Capital Resources."
1
In October, 1995, the Company sold its interests in the HPI and HPNJ
joint ventures, which operate under the name Metro Metal Recycling, to a partner
in those ventures. See Note 6 to the Consolidated Financial Statements. During
fiscal 1996, the Company's advances to joint operations exceeded distributions
by $4.2 million, exclusive of the cash proceeds received from the sale of
interests in HPI and HPNJ. The Company's share of sales from the joint
operations, which are accounted for under the equity method of accounting, was
$142.9 million, $124.1 million and $142.2 million in fiscal 1996, 1995 and 1994,
respectively. The Company's equity share of the joint operations pretax earnings
were $3.6 million, $3.0 million and $2.8 million in fiscal 1996, 1995 and 1994,
respectively.
Proler Recycling's plants are located in Coolidge, Arizona; Lathrop,
California; and Seattle, Washington. Revenues from these plants totaled $13.4
million, $13.9 million and $13.7 million in fiscal 1996, 1995 and 1994,
respectively. In November, 1995, Proler Recycling substantially completed
construction of new plant facilities in Coolidge at a cost of approximately $9
million. The new facilities, combined with the existing plant operations, are
designed to recover copper, tin and other metals and chemicals derived from the
manufacture of electronic printed circuit boards. A series of construction
delays and start up problems at the new facilities resulted in operating losses
during fiscal 1996 that have continued through the first quarter of fiscal 1997.
Management is currently addressing these operating and technical issues in an
effort to have the plant operating at or near full capacity by the end of fiscal
1997. During fiscal 1996, Proler Recycling continued the marketing of specialty
chemicals to a variety of industries on a limited basis.
Proler Environmental expended approximately $1.3 million during fiscal
1996 in the continued development and testing of its gasification technology,
and in June, 1995 received a United States Patent on this process. This
gasification technology uses a thermal conversion process to recycle hydrocarbon
and cellulose-based wastes to produce a synthesis gas suitable for sale to
industrial users and utilities. The Company is currently assessing the
opportunities for and feasibility of various commercial applications of the
gasification process, and is involved in discussions with several domestic and
foreign entities which could lead to the construction of one or more
gasification plants. In fiscal 1997, the Company expects to incur up to $1.5
million in the development of an integrated gasification/vitrification process
which will produce, in addition to a synthesis gas, a glass frit from the
residue of the gasification process, and an additional $1.5 million on
feasibility studies, marketing activities and continued research and development
on the gasification process.
The Company is in the fourth year of a five year business plan, adopted
with the goals of restructuring, selling or otherwise disposing of certain
underperforming and unproductive assets, and supplementing the Company's core
commodity metals business by investing in technologies that profit from
processing and recycling waste and secondary materials. During the past three
years, the Company has completed the sale of its domestic scrap operations and
sold certain joint venture interests, real estate holdings and other
nonoperating assets. See Note 6 to the Consolidated Financial Statements. The
Company is continuing its efforts to transition from its
2
participation in the highly cyclical scrap processing business, primarily
through joint operations over which it exercises limited control, to a recycling
company engaged in environmental services, energy supply and metals recovery
with majority control over its significant assets.
In February 1996, the Company adopted a holding company structure to
enhance its strategic planning flexibility and to aid in the management,
operation and financing of the Company's various businesses. See Note 8 to the
Consolidated Financial Statements. The Company has also retained two investment
banking concerns, J. C. Bradford & Co. and Chase Securities, Inc., to assist in
the evaluation of a broad range of strategic alternatives to enhance shareholder
value which may include sales, public or private offerings of debt or equity
securities, mergers, spin-offs, joint ventures and acquisitions. These actions
may involve one, two or all of the Company's businesses.
The statements contained in this report, in addition to historical
information, are forward looking statements based on the Company's current
expectations, and actual results may vary materially. The Company's business and
financial results are subject to various risks and uncertainties, including the
cyclical nature of the scrap processing business, the fact that the Company
exercises limited control over its joint operations, competitive factors such as
the availability and cost of raw scrap for inventory, fluctuations in sales
prices and demand for the products of the Company and the joint operations, the
ability to reduce excess inventories at the joint operations, the Company's
ability to correct operational and startup problems at its Coolidge facility as
projected, the uncertainty of any future transactions resulting from the
Company's retention of investment bankers and the other risks and uncertainties
discussed herein. These forward looking statements are provided as a framework
for the Company's discussion of its business and management's analysis of the
Company's financial condition and results of operations. The Company does not
intend to provide updated information other than in the context of its Quarterly
Reports on Form 10-Q.
(B) GENERAL DEVELOPMENT OF BUSINESS
The Company is the successor to the former Proler International Corp.
("PIC") which was originally incorporated in Texas in 1947 as the successor to a
scrap business founded by the late Ben and Rose Proler in 1925. PIC changed its
state of incorporation to Delaware in 1966. Effective February 28, 1996, PIC
reorganized into a "holding company" structure, with the Company owning all of
the assets previously owned by PIC and conducting all of the business previously
conducted by PIC through newly-formed, wholly-owned subsidiaries of the Company.
The reorganization was effected by a merger conducted pursuant to Delaware
General Corporation Law. In the merger, PIC merged with a newly-formed,
wholly-owned indirect subsidiary of the Company, with PIC as the surviving
corporation of the merger. All issued shares of common stock of PIC were
automatically converted on a share-for-share basis into shares of common stock
of the Company. PIC then changed its name to "Joint Venture Operations, Inc.,"
and the Company changed its name to "Proler International Corp." See Note 8 to
the Consolidated Financial Statements.
3
The Company's operations use a process developed by PIC (the "Proler
Process") which converts bulky and impure scrap into a high purity steel scrap
("Prolerized Scrap") possessing the characteristics of homogeneity, high
density, uniform size and consistent quality. The Company also processes
low-grade ferrous scrap into premium quality scrap for use as a raw material in
the production of iron and low residual steel, and into precipitation iron for
use in the production of copper. Additionally, the Company recovers and sells
certain non-ferrous metals, including aluminum, brass, copper, tin and zinc.
Historically, as Prolerized Scrap operations expanded geographically,
PIC followed a policy of entering into either incorporated or unincorporated
joint operations with scrap operators in various areas. By so doing, PIC was
able to capitalize upon its co-venturer's established relationships with
suppliers of raw materials, reduce its capital commitments with respect to each
plant, and make use of existing sales organizations. PIC granted each joint
operation an exclusive royalty-free license to use the Proler Process (including
any improvements, refinements and additions thereto) and the trademark
"Prolerized" within a designated area of operations. Under the joint operation
agreements, the transferability of each co-venturer's interest is restricted,
and the unincorporated joint operations require unanimous approval of the
partners on all policy decisions. With the sale of the Company's domestic scrap
operations, the Company's Prolerized Scrap business is conducted through the
joint operations, which are involved in selling primarily to foreign markets.
Proler Recycling's plants collectively produce precipitation iron and
low residual steel and recover tin, all of which is sold to domestic markets.
Proler Recycling recently placed in service new plant facilities to recover
copper, tin and other metals and chemicals derived from the manufacture of
electronic printed circuit boards.
The following table lists the principal facilities operated by the
Company and its joint operations during fiscal 1996 and the type of material
processed by location:
CONSOLIDATED FACILITIES TYPE OF MATERIAL PROCESSED
- ----------------------- --------------------------
Coolidge, Arizona Precipitation iron, tin, copper, etchants,
specialty chemicals
Lathrop, California Precipitation iron
Seattle, Washington Low residual ferrous, tin
JOINT OPERATION FACILITIES TYPE OF MATERIAL PROCESSED
- -------------------------- --------------------------
Los Angeles, California Prolerized, other ferrous, and non-ferrous
Everett, Massachusetts Prolerized, other ferrous, and non-ferrous
Worcester, Massachusetts Prolerized and non-ferrous
Jersey City, New Jersey Prolerized and non-ferrous
Queens, New York Prolerized
Newark, New Jersey (1) Other ferrous
Providence, Rhode Island Other ferrous
4
____________
(1) Sold in October, 1995
In addition to the above, the Company's joint operations include ten feeder
yard locations (one in Arizona, six in California, one in Maine, one in
Massachusetts and one in New Hampshire) where scrap metal is bought, processed
and transported to one of the above joint operation facilities for subsequent
sale.
The following table shows selected financial information for the Company's
share of its joint operations, the Proler Recycling plants and the
Company-operated scrap operations (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
1996 1995 1994
---------- ----------- -------
SHARE OF JOINT OPERATIONS
<S> <C> <C> <C>
Net sales ................................... $ 142,931 $ 124,103 $ 142,197
============ =========== ===========
Gross profit ................................ $ 7,429 $ 6,257 $ 6,037
============ =========== ===========
Gross tons shipped........................... 986 988 1,212
============ =========== ===========
PROLER RECYCLING PLANTS
Net sales ................................... $ 13,432 $ 13,941 $ 13,723
============ =========== ===========
Gross profit (loss).......................... $ (652) $ 670 $ 1,708
============ =========== ===========
Gross tons shipped........................... 77 100 105
============ =========== ===========
COMPANY OPERATED SCRAP OPERATIONS (1)
Net sales ................................... $ -- $ 4,667 $ 29,983
============ =========== ===========
Gross profit (loss).......................... $ -- $ 50 $ 1,378
============ =========== ===========
Gross tons shipped........................... -- 30 220
============ =========== ===========
</TABLE>
(1) Company operated scrap operations include the Kansas City, Kansas, and
Vinton, Texas facilities both of which were sold in fiscal 1995.
(C) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company considers itself to be engaged in a single industry
segment, the processing of metals for recycling and activities incidental
thereto. The following table presents financial information about the Company's
consolidated sales, gross profit (loss) from operations, operating income (loss)
and identifiable assets for the last three fiscal years (dollars in thousands):
5
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------------------
1996 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
Consolidated net sales to unaffiliated
customers (1)................................ $ 13,432 $ 18,610 $ 43,706
Gross profit (loss) from operations................ (652) 720 3,086
Operating income (loss):
Consolidated operations (2)................... (12,747) (4,693) (1,964)
Joint operations.............................. 3,575 2,974 2,768
------------ ------------- -------------
(9,172) (1,719) 804
------------ ------------- -------------
Identifiable assets (excluding the joint
operations)..................................... 25,582 28,588 36,471
</TABLE>
(1) Consolidated net sales include $4,700 and $29,100 in fiscal 1995 and 1994,
respectively, attributable to the Kansas City and Vinton plants which were
sold in the first quarter of fiscal 1995.
(2) Consolidated operating income (loss) includes $6,451 of write-downs and
other charges in fiscal 1996. See Note 4 to the Consolidated Financial
Statements.
(D) NARRATIVE DESCRIPTION OF BUSINESS
PRINCIPAL PRODUCTS. The following table shows the percentages of the
Company's total sales(1) accounted for by its major product lines during each of
the last three fiscal years:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
----------------------------------------------
PRODUCT LINE 1996 1995 1994
- ------------ --------- --------- ----------
<S> <C> <C> <C>
Prolerized Scrap................................... 42% 42% 50%
Other Ferrous Scrap................................ 43 44 39
Precipitation Iron................................. 8 9 6
Non-Ferrous Scrap.................................. 7 5 4
Other.............................................. -- -- 1
</TABLE>
(1) The term "total sales" refers to net sales of the Company and its
consolidated subsidiaries combined with the Company's share of the net
sales of each joint operation in which it owns an interest. The Company's
share of the earnings of the joint operations is accounted for in the
Company's Consolidated Statements of Operations using the equity method of
accounting. Net sales refers to gross sales less shipping and selling
expenses.
6
The total tonnage shipped for each of the fiscal years ended January
31, 1996, 1995 and 1994 was approximately 1,063,000, 1,118,000 and 1,537,000,
respectively. The decline in tonnage shipped in fiscal 1995 (primarily
Prolerized Scrap and Other Ferrous Scrap) is due to the sale of the Kansas City
and Vinton plants, as well as a reduction of sales at the joint operations due
to reduced foreign demand during the year. The term "total tonnage shipped"
refers to gross tons (2,240 pounds) shipped by the Company and its consolidated
subsidiaries combined with the Company's share of tons shipped of each joint
operation in which it owns an interest.
The Company's Prolerized Scrap plants, precipitation iron plants and
low residual steel plant, as well as its other ferrous scrap and non-ferrous
scrap operations, have adequate capacity to meet any foreseeable increase in
demand for its products.
The product mix sold by the Company is determined primarily by the type
of scrap available for purchase by the Company and the demand for such scrap in
the Company's selling markets.
The Company does not determine contribution to gross profits by its
various product lines, which necessarily would involve a number of arbitrary
cost allocations. However, it can generally be stated that, while gross profit
margins vary among the product lines and from year to year, gross profit margins
historically have been higher on Prolerized Scrap and non-ferrous scrap than on
precipitation iron and other ferrous scrap. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PROLERIZED SCRAP. The scrap industry supplies one of the basic raw
materials used in the production of iron and steel. The furnaces which are used
to produce iron and steel are charged with iron and scrap steel ("ferrous
scrap") or with pig iron, which is produced from smelting iron ore in a blast
furnace, or with a combination of ferrous scrap and pig iron or iron
substitutes. The proportion of ferrous scrap used to make iron and steel varies,
depending upon the type of furnace used, the specifications of the end product
desired, the relative costs of ferrous scrap, pig iron or iron substitutes to
the steel makers, and other considerations. In recent years mini-mills, which
predominantly operate electric furnaces and primarily use ferrous scrap as a raw
material, have become increasing users of ferrous scrap.
PROLER PROCESS. In this process, scrap automobiles and other ferrous
scrap are conveyed into a specially designed hammer mill that fragmentizes the
scrap into small pieces, which are cleaned and separated into their ferrous and
non-ferrous metal components and automobile shredder residue. The ferrous
components are processed into small, fist-sized pieces of Prolerized Scrap,
which is either inventoried for later shipment or shipped directly via rail,
truck, ship or barge to iron and steel mills or foundries. The non-ferrous metal
components are sold to a variety of customers. Automobile shredder residue is
disposed of in landfills or used as interim landfill cover with further
processing.
7
PLANTS AND JOINT OPERATIONS. The Company completed the disposition of
its wholly-owned domestic Prolerized Scrap plants as follows: the Kansas City
plant was sold in February, 1994 and the Vinton plant was sold in April, 1994.
See Note 6 to the Consolidated Financial Statements.
The Company, through its joint operations, operates five Prolerized
Scrap plants in the United States. The locations are as follows: Los Angeles,
California; Everett and Worcester, Massachusetts; Jersey City, New Jersey; and
Queens, New York. The Company and its partner sold the assets of its 50 percent
owned Chicago, Illinois Prolerized Scrap plant in October, 1993. See Note 6 to
the Consolidated Financial Statements.
SALES. Prolerized Scrap produced at the Company's Kansas City and
Vinton plants was sold to domestic steel producers. Most of the Prolerized Scrap
produced at the Los Angeles, Everett, Jersey City, Queens and Worcester plants
is sold to foreign customers.
SOURCES OF SUPPLY. Raw material for the Proler Process consists
primarily of scrap automobiles purchased on a day-to-day basis from a large
number of suppliers, including automobile salvage yards, scrap dealers and
truckers. Certain of the joint operations make significant purchases from a few
large suppliers. While the joint operations are not dependent on any single
source of supply, the loss of a large supplier could cause an increase in prices
paid for raw materials from other suppliers and, at some locations, could also
cause a reduction in the volume of raw materials available. Accordingly, the
loss of a large supplier could have a material adverse effect on the business of
the joint operation affected.
OTHER FERROUS SCRAP. The Company, through its joint operations,
currently operates three ferrous scrap plants in Los Angeles, Everett and
Providence. In October, 1995, the Company sold its interest in a Newark joint
operations' scrap plant. See Note 6 to the Consolidated Financial Statements.
The ferrous scrap plants prepare to customers' specifications various grades of
ferrous scrap other than Prolerized Scrap, primarily heavy melting and premium
grades, for sale to steel producers and foundries. Processing of this type of
scrap consists principally of cleaning, sorting and crushing or cutting the
scrap into pieces of proper size which are then inventoried for future shipment
or shipped directly via rail, truck, barge or ship. The major sources of this
type of scrap are industrial manufacturing plants, railroads and scrap dealers.
Competition to buy this scrap is significant, with the price paid being the most
significant competitive factor.
LOW RESIDUAL STEEL AND PRECIPITATION IRON. Low residual scrap steel is
used by steel mills in making premium quality steel. Precipitation iron is used
in the copper mining industry in one of the processes by which copper is
extracted from low grade ore.
The Company produces both low residual scrap steel and precipitation
iron from tin plated steel can clippings, reject cans from can manufacturers and
recycled tin cans. This process, which incorporates many of the techniques used
in the Proler Process, converts these raw materials into a loosely shredded,
relatively pure ferrous scrap suitable for use as feedstock for detinning
8
operations or as precipitation iron in the production of copper. This material
can also be baled into low residual bundles consumed by the steel industry to
produce various forms of quality steel.
PLANTS AND SALES. The Company owns and operates two precipitation iron
plants located in Coolidge, Arizona, and Lathrop, California. In November, 1995,
the production from the Coolidge plant was shifted to Lathrop to achieve certain
economies of scale. Low residual steel is produced at the Seattle plant.
Substantially all of the Company's sales of precipitation iron are made under
contracts with three major domestic copper producers calling for the sale of a
minimum number of tons per month at prices that are determined in relation to
certain prevailing scrap prices. Precipitation iron is shipped to customers via
truck and rail. The development of processes for producing copper from low grade
ore that does not require the use of precipitation iron has reduced demand for
precipitation iron. The sales of low residual scrap steel are made to a variety
of steel mills and foundries located throughout the country.
SOURCES OF SUPPLY. The Company's principal supply of raw material for
the production of precipitation iron and low residual scrap is from scrap
generated in the manufacture of metal cans and containers. Most of this scrap is
purchased directly from container manufacturers. The Company also acquires used
cans from municipal waste processors and various scrap dealers. The Company is
not dependent upon any single source of supply.
The following table shows the gross tons of precipitation iron and low
residual scrap steel sold by the Proler Recycling plants:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
----------------------------------------------------
1996 1995 1994
------------ --------------- ----------
<S> <C> <C> <C>
Precipitation iron................................. 52,211 71,808 76,967
Low residual scrap steel........................... 24,525 28,100 27,900
</TABLE>
NON-FERROUS SCRAP. The non-ferrous metals recovered by several of the
Prolerized Scrap plants are processed at facilities in Los Angeles, Jersey City,
Everett and Worcester. The non-ferrous metal scrap is cleaned and manually or
mechanically segregated according to its principal metallic components and
shipped to a variety of customers via truck and ship.
NON-FERROUS METAL RECOVERY. The Company's Coolidge and Seattle
locations also include operations from which tin metal is recovered from the
recycling of industrial waste solutions and precipitates. The volume of tin sold
during fiscal 1996, 1995, and 1994 was 281,000, 397,900 and 361,300 pounds,
respectively.
In fiscal 1996, the Company substantially completed construction of a
new plant at its Coolidge location. The new plant is designed to recover copper,
tin and other metals and
9
chemicals derived from the manufacture of electronic printed circuit boards.
This facility has an annual recycling capacity of approximately 5 million pounds
of off-spec printed circuit boards and 1.5 million gallons of etchants
(chemicals used in the manufacture of electronic printed circuit boards). The
Company estimates this plant would have the capacity to recover approximately 2
million pounds of copper and 800,000 gallons of regenerated etchants annually
when fully operating. This facility has experienced a series of construction
delays and start up problems. Management is currently addressing these problems
in an effort to have the plant fully operating by the end of the current fiscal
year.
OTHER. The Company is involved in the manufacture and supply of
replacement parts for the Prolerized Scrap plants in which the Company either
owns an interest or had an interest. Additionally, the Company has begun
distributing a specialty chemical solution used for water treatment and soil
stabilization. The Company anticipates that these types of sales will allow
access to the metal-bearing waste streams these chemicals are used to treat.
Sales of these chemicals in fiscal 1996 were not material.
RAW MATERIALS AND INVENTORY. See "Sources of Supply" above under:
"Prolerized Scrap," "Low Residual Steel and Precipitation Iron" and the general
discussion under "Other Ferrous Scrap," "Non-Ferrous Scrap" and "Other".
TRADEMARKS AND PATENTS. The Company owns several registered trademarks
and certain patents. While the Company regards these trademarks and patents to
be of value, it does not consider its business dependent upon them.
WORKING CAPITAL. The Company's working capital requirements are
currently met from distributions from joint operations and borrowings under its
credit facilities. As of January 31, 1996, the Company had $3.5 million of net
working capital and $9.7 million in outstanding bank debt. At April 26, 1996,
the Company had outstanding bank debt totalling $17.2 million. The bank debt
outstanding at April 30, 1996 will be classified as a current liability in the
Company's financial statements as of that date based on the terms of the
existing credit facilities. Accordingly, the Company will have negative working
capital as of that date. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity, Financing and Capital
Resources."
SIGNIFICANT CUSTOMERS. As discussed in Note 11 to the Consolidated
Financial Statements and Note 8 to the Combined Financial Statements of the
Company's joint operations, the Company and its joint operations have
significant customers.
BACKLOG. The Company and some of its customers routinely enter into
scrap contracts which require delivery of scrap over a period of time. Sales are
generally made on a month-to-month or individual order basis. At any point in
time, the Company may have unfulfilled commitments with respect to these
contracts that will be filled in the normal course of business. At January 31,
1996 the Company had no significant unfulfilled orders.
10
GOVERNMENT BUSINESS. The Company does not contract with the U.S.
Government and does not have any contracts subject to renegotiation.
COMPETITION. All facets of the business in which the Company is
currently engaged are highly competitive and are characterized by cyclical
fluctuations in profitability depending upon the availability and price of raw
scrap and the demand and prices for scrap in the iron and steel industries and
in the copper and other non-ferrous metals industries. In addition, the level of
profitability of the Company's operations is affected by work stoppages or other
events involving the relatively few customers in the industries to which the
Company sells its products. Competitive forces facing the Company are further
complicated by the fact that a number of the Company's principal customers also
conduct scrap supply operations, which provide an internal source of supply. As
a result, particularly when the end users' output decreases, much of their
requirements for scrap may be filled by related party sources.
In purchasing its raw scrap and in selling its products, the Company
competes with a large number of other scrap dealers and brokers, some of which
have greater financial and other resources than the Company, and many of which
are small firms operating locally. Competition in the business of the Company
involves geographical location of plant, reliability of service and product
quality. Prolerized Scrap is sold in competition with other forms of ferrous
scrap. While it is a premium, high grade scrap, there are competing processes
which also produce a high quality grade of scrap.
Research has been and is currently being conducted by others to develop
methods for producing copper from low grade ore that would not require the use
of precipitation iron, and several such processes have been developed and are
technically feasible. Technological changes in the production of copper by the
Company's copper mining customers could further affect future demand for the
Company's products.
Foreign sales are subject to additional factors such as foreign
exchange regulations, availability of ships and local laws governing the conduct
of business in the countries where such sales are made. Approximately 83% and
80% of the Company's total sales, including the Company's share of joint
operation sales, were to foreign customers during fiscal 1996 and 1995,
respectively.
RESEARCH. The Company continuously updates and improves its operating
facilities and processes as technological advances are made.
The Company's wholly-owned subsidiary, Proler Environmental, has
developed and tested a gasification technology that uses thermal conversion to
recycle hydrocarbon and cellulose-based wastes to produce a synthesis gas
suitable for sale to industrial users and utilities. The residue produced by
this process also has potential commercial uses, or may be disposed of in
landfills. This patented technology was developed by Proler Environmental as a
joint project with a major Mexican steel company. The Company has successfully
tested the process at its 50 ton per day
11
demonstration plant in Houston, Texas on automobile shredder residue, tires,
cardboard/paper sludge, municipal solid waste and several industrial wastes. In
March, 1996, the Company entered into an agreement regarding the integration of
a vitrification system with the Company's gasification process. This
vitrification system reforms the residue from the gasification process into a
glass frit that can be used in ceramic tile, spun wool insulation, roofing
shingles and as an aggregate. The Company expects to incur up to $1.5 million of
costs in fiscal 1997 integrating this vitrification system with the Houston
demonstration plant.
The Company is currently assessing the opportunities for and
feasibility of various commercial applications of the gasification process, and
is having discussions with several foreign and domestic entities, which may lead
to the construction of one or more gasification plants. The Company expects to
incur an additional $1.5 million on feasibility studies, marketing and continued
research and development on the gasification process in fiscal 1997. The
commercial potential of this process will depend on a number of factors,
including the amount of capital investment required for site acquisition and
construction, which is expected to be significant; the ability to charge tipping
fees for waste materials sufficient to earn an adequate return on investment;
the availability of long-term sources of suitable waste materials; the ability
to economically dispose of the residual or convert it to usable purposes; and
local demand for the synthesis gas produced by the process. Management initially
estimates that costs for a gasification plant could range from $10 million to
$40 million depending on size and other factors. Such a plant could be
constructed as a stand-alone facility or in tandem with a cogeneration plant or
integrated into a manufacturing operation to continuously recycle processed
wastes into reusable feedstock and energy. The sales, development and
construction time-table regarding gasification projects of the type and
magnitude currently being pursued by the Company can be reasonably expected to
take several years from initial sales presentation through completion of
construction and the achievement of commercial operations. There can be no
assurance that any of the projects the Company is currently pursuing will result
in a commercially operating plant.
During fiscal 1996, 1995 and 1994 Proler Environmental expended
approximately $0.2 million, $0.2 million and $1.3 million, respectively, in
connection with the acquisition and development of equipment. Proler
Environmental also incurred $1.1 million, $1.1 million and $0.2 million of
research and development expenses during fiscal 1996, 1995 and 1994,
respectively, exclusive of associated overhead incurred by the parent company.
During the fourth quarter of fiscal 1996, Proler Environmental recorded a charge
of approximately $4.0 million resulting from the write-off of its investment in
its Houston gasification plant due to a change in its intended use. Management
now believes that the future use of the plant will be primarily that of
demonstration, marketing and training for larger scale projects. As a result,
the Houston plant is not expected to generate any significant future net
revenues and, accordingly, Proler Environmental wrote-off its $4.0 million
investment in this plant.
Proler Recycling is exploring methods of recovering metals from a
variety of industrial wastes and secondary materials. It plans to continue to
identify and enter new businesses for metals recovery, particularly for tin and
copper. The Company expended approximately $0.2
12
million, $0.6 million and $0.4 million on research activities during fiscal
1996, 1995 and 1994, respectively. Additionally, the Company expended
approximately $6.7 million, $3.2 million and $0.4 million on capital projects
associated with these operations in fiscal 1996, 1995 and 1994, respectively.
The largest component of these capital expenditures relates to Proler
Recycling's new plant facility in Coolidge.
ENVIRONMENTAL MATTERS. Certain materials resulting from the operations
of the Company and its joint operations must be handled consistent with various
federal and state environmental laws and regulations. As with any business that
produces significant amounts of industrial wastes, the Company could face
substantial additional costs if past or present disposal practices would no
longer be deemed acceptable by the United States Environmental Protection Agency
("EPA") or state regulatory agencies. The Company and its joint operations can
also be required from time to time to clean-up sites now or formerly used in
their operations. See further discussion herein and in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," Note
9 to the Consolidated Financial Statements and Note 6 to the Combined Financial
Statements.
A principal source of metals reclaimed by the Prolerized Scrap plants
is the shredding of automobiles. Presently automobile shredder residue ("ASR")
produced in these operations constitutes approximately 20% to 25% of the scrap
weight of each automobile shredded, and is likely to increase as car
manufacturers continue to replace metal parts. The EPA and states such as
Massachusetts and California have their own testing protocols to determine
whether a waste is hazardous and must be managed as such. To date, however,
tests of ASR generated by the Company and its joint operations indicate that
levels of lead, cadmium and other contaminants covered by the regulations have
generally been within acceptable levels under EPA and applicable state
regulations.
The EPA has recognized, based on its study of potential contamination
of shredder residue at seven shredder sites, that well-managed shredder
operations conducted in an environmentally- sound manner provide environmental
benefits. The Company and its joint operations have implemented supplier
education efforts, source control, inspection and testing programs to identify
and reduce the sources of lead and certain other heavy metals in ASR. Incoming
material is inspected to ensure that the most probable sources of such materials
are removed from automobiles before arriving at the plants. Fuel tanks, exhaust
systems, leaded wheel weights and batteries are removed prior to shredding. The
Company and its joint operations have also taken certain steps to eliminate from
the materials they process capacitors contained in obsolete household appliances
("white goods"), which are often shredded along with automobiles. Such
capacitors are considered by the Institute of Scrap Recycling Industries to be a
likely source of polychlorinated biphenyls ("PCBs") in ASR. The Company
continues to evaluate additional methods of reducing levels of heavy metals,
PCBs and other contaminants in ASR. Should laws and regulations covering
hazardous wastes or toxic substances apply to the handling of ASR as a result of
the levels of heavy metals, PCBs and other contaminants, the Company could incur
substantial expense in such handling of ASR. Even absent such a determination,
the Company
13
and its joint operations incur significant expenditures to dispose of ASR. It
should be noted, however, that disposal costs at certain plant locations have
decreased significantly in recent years.
Hugo Neu-Proler Company ("HNP"), a 50% owned joint operation of the
Company, and the Port of Los Angeles (the "Port") are in the final stages of
negotiating a renewal of HNP's lease, the original term of which expired on
August 30, 1994. In December, 1992, HNP signed a Memorandum of Understanding
with the Port related to the lease renewal and in fiscal 1994 and 1995 provided
letters of credit totaling $9.78 million ($4.89 million each from the Company
and HNP's other owner) to secure HNP's remediation obligations under the lease.
The Port is developing an Environmental Impact Report in connection with the
lease renewal. Under the current lease, HNP would be responsible for remediating
certain environmental conditions on the property caused by HNP, the extent and
cost of which are uncertain. Currently, HNP estimates that it will incur capital
expenditures of a minimum of $4.0 million to $5.0 million in connection with
environmental control facilities at the Terminal Island location over the next
three to four years. HNP has accrued approximately $0.9 million to cover the
costs of anticipated remediation at this site.
Prior to 1988, the Company operated a metals reclamation and shredding
facility on a 13- acre property leased from an unrelated third party in
Copperton, Utah. The Company has learned that the EPA has identified this
property as an "Other Potential Source Area" within the boundaries of the
Kennecott South Zone, an approximate 37-square mile site which has been proposed
for listing on the National Priorities List. The Company incurred approximately
$550,000 to remediate this site in late 1993 and early 1994. Management is
unable to determine at this time the Company's exposure, if any, to claims or
actions stemming from the EPA's proposal.
Proler Recycling receives partially saturated etchants for reuse in its
proprietary metal recycling process under bills of lading, with letters of
concurrence from the appropriate environmental agencies of seven states that
have been delegated authority under the Resource Conservation and Recovery Act
("RCRA") by the EPA. Pursuant to allegations by a competitor of the Company, the
EPA is reviewing the state determinations and on January 16, 1996, sent the
Company a Request for Information with respect to this matter. The Company has
responded to the EPA's request and has been involved in discussions with
representatives of the EPA. If the EPA should disagree with the state
determinations, Proler Recycling would be required to receive the etchants under
hazardous waste manifests, which would result in the loss of a competitive
advantage to the Company and could increase the Company's costs in processing
these materials.
The Company anticipates making $0.7 million in capital expenditures for
environmental control facilities during fiscal 1997, including its share of
those in connection with the Terminal Island facility. Changes in environmental
laws and regulations and their interpretation might require the Company or its
joint operations to install additional environmental control equipment and to
implement additional compliance procedures. The Company also recorded a charge
to operations of approximately $1.2 million in fiscal 1996 with respect to
future clean-up and closure
14
costs of a Houston landfill owned by the Company. See Note 4 to the Consolidated
Financial Statements.
EMPLOYEES. As of January 31, 1996, the Company and its consolidated
subsidiaries employed 91 people. At the same date, the joint operations had 422
employees.
(E) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
The Company sells to domestic markets and the joint operations
primarily sell to international markets. The table below summarizes for the last
three fiscal years the Company's export sales to customers by geographical area,
inclusive of its share of the export sales of each joint operation in which it
owns an interest (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Far and Near East......................... $ 120,635 $ 104,852 $ 122,086
Europe.................................... 4,719 3,450 --
Canada.................................... 5,059 3,268 4,961
Mexico.................................... 33 1,737 --
South America............................. -- 1,122 3,044
Other Export Customers.................... 13 -- 2,003
--------------- --------------- ---------------
Total Export Sales........................ $ 130,459 $ 114,429 $ 132,094
=============== =============== ===============
</TABLE>
ITEM 2. PROPERTIES.
The Company's executive offices at 4265 San Felipe, Suite 900 in
Houston, Texas occupy 8,500 square feet of leased space. The Company owns
approximately 100 acres of land on the Houston, Texas ship channel which is for
sale, and a 36 acre tract of land in Houston previously used in connection with
operations.
The five Prolerized Scrap plants are each owned by a joint operation.
In addition to a Prolerized Scrap plant, these sites include extensive
facilities for sorting, handling and processing scrap. The approximate size of
each site used by the Company's joint operations and the expiration date of any
lease for each are listed separately below:
15
EXPIRATION DATE
LOCATION SIZE OF LEASE
- -------- ---- -----------------
Los Angeles, California (1)............. 22 acres Under negotiation
Everett, Massachusetts (1).............. 29 acres Property owned
Jersey City, New Jersey (1)............. 55 acres Property owned
Queens, New York (1).................... 5 acres Property owned
Worcester, Massachusetts (1)............ 21 acres Property owned
Providence, Rhode Island................ 16 acres 12/31/99
Providence, Rhode Island................ 6 acres 12/31/99
(1) Prolerized Scrap plant operation.
The Company has been notified that a portion of the Worcester,
Massachusetts property owned by one of its joint operations may be taken by
eminent domain in order to extend a state highway.
The Proler Recycling plants at Coolidge, Arizona and Lathrop,
California are on approximately 80 acres and 15 acres of owned land,
respectively. The Company's Seattle, Washington low residual ferrous plant is
located on approximately two acres of land under a lease that expires in June,
1999.
In addition to the above, the Company owns approximately 47 acres in
various parts of the country that are not used in current operations. In
addition, the joint operations own or lease industrial properties that are being
used for feeder yards or will be used for expansion of facilities.
The management of the Company believes that all of the plants operated
by the Company or by its joint operations are equipped and maintained to
adequately support the present operations at such plants, and are served by
transportation and other facilities generally adequate to permit efficient
operation.
ITEM 3. LEGAL PROCEEDINGS.
On April 17, 1996, a Los Angeles Grand Jury subpoena was issued by the
Antitrust Division of the United States Department of Justice ("DOJ") requiring
the production of certain documents and information principally concerning the
purchase of scrap metal by HNP. HNP intends fully to cooperate with the DOJ, and
toward that end, HNP and its joint venture partners will be engaged in the
process of assembling relevant information. At this time HNP is not aware of any
of the specifics underlying this investigation.
16
The Company is subject to certain litigation and claims arising in the
ordinary course of business. In the opinion of management, the disposition of
these claims and lawsuits will not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the quarter ended January 31, 1996.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name and age of each executive
officer of the Company, all positions and offices held by each person named and
the period during which each person named has served as an officer of the
Company. Unless otherwise stated below, each person has held such positions and
offices for more than the past five years:
<TABLE>
<CAPTION>
SERVED
AS AN
OFFICER OF
NAME AGE POSITION AND OFFICES HELD COMPANY SINCE
<S> <C> <C>
Herman Proler 68 Chairman of the Board, Director (1) 1948
Steven F. Gilliland 44 President, Chief Executive Officer,
Director (2)1995
Norman G. Bishop 65 Vice President-Technical (3) 1993
Harold B. Burnham 51 Vice President (4) 1995
Dennis L. Caputo 49 Vice President-Environmental
and Safety Compliance (5) 1989
David A. Juengel 36 Vice President, Treasurer and
Assistant Secretary (6) 1991
Ian A. Linton 36 Vice President-Western Operations (7) 1991
Michael F. Loy 50 Vice President-Finance, Chief Financial
Officer and Secretary (8) 1992
Kurt Smalberg 60 Vice President-Scrap Operations (9) 1995
Joy S. Thakur 29 Vice President (10) 1995
</TABLE>
(1) Mr. Proler has been Chairman of the Board since 1985. From 1985 until
October 5, 1995, Mr. Proler also served as Chief Executive Officer of
the Company.
(2) Mr. Gilliland was elected President, Chief Operating Officer and
Director on February 8, 1995 and on October 5, 1995 was elected Chief
Executive Officer. Mr. Gilliland was
17
employed by CRSS Inc. and its predecessors in various executive
positions from 1980 to 1990 and again from 1992 to 1995 when he served
as Senior Vice President. From 1990 to 1992, he served as Senior Vice
President and Chief Operating Officer of Transco Power Company.
(3) Mr. Bishop joined the Company on February 13, 1989 and served as Vice
President of Proler Environmental. He was elected Vice
President-Technical of the Company on April 12, 1993. Prior to February
13, 1989, Mr. Bishop was Vice President of Zia Technology, Inc. for
seven years.
(4) Mr. Burnham joined the Company on June 12, 1995, as Vice President.
Prior to his employment with Proler, he was employed as Director of
Sales for Gilbert Commonwealth in 1994. He served as Director, Business
Development in the Power Division of CRS Sirrine Engineers, Inc. from
1987 to 1994.
(5) Mr. Caputo joined the Company on June 8, 1989, as Vice
President-Environmental and Safety Compliance. Prior to his employment
with the Company, Mr. Caputo was a principal with ENSR Consulting and
Engineering.
(6) Mr. Juengel joined the Company on September 23, 1988 as Tax Manager. He
was elected Assistant Vice President of Finance and Accounting on
September 11, 1991 and was promoted to Vice President, Treasurer and
Assistant Secretary on December 8, 1992. Prior to his employment with
the Company, Mr. Juengel was employed as a Tax Manager by Ernst & Young
and Coopers & Lybrand.
(7) Mr. Linton joined the Company on May 20, 1991. He was elected Vice
President- Refining on June 12, 1991 and was promoted to Vice
President-Western Operations on December 8, 1992. Prior to his
employment with the Company, Mr. Linton was employed as Group Manager
of Capper Pass & Son Limited, North Humberside, England.
(8) Mr. Loy joined the Company on August 1, 1992 as Vice President-Finance
and Chief Financial Officer and on December 8, 1992 was elected to the
additional position of Secretary of the Company. Prior to joining the
Company, Mr. Loy served from 1989 to 1992 as Director and President of
MFL Consulting Group, Inc. From 1987 to 1989, he served as Director,
Vice President and Chief Financial Officer of Cabot Energy Corporation.
(9) Mr. Smalberg joined the Company on October 15, 1995, as Vice
President-Scrap Operations. Prior to his employment with the Company,
Mr. Smalberg was a private investor from October, 1994 to October,
1995, Senior Vice President of Hugo Neu Corporation from October, 1990
to September, 1994 and President of the Steel Can Recycling Institute
from August, 1988 to September, 1990.
18
(10) Mr. Thakur joined the Company on May 30, 1995, as Vice President. He
was previously employed as Manager of Project Development for Gas
Energy, Inc. in New York, from 1994 to 1995, and in a variety of
financial positions with CRSS Inc. from 1987 to 1994.
The term of office of each of the above officers extends until the next
annual meeting of directors or until his successor has been duly elected and
qualified.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND STOCKHOLDER MATTERS.
The table below summarizes the high and low sales prices reported on
the New York Stock Exchange for shares of the Company's common stock.
HIGH AND LOW SALES PRICES OF COMMON STOCK BY FISCAL QUARTERS(1)
FOR THE YEARS ENDED JANUARY 31,
------------------------------------------
1996 1995
-------------------- ------------------
HIGH LOW HIGH LOW
First quarter........... $8 $6 3/8 $14 3/4 $7 1/2
Second quarter.......... 8 1/4 7 1/8 9 5/8 7 5/8
Third quarter........... 8 7/8 7 10 1/4 6 7/8
Fourth quarter.......... 8 5/8 7 7 5/8 5 5/8
(1) The Company's common stock is traded on the New York Stock Exchange. As
of April 26, 1996, there were 356 holders of record of the Company's
common stock.
The Company's Board of Directors suspended the payment of dividends on
the Company's Common Stock in fiscal 1992. Also, the Company's credit agreements
with a bank prohibit the payment of cash dividends. See Note 5 to the
Consolidated Financial Statements.
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The table below sets forth a summary of selected consolidated financial
information of the Company and its subsidiaries for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ----------- ------------ -----------
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales (1)......................... $ 13,432 $ 18,610 $ 43,706 $ 63,842 $ 110,890
========== ========== =========== ============ ===========
Earnings (loss) from joint
operations......................... $ 3,575 $ 2,974 $ 2,768 $ (5,660) $ (3,327)
========== ========== =========== ============= ============
Asset write-downs and
other charges....................... $ (6,451) $ -- $ -- $ -- $ (3,495)
=========== ========== =========== =========== ============
Net income (loss)..................... $ (9,044) $ 303 $ (2,262) $ (9,909) $ (16,328)
=========== ========== ============ ============= ============
Net income (loss)
per share........................... $ (1.92) $ .06 $ (.48) $ (2.10) $ (3.47)
========= ========== =========== ============ ===========
Investment in joint operations,
at equity.......................... $ 39,359 $ 34,776 $ 26,273 $ 40,138 $ 61,298
========== ========== =========== ============ ===========
Total assets.......................... $ 66,772 $ 65,439 $ 66,583 $ 77,799 $ 119,173
========== ========== =========== ============ ===========
Long-term debt........................ $ 9,700 $ -- $ -- $ 5,000 $ --
========== ========== =========== ============ ===========
Cash dividends per
share............................... $ -- $ -- $ -- $ -- $ .325
========== ========== =========== ============ ===========
</TABLE>
(1) The Company sold its Houston plant in the second quarter of fiscal 1993 and
its Kansas City and Vinton plants in the first quarter of fiscal 1995. Such
plant sales account for the majority of the revenue decline since fiscal 1992.
The Company's consolidated financial statements included elsewhere
herein present the Company's share of the joint operations using the equity
method of accounting in accordance with generally accepted accounting
principles. The following table presents a proforma condensed combined balance
sheet and statement of operations of the Company assuming its proportionate
share of the Joint Operations is combined with the Company. Management believes
this presentation is informative of the Company's financial condition and
results of operations given that a significant portion of the Company's business
is conducted through the joint operations.
20
PROFORMA CONDENSED COMBINED BALANCE SHEET
AS OF JANUARY 31, 1996
<TABLE>
<CAPTION>
PROPORTIONATE
SHARE OF COMBINED
COMPANY JOINT OPERATIONS COMPANY
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Current assets..................................... $ 7,234 $ 31,661 $ 38,895
Investments in joint operations.................... 39,359 -- --
Property and other assets, net..................... 20,179 14,825 35,004
------------- ------------- -------------
$ 66,772 $ 46,486 $ 73,899
============= ============= =============
Current liabilities................................ $ 3,732 $ 5,758 $ 9,490
Borrowings under revolving line of credit 9,700 -- 9,700
Other liabilities.................................. 3,876 1,369 5,245
Stockholders' and partners' equity................. 49,464 39,359 49,464
------------- ------------- -------------
$ 66,772 $ 46,486 $ 73,899
============= ============= =============
</TABLE>
PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
PROPORTIONATE
SHARE OF COMBINED
COMPANY JOINT OPERATIONS COMPANY
------------- ------------ -------------
(in thousands)
<S> <C> <C> <C>
Net sales.......................................... $ 13,432 $ 142,931 $ 156,363
Cost of sales...................................... 14,084 135,502 149,586
------------- ------------ -------------
Gross profit (loss)........................... (652) 7,429 6,777
Earnings from joint operations..................... 3,575 --
Selling, general and administrative
expense....................................... (4,418) (4,162) (8,580)
Research and development expense................... (1,226) (1,226)
Asset write-downs and other charges................ (6,451) (6,451)
-------------- -------------
Operating income (loss)........................ (9,172) (9,480)
Gain on sale of assets............................. 318 318
Other income (expense), net........................ 39 308 347
------------- -------------
Income (loss) before income taxes.................. (8,815) (8,815)
Provision for income taxes......................... 229 229
------------- ------------ -------------
Net income (loss).................................. $ (9,044) $ 3,575 $ (9,044)
============== ============ =============
</TABLE>
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
The statements contained in this report, in addition to historical
information, are forward looking statements based on the Company's current
expectations, and actual results may vary materially. The Company's business and
financial results are subject to various risks and uncertainties, including the
cyclical nature of the scrap processing business, the fact that the Company
exercises limited control over its joint operations, competitive factors such as
the availability and cost of raw scrap for inventory, fluctuations in sales
prices and demand for the products of the Company and the joint operations, the
ability to reduce excess inventories at the joint operations, the Company's
ability to correct operational and start-up problems at its Coolidge facility as
projected, the uncertainty of any future transactions resulting from the
Company's retention of investment bankers and the other risks and uncertainties
discussed herein. These forward looking statements are provided as a framework
for the Company's discussion of its business and management's analysis of the
Company's financial condition and results of operations. The Company does not
intend to provide updated information other than in the context of its Quarterly
Reports on Form 10-Q.
GENERAL
The Company reported a consolidated net loss of $9,044,000 for the year
ended January 31, 1996 as compared with consolidated net income of $303,000 in
fiscal 1995. In the fourth quarter of fiscal 1996, the Company adopted Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of," and recorded
asset write-downs and other charges of $6.5 million which contributed to the
fiscal 1996 net loss. See Note 4 to the Consolidated Financial Statements.
The Company is primarily engaged, through its subsidiaries and its
joint operations, in buying, processing, recycling and selling ferrous and other
scrap metals. While the Company sells products from its consolidated operations
primarily to domestic markets, the joint operations primarily export scrap to
foreign markets. The Company's and its joint operations' current business is
characterized by cyclical fluctuations in profitability depending upon the
availability and price of raw scrap and the demand and prices for processed
scrap by the domestic and foreign iron and steel industries and the non-ferrous
metals industries.
The Company's unincorporated joint operations are structured so that
the participants advance and withdraw funds equally, and policy decisions
require the unanimous consent of the participants. The Company makes advances to
the joint operations on a regular basis, primarily for the purchase of inventory
and for operating costs. The Company receives periodic distributions from its
joint operations, primarily from the sales proceeds of shipments. During fiscal
1996, the Company's advances to joint operations exceeded distributions by $4.2
million,
22
exclusive of the cash proceeds from the sale of interests in HPI and HPNJ. See
Note 6 to the Consolidated Financial Statements.
Raw material for the Proler Process consists primarily of scrap
automobiles purchased on a day-to-day basis from a large number of small
suppliers, including automobile salvage yards, scrap dealers and truckers. In
order to maintain its sources of supply, the joint operations purchase raw
materials from their suppliers even during periods when they face lower demand
and lower prices for the products they sell. The principal supply of raw
material for the production of precipitation iron and low residual steel is from
scrap generated in the manufacture of metal cans and containers primarily
purchased directly from container manufacturers. The Company also acquires used
cans from municipal waste processors and various scrap dealers.
The Company does not determine contribution to gross profits by its
various product lines, which necessarily would involve a number of arbitrary
cost allocations. However, it can generally be stated that, while gross profit
margins vary among the product lines and from year-to-year, gross profit margins
historically have been higher on Prolerized Scrap and non-ferrous scrap than on
precipitation iron and other ferrous scrap.
As described in "Item 1. Current Developments," during the past three
years the Company has sold its domestic scrap operations, certain joint venture
operations, real estate holdings and other non-operating assets as part of a
business plan intended to enable the Company to complete a transition from its
current participation in the highly cyclical scrap business, primarily through
its joint operations, to a recycling company engaged in environmental services,
energy supply and metals recovery with majority control of its significant
assets. With the divestitures of the domestic scrap operations, the Company's
principal scrap processing business is conducted through its joint operations,
with the Company's remaining revenues derived from the Proler Recycling plants.
As discussed in "Item 1. Current Developments" the Company recently
retained two investment firms to assist in evaluating a broad range of strategic
alternatives to deal with the Company's short and long-term goals and capital
needs. Such alternatives may include sales, public or private offerings of debt
or equity securities, mergers, spin-offs, joint ventures and acquisitions. These
actions may involve one, two or all of the Company's businesses.
LIQUIDITY, FINANCING AND CAPITAL RESOURCES
The Company currently meets its working capital requirements from
distributions from the joint operations and borrowings under the credit facility
described below. As of January 31, 1996, the Company had working capital of $3.5
million, a decline from the $5.0 million reported as of January 31, 1995.
Between the same periods, the Company's share of combined working capital in the
joint ventures increased by $2.5 million, from $23.4 million to $25.9 million.
Based on the terms of the Company's credit agreements, outstanding debt will be
classified as a current liability in the Company's Consolidated Financial
Statements as of April 30, 1996
23
resulting in negative working capital at the Company as of that date. This
reclassification does not affect working capital levels at the joint operations.
During fiscal 1996, the Company received combined cash proceeds of
approximately $5.1 million from the sale of real estate and the sale of its
interests in HPI and HPNJ. See Note 6 to the Consolidated Financial Statements.
As noted above, the Company regularly makes advances to the joint
operations and receives periodic distributions, primarily from the sales
proceeds of export shipments. The joint operations also purchase inventory to
maintain sources of supply, even in periods of lower demand and lower sales
prices. Given these factors and the cyclical nature of the scrap markets, the
Company's liquidity can be adversely affected if lower sales, coupled with
continued inventory purchases, result in accumulation of excess inventories at
the joint operations. During the period from October, 1995 through December,
1995 and again in March, 1996 and continuing to date, the joint ventures have
experienced lower prices and demand from foreign steel mills and higher levels
of inventory purchases, resulting in the accumulation of excess inventories and
increased financing requirements. Currently, approximately 30% of these
inventories are subject to outstanding sales orders. The Company is financing
its share of increased inventory purchases primarily through increased
borrowings under its bank credit facilities. The level of debt is reduced as the
proceeds of export sales are received. Due to the volume of sales activity and
inventory levels, the Company's bank debt has fluctuated in recent months.
As of January 31, 1996, borrowings of $9.7 million were outstanding
under the revolving line of credit, down from a high of $18.4 million in
December 1995, and $6.2 million of letters of credit were outstanding under the
letter of credit facility, including $4.89 million issued in connection with a
lease at a joint operation's Los Angeles facility. In February, 1996, the
Company paid the revolving line of credit down to $0.7 million, primarily from
distributions of sales proceeds of export shipments. In March and April, 1996,
the Company made significant advances to the joint operations, primarily for
inventory purchases, and funded operating losses from the consolidated
operations. As of April 26, 1996, outstanding borrowings on the revolver
totalled $17.2 million. The Company expects that its outstanding borrowings will
increase until additional export sales orders are made and completed.
As more fully described in Note 5 to the Consolidated Financial
Statements, the Company's credit agreements with the bank, as amended, provide
for a $23 million revolving line of credit, an additional $5 million revolving
line of credit and a $6.5 million letter of credit facility. The agreements are
collateralized by substantially all of the Company's assets, including its
rights to distributions from certain joint operations. The revolving lines of
credit are subject to a borrowing base of eligible receivables and inventory,
and the combined commitment levels reduce by certain amounts at specified dates
to $10 million at January 31, 1997. The $23 million line of credit terminates on
February 28, 1997, the $5 million line of credit terminates on June 30, 1996 and
the $6.5 million letter of credit facility terminates on June 30, 1997.
Management
24
believes that the amounts available under its credit facilities, together with
distributions from joint operations, should be sufficient to meet its current
working capital and short-term inventory financing requirements. However, those
requirements could increase if inventory accumulations at the joint ventures
continue. The Company's ability to borrow against assets of the joint operations
may be limited by the Company's inability to grant a direct security interest in
those assets to the bank and by certain limitations on the Company's ability to
pledge its interests in the joint operations.
Consolidated capital expenditures of $7.1 million in fiscal 1996 were
primarily for new plant construction at the Company's Coolidge location. In
addition, the Company's share of joint operations' capital expenditures for
fiscal 1996 was $4.6 million, most of which was expended for replacement and
improvement of plant and equipment.
As discussed in "Item 1. Current Developments" and "Research," the
Company continues to develop and test industrial waste processing and recovery
technologies. In fiscal 1997, Proler Environmental expects to incur
approximately $3 million in continued research and development, marketing and
feasibility study activities. Proler Environmental also expects to incur
significant capital expenditures in the commercial application of its
gasification process; however, the amount and timing of such expenditures are
uncertain. Management believes that external financing sources, coupled with
internally generated funds, will be sufficient to fund such future capital
outlays. As discussed in Note 9 to the Consolidated Financial Statements, Proler
Recycling has an agreement containing an inventory purchase commitment totalling
$1.7 million.
The Company is engaged in ongoing proceedings and communications with
regulatory authorities concerning environmental matters, and ongoing litigation
regarding non-environmental matters. An adverse outcome in these legal
proceedings, or any significant additional expenditures that may be required in
order for the Company or its joint operations to operate in accordance with
environmental laws and regulations, or to clean up sites now or formerly used by
them, could affect the Company's financial position.
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Consolidated net sales of $13.4 million in fiscal 1996 were 28% lower
than consolidated net sales of $18.6 million in fiscal 1995. Consolidated cost
of sales of $14.1 million in fiscal 1996 were 21% lower than consolidated cost
of sales of $17.9 million in fiscal 1995. The decreases in both sales and cost
of sales were principally due to the sale of the Company's Kansas City and
Vinton plants during the first quarter of fiscal 1995. Fiscal 1995 included $4.7
million and $4.6 million in sales and cost of sales, respectively, attributable
to the sold plants. Excluding the sold plants from the results of operations,
the following table highlights the more significant operating information of the
Proler Recycling plants (dollars in thousands):
25
FOR THE YEARS ENDED JANUARY 31,
-----------------------------------------
1996 1995 % CHANGE
----------- ------------ --------
Sales volumes (gross tons)...... 77,200 100,000 (23)%
Net sales....................... $ 13,432 $ 13,941 (4)%
Cost of sales................... 14,084 13,271 6 %
---------- -----------
Gross profit (loss)............. $ (652) $ 670
=========== ===========
The sales volume decrease during fiscal 1996 is primarily attributable
to reduced demand for precipitation iron by copper mining customers and lower
tin production and sales due to operational problems experienced at the tin
recovery unit. Sales price increases for precipitation iron substantially offset
the effect of reduced volumes sold. The Company consolidated its production
operations at its Lathrop plant during the fourth quarter of fiscal 1996, which
is expected to lower future unit production costs and increase margins. The
operational problems experienced at the Coolidge tin recovery unit resulted in a
30% decline in production and a loss for the year of approximately $1.0 million.
Start-up operations of the Company's copper recovery unit in Coolidge commenced
in the fourth quarter of fiscal 1996. Start-up losses from the unit were
approximately $0.5 million in the quarter. Gross profit from the sale of
precipitation iron and low residual steel partially offset these losses. The
copper recovery unit is now operating, however losses continued into the first
two months of fiscal 1997.
Earnings from joint operations increased from $3.0 million in fiscal
1995 to $3.6 million in fiscal 1996. As more fully discussed in Note 6 to the
Consolidated Financial Statements and Note 4 to the Combined Financial
Statements, in October, 1995 the Company completed the sale of its joint venture
interests in HPI and HPNJ. The Company's share of pretax losses from these joint
ventures was $0.1 million and $2.3 million for fiscal 1996 and 1995,
respectively.
The Company's share of pretax loss from joint operations for the fourth
quarter of fiscal 1996 was $2.7 million compared with pretax earnings of $2.8
million for the fourth quarter of fiscal 1995 as the result of lower sales
prices and demand from foreign steel mills. Due to these market conditions as
well as the start-up losses of the Company's wholly-owned operations discussed
above, the Company expects to report a net loss in the first quarter of fiscal
1997.
In fiscal 1995, the Company recorded equity income of $2.4 million, net
to its interest in the joint operations, attributable to the sale of inventory
that had no cost basis. The production and accounting process utilized by the
joint operations to record inventory quantities (particularly shredded scrap)
relies on estimates that can be affected by weight imprecisions, moisture and
other factors. Such factors historically have a tendency to understate actual
scrap quantities. When certain inventories are substantially depleted as
occurred in fiscal 1995 and 1994, unrecorded quantities that have no cost basis
are realized.
26
Excluding the results from the sold joint venture interests, the
following table highlights the more significant operating statistics and
percentage changes between fiscal 1996 and 1995 of the joint operations on a
100% basis (dollars in thousands):
FOR THE YEARS ENDED JANUARY 31,
------------------------------------------
1996 1995 % CHANGE
------------ ------------- --------
Sales volumes (gross tons).......... 2,112,000 1,786,000 18%
Net sales........................... $ 309,090 $ 233,856 32%
Cost of sales....................... 292,681 217,201 35%
------------ -------------
Gross profit........................ $ 16,409 $ 16,655
============ =============
Ferrous scrap sales volumes increased 19% in fiscal 1996 while
non-ferrous sales volumes decreased slightly. The ferrous scrap sales increase
was primarily due to increased demand from steel mills in South Korea and
Turkey. Non-ferrous sales prices increased by approximately 70% during the year
while average ferrous sales prices increased by approximately 10%. Cost of sales
per ton increased by 14% primarily as a result of higher buying costs. Also, in
fiscal 1996, LIFO cost of sales was approximately $5.2 million higher than using
replacement costs. In fiscal 1995, LIFO cost of sales was approximately $2.1
million lower than using replacement costs.
Selling, general and administrative expenses increased 19% in fiscal
1996 compared to fiscal 1995 due primarily to increased personnel and to
increased marketing related expenses attributable to the Company's gasification
project.
Research and development expenses decreased $0.5 million compared to
fiscal 1995 due mainly to reduced research activities at Proler Recycling.
As discussed more fully in Note 4 to the Consolidated Financial
Statements, the Company recorded asset write-downs and other charges of $6.5
million in the fourth quarter of fiscal 1996.
Interest expense increased 41% during fiscal 1996 due to increased bank
borrowings and increased borrowings on company-owned life insurance policies.
Other income, net (which includes real estate costs of $0.7 million and
$1.0 million in fiscal 1996 and 1995, respectively) increased approximately $1.0
million during fiscal 1996 as compared to fiscal 1995 due primarily to the
reimbursement of legal fees and settlement charges by the Company's insurance
carriers from the settlement of a lawsuit.
FISCAL 1995 COMPARED TO FISCAL 1994
Consolidated net sales of $18.6 million in fiscal 1995 were 57% lower
than consolidated net sales of $43.7 million in fiscal 1994. Consolidated cost
of sales of $17.9 million in fiscal
27
1995 were 56% lower than consolidated cost of sales of $40.6 million in fiscal
1994. The decreases in both sales and cost of sales were principally due to the
sale of the Company's Kansas City and Vinton plants during the first quarter of
fiscal 1995. The Company recorded net sales and cost of sales of $29.1 million
and $28.5 million, respectively, during fiscal 1994 attributable to operations
at these two plants. Fiscal 1995 included $4.7 million and $4.6 million in sales
and cost of sales, respectively, attributable to the sold plants. Additionally,
fiscal year 1994 included approximately $900,000 of parts and equipment net
sales proceeds whereas the gain on such sales in fiscal 1995 was insignificant.
Excluding the Kansas City and Vinton plants and the parts and equipment
sales from the results of operations, the following table highlights the
operating information of the Proler Recycling plants (dollars in thousands):
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------
1995 1994 % CHANGE
--------------- ------------ --------
Sales volumes (gross tons).... 100,000 107,000 (7)%
Net sales..................... $ 13,941 $ 13,723 2 %
Cost of sales................. 13,271 12,015 10 %
-------------- ------------
Gross profit.................. $ 670 $ 1,708 (61)%
============== ============
The increase in cost of sales during fiscal 1995 was due partially to
non-recurring disposal charges and costs associated with the development of a
new recycling program involving waste streams from the printed circuit board
industry. Additionally, the Company experienced increases in the purchase price
of scrap material used in the manufacture of precipitation iron and low residual
steel. Corresponding sales price increases were less than the cost increases due
to the majority of the Company's precipitation iron sales being under
fixed-price contracts. These contracts were renegotiated such that the sales
prices fluctuate monthly in relation to certain prevailing scrap prices.
Earnings from joint operations were $3.0 million in fiscal 1995
compared to $2.8 million in fiscal 1994. The joint operations primarily make
export sales and the sales prices realized during most of the year were less
than those in the domestic market. The joint operations compete to buy scrap in
the domestic market where higher sales prices result in higher buying costs. In
the fourth quarter, despite such higher buying costs, the joint operations
reported an increase in gross profit, primarily due to a significant increase in
nonferrous sales and a LIFO inventory cost reduction.
The following table highlights the more significant operating
statistics and percentage changes between fiscal 1995 and 1994 of the joint
operations on a 100% basis (dollars in thousands):
28
FOR THE YEARS ENDED JANUARY 31,
----------------------------------------------
1995 1994 %CHANGE
--------------- --------------- --------
Sales volumes (gross tons)..... 2,105,000 2,607,000 (19)%
Net sales...................... $ 267,063 $ 307,455 (13)%
Cost of sales.................. 253,756 294,360 (14)%
--------------- --------------
Gross profit................... $ 13,307 $ 13,095 2 %
=============== ==============
Average sales prices increased in fiscal 1995 to $127 per ton compared to $118
per ton in fiscal 1994. Costs of sales per ton increased to $121 in fiscal 1995
from $113 in fiscal 1994. Tonnage shipped in fiscal 1995 decreased from fiscal
1994 volumes due to reduced foreign demand. Cost of sales per ton would have
been approximately $1 higher in fiscal 1995 and approximately $5 lower in fiscal
1994 using replacement costs.
In fiscal 1995, the Company recorded equity income of $2.4 million,
net to its interest in the joint operations, attributable to the sale of
inventory that had no cost basis. In fiscal 1994, the Company recorded $1.5
million in similar sales of inventory that had no cost basis. The production and
accounting process utilized by the joint operations to record inventory
quantities (particularly shredded scrap) relies on estimates that
can be affected by weight imprecisions, moisture and other factors. Such factors
historically have a tendency to understate actual scrap quantities. In periods
such as fiscal 1994 and fiscal 1995 when certain inventories are substantially
depleted, unrecorded quantities that have no cost basis are realized. Partially
offsetting these sales, the Company recorded equity losses of $2.3 million and
$0.6 million in fiscal 1995 and 1994, respectively, attributable to its
interests in HPI and HPNJ. The Company liquidated its investment in this joint
operation in October, 1995.
Research and development expenses of $1.7 million in fiscal 1995
increased $1.1 million compared to fiscal 1994. The Company has intensified its
efforts towards the research and development of technologies involving the
processing and recycling of waste materials.
Selling, general and administrative expenses decreased 16% in fiscal
1995 compared to fiscal 1994 primarily due to a reduction in legal and
professional fees.
Interest expense decreased 46% in fiscal 1995 as compared to fiscal
1994 due to the decrease in outstanding bank indebtedness between the years.
Interest income increased in fiscal 1995 compared to fiscal 1994 due to higher
average cash balances during fiscal 1995.
Other income (expense), net (which includes real estate costs of $1.0
million and $2.3 million in fiscal 1995 and 1994, respectively) decreased
approximately $1.4 million in fiscal 1995 as compared to fiscal 1994 primarily
due to $1.1 million of reduced site restoration costs in the
29
current year. Also included in fiscal 1995 is approximately $0.3 million in
income attributable to an expired option on the sale of one of the Company's
properties located in Missouri.
Income taxes decreased by approximately $0.4 million in fiscal 1995
compared to fiscal 1994 primarily due to decreased tax liabilities at the
corporate joint operations. The fiscal 1994 income tax provision included the
Company's share of taxes related to the sale of Prolerized Chicago Corp.'s
assets.
ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
The Company's operations are subject to environmental laws and
regulations, and the Company is involved in ongoing proceedings and
communications with regulatory authorities concerning environmental matters. It
is possible that, as a result of these proceedings and communications, the
Company may in the future incur additional costs to assure compliance with
environmental laws and regulations, or it may be required to modify or curtail
operations. In the past, the Company has incurred significant environmental
costs in connection with the clean-up and handling of materials at sites
operated by the Company. See "Item 1. Environmental Matters," Note 9 to the
Consolidated Financial Statements and Note 6 to the Combined Financial
Statements.
NEW ACCOUNTING STANDARDS
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," which encourages, but does not
require, employers to adopt a fair value method of accounting for employee
stock-based compensation, and which requires increased stock-based compensation
disclosures if expense recognition is not adopted. The Company does not intend
to elect expense recognition for stock options and therefore implementation of
SFAS No. 123 will have no effect on the Company's operating results or financial
condition.
INFLATION
The effect of inflation on the Company has not been significant
during the past several years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required under this item begins on page 33 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
30
PART III
In accordance with paragraph (3) of General Instruction G to Form
10-K, Part III of this Report is omitted because the Company will file with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year ended January 31, 1996, a definitive proxy statement pursuant to
Regulation 14A involving the election of directors, which proxy statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1)&(2) - Financial Statements and Financial Statement Schedules:
Reference is made to the index on page 33 of this Report.
(3) - Exhibits: Reference is made to the list on pages 75-78 of the
exhibits filed with this Report. (b) No reports on Form 8-K were filed
during the quarter ended January 31, 1996.
31
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PROLER INTERNATIONAL CORP.
(COMPANY)
April 30, 1996 /S/ STEVEN F. GILLILAND
STEVEN F. GILLILAND
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
April 30, 1996 /S/ MICHAEL F. LOY
MICHAEL F. LOY
VICE PRESIDENT - FINANCE
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.
April 30, 1996 /S/ HARVEY ALTER
HARVEY ALTER, DIRECTOR
April 30, 1996 /S/ STEVEN F. GILLILAND
STEVEN F. GILLILAND, DIRECTOR
April 30, 1996 /S/ RICHARD B. MAYOR
RICHARD B. MAYOR, DIRECTOR
April 30, 1996 /S/ JOHN J. MCKENNA
JOHN J. MCKENNA, DIRECTOR
April 30, 1996 /S/ HERMAN PROLER
HERMAN PROLER, DIRECTOR
32
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE(S)
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES:
<S> <C>
Report of Independent Accountants................................................................ 34
Consolidated Financial Statements:
Balance Sheets at January 31, 1996 and 1995................................................... 35
Statements of Operations for the three years ended January 31, 1996........................... 36
Statements of Stockholders' Equity for the three years ended January 31,
1996........................................................................................ 37
Statements of Cash Flows for the three years ended January 31, 1996........................... 38
Notes to Consolidated Financial Statements.................................................... 39-58
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS:
Reports of Independent Accountants............................................................... 59-61
Combined Financial Statements:
Balance Sheets at January 31, 1996 and 1995................................................... 62
Statements of Operations for the three years ended January 31, 1996........................... 63
Statements of Stockholders' and Partners' Equity for the three years ended
January 31, 1996......................................................................... 64
Statements of Cash Flows for the three years ended January 31, 1996........................... 65
Notes to Combined Financial Statements........................................................ 66-74
</TABLE>
The financial statement schedules have been omitted because they are not
required, not applicable or the required information is presented in the
financial statements or notes thereto.
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Proler International Corp.
We have audited the consolidated balance sheets of Proler International
Corp. and subsidiaries as of January 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended January 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Proler
International Corp. and subsidiaries as of January 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Notes 1, 4, and 7 to the consolidated financial
statements, the Company changed its methods of accounting for income taxes in
fiscal 1994 and for impairment of long-lived assets in fiscal 1996.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 29, 1996
34
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- ----------
ASSETS (in thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents................................................ $ 1,161 $ 3,829
Accounts receivable, trade............................................... 1,659 2,012
Other receivables........................................................ 459 171
Inventories.............................................................. 2,776 1,752
Maintenance parts........................................................ 669 906
Prepaid expenses......................................................... 510 672
------------ -----------
Total current assets................................................... 7,234 9,342
Investments in joint operations, at equity.................................... 39,359 34,776
Property, plant and equipment, net............................................ 15,845 19,245
Other assets.................................................................. 4,334 2,076
------------ -----------
Total assets..................................................... $ 66,772 $ 65,439
============ ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable, trade.................................................. $ 1,956 $ 2,094
Accrued liabilities...................................................... 1,776 2,223
------------ -----------
Total current liabilities............................................ 3,732 4,317
Borrowings under revolving line of credit..................................... 9,700 --
Other liabilities............................................................. 3,876 2,642
Commitments and contingencies
Stockholders' equity:
Common stock, par value $1 per share; authorized
15,000,000 shares; issued and outstanding, 5,351,460
shares............................................................... 5,351 5,351
Capital in excess of par value........................................... 192 192
Retained earnings........................................................ 49,978 59,025
------------ -----------
55,521 64,568
Less 634,104 and 637,302 shares of
treasury stock, respectively, at cost............................. (6,057) (6,088)
------------ -----------
Total stockholders' equity........................................... 49,464 58,480
------------ -----------
Total liabilities and stockholders' equity....................... $ 66,772 $ 65,439
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
35
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
--------------- -------------- -------------
(in thousands except per share data)
<S> <C> <C> <C>
Net sales....................................................... $ 13,432 $ 18,610 $ 43,706
Cost of sales................................................... 14,084 17,890 40,620
--------------- -------------- -------------
Gross profit (loss)........................................ (652) 720 3,086
Earnings from joint operations.................................. 3,575 2,974 2,768
Selling, general and administrative expense..................... (4,418) (3,723) (4,413)
Research and development expense................................ (1,226) (1,690) (637)
Asset write-downs and other charges............................. (6,451) -- --
--------------- -------------- -------------
Operating income (loss).................................... (9,172) (1,719) 804
--------------- -------------- -------------
Gain on sale of assets, net. . . . . ........................... 318 2,894 --
--------------- -------------- -------------
Other income (expense):
Interest expense........................................... (638) (453) (835)
Interest income............................................ 256 293 162
Other, net................................................. 421 (551) (1,943)
--------------- -------------- -------------
39 (711) (2,616)
--------------- -------------- -------------
Income (loss) before income taxes and accounting
change....................................................... (8,815) 464 (1,812)
Provision for income taxes...................................... 229 161 568
--------------- -------------- -------------
Income (loss) before accounting change.......................... (9,044) 303 (2,380)
Cumulative effect of change in accounting for
income taxes................................................. -- -- 118
--------------- -------------- -------------
Net income (loss)............................................... $ (9,044) $ 303 $ (2,262)
=============== ============== =============
Weighted average shares outstanding............................. 4,714 4,711 4,711
=============== ============== =============
Per share:
Income (loss) before accounting change ...................... $ (1.92) $ .06 $ (.51)
Cumulative effect of change in
accounting for income taxes................................ -- -- .03
--------------- -------------- ------------
Net income (loss)............................................ $ (1.92) $ .06 $ (.48)
=============== ============== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
36
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JANUARY 31, 1996
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Capital
In Excess
Common Of Par Retained Treasury Stockholders'
Stock Value Earnings Stock Equity
---------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1993.................. $ 5,351 $ 192 $ 60,993 $ (6,118) $ 60,418
Net loss..................................... -- -- (2,262) -- (2,262)
---------- -------- ------------ ---------- ------------
Balance at January 31, 1994.................. 5,351 192 58,731 (6,118) 58,156
Net income................................... -- -- 303 -- 303
Issuance of 3,198 shares under
incentive compensation plan................ -- -- (9) 30 21
---------- -------- ------------ ---------- ------------
Balance at January 31, 1995.................. 5,351 192 59,025 (6,088) 58,480
Net loss..................................... -- -- (9,044) -- (9,044)
Issuance of 3,198 shares under
incentive compensation plan............... -- -- (3) 31 28
---------- -------- ------------ ---------- ------------
Balance at January 31, 1996.................. $ 5,351 $ 192 $ 49,978 $ (6,057) $ 49,464
=========== ======== ============ ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
37
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ----------
(In thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss).............................................. $ (9,044) $ 303 $ (2,262)
Adjustments to reconcile net income (loss) to cash:
Depreciation................................................. 1,138 905 849
Gain on sale of assets....................................... (318) (2,894) --
Provision for bad debts...................................... 59 40 --
Asset write-downs and other charges.......................... 6,451 -- --
Earnings from joint operations............................... (3,575) (2,974) --
Advances to joint operations, net of income taxes (4,035) (5,629) --
Cumulative effect of accounting change....................... -- -- (118)
Other........................................................ (197) (511) --
Changes in assets and liabilities, net of effects of assets sold:
(Increase) decrease in receivables........................... 406 4,331 (1,667)
(Increase) decrease in inventories and
maintenance parts......................................... (787) (107) 433
Decrease in prepaid expenses and
other assets.............................................. 405 115 63
Increase (decrease) in current liabilities................... (938) (1,121) 1,504
Decrease in other liabilities................................ (156) (347) (340)
------------ ------------- -------------
Net cash used in operating activities........................ (10,591) (7,889) (1,538)
------------ ------------- -------------
Cash flows from investing activities:
Capital expenditures........................................... (7,061) (3,859) (2,628)
Proceeds from sales of assets.................................. 5,251 8,170 551
Distributions from joint operations, net of earnings
and advances.............................................. -- -- 12,883
Dividends received from joint operations....................... 33 100 982
------------ ------------- -------------
Net cash provided by (used in) investing activities (1,777) 4,411 11,788
------------- ------------- --------------
Cash flows from financing activities:
Bank borrowings (repayments)................................. 9,700 -- (10,000)
------------ ------------ ---------------
Net cash provided by (used in) financing activities 9,700 -- (10,000)
------------- ------------ ---------------
Net increase (decrease) in cash and cash equivalents (2,668) (3,478) 250
Cash and cash equivalents at beginning of year.................... 3,829 7,307 7,057
------------ ------------- -------------
Cash and cash equivalents at end of year.......................... $ 1,161 $ 3,829 $ 7,307
============ ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
38
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND INVESTMENTS IN JOINT OPERATIONS
The consolidated financial statements include the accounts of Proler
International Corp. ("the Company") and its wholly-owned direct and indirect
subsidiaries. All significant intercompany balances and transactions have been
eliminated. Certain amounts included in the prior year financial statements have
been reclassified to be consistent with current year presentation with no effect
on net income (loss) or equity.
The consolidated financial statements also include, on the equity
method, the Company's share of several joint operations with interests ranging
from 33-1/3% to 50% (see Note 3). Included in the Company's consolidated
retained earnings at January 31, 1996 and 1995 is approximately $37,998,000, and
$33,765,000, respectively, related to undistributed earnings of the joint
operations.
The Company is primarily engaged, through its indirect wholly-owned
subsidiaries and 50% or less-owned joint operations, in buying, processing,
recycling and selling ferrous and other scrap metals. The Company's principal
scrap processing business is conducted through its joint operations, which
primarily make export sales. The Company's indirect wholly-owned subsidiary,
Proler Recycling, Inc. ("Proler Recycling") operates three plants which
collectively sell precipitation iron, low residual steel, tin, copper, etchants
and specialty chemicals in the domestic market.
INVENTORIES
The Company's inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method. Two of the 50%-owned joint
operations account for inventories using the last-in, first-out (LIFO) method
while the others follow FIFO. Approximately 75% and 70% of the joint operations'
combined inventory is accounted for using LIFO at January 31, 1996 and 1995,
respectively. Such LIFO inventories are carried at $42,700,000 and $24,220,000
at January 31, 1996 and 1995, respectively, and the excess of replacement cost
over LIFO value was approximately $24,288,000 and $19,092,000 at January 31,
1996 and 1995, respectively.
REVENUE RECOGNITION
The Company recognizes revenues from product sales when goods are
shipped or when ownership is assumed by the customer.
39
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FEDERAL INCOME TAXES
The Company and its wholly-owned direct and indirect subsidiaries file
a consolidated federal income tax return which includes the Company's share of
earnings or losses from unincorporated joint operations. The corporate joint
operations file separate federal income tax returns. Investment tax credits are
accounted for using the flow-through method.
Certain of the joint operations are organized as partnerships and
others as corporations. The Company's share of the earnings of all joint
operations is included in the consolidated statements of operations before
income taxes and the provision for income taxes includes amounts applicable to
its share of earnings from joint operations.
In fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as more fully described in
Note 7. Deferred federal income taxes are recorded based upon differences
between the tax and financial reporting bases of the Company's assets and
liabilities.
PER SHARE INFORMATION
Per share information has been computed based on the weighted average
number of common shares outstanding during the periods presented. The weighted
average number of common shares outstanding for the years ended January 31,
1996, 1995 and 1994 does not include the effect of stock options as they were
insignificant.
PROPERTY, PLANT AND EQUIPMENT
The Company primarily uses the straight-line method of providing
depreciation over the estimated useful lives of the assets for financial
reporting purposes. Estimated useful lives used in computing depreciation fall
within the following ranges:
YEARS
-------------
Machinery and equipment..................................... 3 to 15
Automobiles, trucks and trailers............................ 3 to 5
Buildings and yard improvements............................. 4 to 33
Furniture and fixtures...................................... 5 to 10
When assets are retired or otherwise disposed, the cost and related
accumulated depreciation are removed from the accounts and the resulting gains
or losses are reflected in operations.
40
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs are charged to expense as incurred.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. Cash paid for income taxes and interest was
approximately $303,000 and $496,000, $234,000 and $178,000 and $248,000 and
$487,000, in fiscal 1996, 1995 and 1994, respectively.
CONCENTRATIONS OF CREDIT
The Company sells its products primarily in North America and the joint
operations sell their products primarily in the Far and Near East. The Company
and the joint operations perform ongoing credit evaluations of their customers
and require letters of credit on foreign sales. Reserves for potential credit
losses are maintained and such losses have been within management's
expectations.
The Company invests its excess cash in deposits with major banks and in
money market securities of companies from a variety of industries. These
securities typically mature within 90 days. The Company has not experienced any
losses on its money market investments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company includes fair value information in the notes to
consolidated financial statements when the fair value of its financial
instruments is different from the book value. The carrying value of cash and
cash equivalents, receivables and accounts payable approximate fair value due to
the short term maturities of these instruments. The carrying value of the
Company's note receivable and revolving credit agreements approximate fair value
because the rates on such instruments are variable, based on current market.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
41
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NEW ACCOUNTING STANDARD
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," which encourages, but does not
require, employers to adopt a fair value method of accounting for employee
stock-based compensation, and which requires increased stock-based compensation
disclosures if expense recognition is not adopted. The Company does not intend
to elect expense recognition for stock options and therefore implementation of
SFAS No. 123 will have no effect on the Company's operating results or financial
condition.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
The following are the details of certain balance sheet accounts
(dollars in thousands):
JANUARY 31,
1996 1995
------------- --------
INVENTORIES
Processed scrap ............................... $ 742 $ 1,057
Unprocessed scrap and other.................... 2,034 695
------------- ------------
$ 2,776 $ 1,752
============= ============
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land........................................... $ 633 $ 633
Machinery and equipment........................ 17,631 12,245
Gasification plant............................. -- 3,661
Buildings and yard improvements................ 8,427 5,163
Furniture and fixtures......................... 317 265
Construction in progress....................... 647 3,441
Assets held for sale........................... 5,143 9,639
------------- ------------
32,798 35,047
Less accumulated depreciation.................. (16,953) (15,802)
------------- ------------
$ 15,845 $ 19,245
============= ============
42
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------
1996 1995
------------ ------------
OTHER ASSETS
<S> <C> <C>
Note receivable, net of associated deferred gain................................ $ 2,502 $ --
Deferred compensation .......................................................... 718 718
Cash surrender value, less loans of $2,358 and $1,801 in
1996 and 1995, respectively................................................... 948 1,244
Other........................................................................... 166 114
---------- -----------
$ 4,334 $ 2,076
========== ===========
ACCRUED LIABILITIES
Payroll......................................................................... $ 77 $ 496
Deferred compensation, current portion.......................................... 516 500
Insurance ...................................................................... 133 589
Environmental and litigation.................................................... 555 346
Other........................................................................... 495 292
----------- -----------
$ 1,776 $ 2,223
=========== ===========
OTHER LIABILITIES
Deferred compensation, long-term portion........................................ $ 2,490 $ 2,642
Environmental and other......................................................... 1,386 --
----------- -----------
$ 3,876 $ 2,642
=========== ===========
</TABLE>
3. INVESTMENTS IN JOINT OPERATIONS
The Company has historically conducted a significant portion of its
business through joint operations. Certain of these joint operations are
organized as partnerships and others as corporations. The agreements governing
such operations generally provide that all decisions will be made unanimously by
the partners/shareholders. In the more significant joint operations, the
Company's partner is Hugo Neu Corporation (formerly Hugo Neu & Sons, Inc.) or
one of its subsidiaries.
The principal joint operations included in the summary of financial
information and the Company's percentage interest owned are as follows:
43
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Hugo Neu-Proler Company.................................. 50%
Prolerized New England Company........................... 50%
Prolerized Chicago Corporation (a)....................... 50%
HPNJ (b)................................................. 50%
HPI (b).................................................. 49%
Prolerized Schiabo-Neu Company........................... 33 1/3%
(a) Sold in October, 1993
(b) Sold in October, 1995
A summary of the financial position of the combined joint operations
(100% basis) is as follows (dollars in thousands):
JANUARY 31,
1996 1995
----------- -------
Current assets, primarily inventory..... $ 82,121 $ 50,740
Property, plant and equipment, net...... 32,834 25,985
Other................................... 431 415
----------- -----------
$ 115,386 $ 77,140
=========== ===========
Current liabilities..................... $ 12,480 $ 8,882
Other liabilities....................... 2,739 436
Stockholders' and partners' equity...... 100,167 67,822
----------- -----------
$ 115,386 $ 77,140
=========== ===========
The Company's investment in the joint operations and its percentage
interest in the above assets and liabilities as of January 31, 1996 and 1995 is
set forth below (dollars in thousands):
JANUARY 31,
----------------------------
1996 1995
----------- ------------
Current assets, primarily inventory............. $ 37,762 $ 23,889
Property, plant and equipment, net.............. 14,610 11,402
Other assets.................................... 215 207
Liabilities..................................... (7,127) (4,349)
Adjustment to conform reporting periods......... (6,101) 3,627
----------- -----------
Net investment.................................. $ 39,359 $ 34,776
=========== ===========
44
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A summary of the results of operations of the combined joint operations
is as follows (dollars in thousands):
Combined 100% Basis:
FOR THE YEARS ENDED JANUARY 31,
1996 1995 1994
------------ ----------- -------------
Net sales..................... $ 333,526 $ 267,063 $ 307,455
=========== ============ =============
Gross profit.................. $ 15,407 $ 13,307 $ 13,095
=========== ============ =============
Earnings...................... $ 6,697 $ 7,129 $ 5,304
=========== ============ =============
Company Percentage Interest:
FOR THE YEARS ENDED JANUARY 31,
1996 1995 1994
----------- ----------- ------------
Net sales..................... $ 142,931 $ 124,103 $ 142,197
=========== ============ ============
Gross profit.................. $ 7,429 $ 6,257 $ 6,037
=========== ============ ============
Earnings...................... $ 3,575 $ 2,974 $ 2,768
=========== ============ ============
4. ASSET WRITE-DOWNS AND OTHER CHARGES
In the fourth quarter of fiscal 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long- lived Assets and for Long-lived Assets to Be Disposed Of."
SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company evaluated the recoverability of certain
individual real estate assets and recorded asset write-downs of approximately
$1.2 million. Such write-downs are primarily due to uncertainties as to the
Company's ability to utilize these assets in operations in the future and for
which there appears to be relatively insignificant current market value.
During the fourth quarter of fiscal 1996, Proler Environmental
Services, Inc. ("Proler Environmental"), an indirect wholly-owned subsidiary of
the Company, recorded a charge of approximately $4.0 million resulting from the
write-off of its investment in its Houston gasification plant due to a change in
its intended use. The Company is currently assessing the opportunities for and
feasibility of various commercial applications of the gasification process, and
is having discussions with several entities which may lead to the construction
of one or more gasification plants. Management now believes that the future use
of this gasification plant will be primarily that of demonstration, marketing
and training for larger scale projects. As a result,
45
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
the Houston plant is not expected to generate any significant future net
revenues and, accordingly, Proler Environmental wrote-off its $4.0 million
investment in this plant.
The Company also recorded a charge to operations of approximately $1.2
million in the fourth quarter of fiscal 1996 for the accrual of future clean-up
and closure costs of a Houston landfill owned by the Company, which has now been
determined not to be required in the Company's future operations and which is
being closed pursuant to the requirements of Texas Natural Resource Conservation
Commission rules and regulations.
5. BANK DEBT
In April, 1996, the Company amended its credit facilities to provide
for a $23 million revolving line of credit, an additional $5 million revolving
line of credit and a $6.5 million letter of credit facility. The agreements are
collateralized by substantially all of the Company's assets, including its
rights to cash distributions from certain joint operations. As of January 31,
1996, $9.7 million in borrowings were outstanding on the $23 million revolving
line of credit and $6.2 million of letters of credit were outstanding.
The combined commitment levels of the revolving lines of credit reduce
from $28.0 million to the following: $23.0 million on June 30, 1996; $20.0
million on July 31, 1996; $17.5 million on August 31, 1996; $15.0 million on
September 30, 1996; $12.5 million on December 31, 1996; and $10.0 million on
January 31, 1997. The $23 million line of credit terminates on February 28,
1997, the $5 million line of credit terminates on June 30, 1996 and the $6.5
million letter of credit facility terminates on June 30, 1997. Amounts available
under the lines of credit are computed in accordance with a borrowing base
formula and are generally limited by values assigned to accounts receivable and
inventory. A commitment fee of 1/2 percent per annum is charged on the unused
portion of the revolving lines of credit. Borrowings under the revolving lines
of credit bear interest at either the bank's prime rate plus one percent or a
Eurodollar-based rate, at the Company's option.
Under the terms of the credit agreements, the Company must maintain,
among other things, a minimum net worth, specified ratios of current assets to
current liabilities and specified levels of earnings before interest, taxes,
depreciation and amortization as computed in accordance with the agreements. In
addition, the Company is limited as to incurring additional indebtedness,
limited to incurring capital expenditures in excess of certain amounts, and
prohibited from paying cash dividends.
46
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The joint operations have recently experienced lower prices and demand
from foreign steel mills and higher levels of inventory purchases, resulting in
the accumulation of excess inventories and increased financing requirements by
the Company. As of April 26, 1996,outstanding bank borrowings totalled $17.2
million and the Company expects that its outstanding borrowings will increase
until additional joint venture export sales orders are made and completed.
Management believes that the amounts available under its credit facilities,
together with distributions from joint operations, should be sufficient to meet
its current working capital and short-term inventory financing requirements.
However, those requirements could increase if inventory accumulations at the
joint ventures continue.
6. SALES OF ASSETS
In October, 1993, substantially all of the assets of Prolerized Chicago
Corporation, a 50%-owned joint operation, were sold to an unrelated third party
for an aggregate consideration of approximately $2.4 million. The Company
recognized a pretax gain of approximately $0.5 million attributable to its
interest in this sales transaction. Such amount is included in earnings from
joint operations. The Company's share of this joint operation's pretax earnings
was $442,000 in fiscal 1994.
In February, 1994, Prolerized Steel Corporation, an indirect
wholly-owned subsidiary of the Company, sold the assets of its scrap metal
processing facility located in Kansas City, Kansas to an unrelated third party
for approximately $5.1 million. Also, in April, 1994, the assets of the
Company's Vinton, Texas scrap processing facility were sold to an unrelated
third party for approximately $2.6 million. The Company recorded gains on these
two sales totaling $2.9 million. The Company reported net sales of $4.7 million
and $29.1 million and gross profit of $0.1 million and $0.6 million attributable
to the operations at the Kansas City and Vinton plants in fiscal 1995 and 1994,
respectively.
In July, 1995, the Company sold a 65 acre tract of real estate in
Houston to an unrelated third party for $5.23 million. The consideration
included $1.03 million in cash and a $4.2 million promissory note bearing
interest at a bank's prime rate. The note is payable in 66 monthly installments
with the first six payments of interest only, the next 59 payments of $61,000 of
principal and interest and a final payment of the remaining balance in January,
2001 (which payment would approximate $1.9 million at current interest rates).
The gain on sale of $1.6 million is being accounted for using the installment
method of accounting and, accordingly, a $0.3 million gain on sale was recorded
during fiscal 1996 and $1.3 million of the gain was deferred. In December, 1995,
the Company also sold a 124 acre tract of real estate in Missouri to an
unrelated third party for cash of $0.8 million, the approximate net book value
of the property.
47
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In October, 1995, the Company sold its interest in HPI and HPNJ, joint
ventures engaged in a scrap metal processing business in Newark, New Jersey,
operating under the name of Metro Metal Recycling, to Hugo Neu Corporation, a
partner in the ventures. The Company received $3.3 million in cash from the sale
of its interest and an additional $4.4 million in cash representing
reimbursement of advances made to the joint ventures. The proceeds approximated
the Company's net book value of investments, and accordingly, no gain or loss
was recognized. The Company's interest in these ventures was reduced to 1% for
the January through October, 1995 period. The Company's share of the pretax
losses of these ventures was $0.1 million, $2.3 million and $0.6 million in
fiscal 1996, 1995 and 1994, respectively.
7. INCOME TAXES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes" effective
February 1, 1993 and the cumulative effect of this change was a decrease in net
loss of $118,000 or $.03 per share for fiscal 1994. This statement changed the
criteria for the recognition and measurement of deferred tax assets or
liabilities, including net operating loss carryforwards. The provision for
income taxes is comprised of the following (dollars in thousands):
FOR THE YEARS ENDED JANUARY 31,
1996 1995 1994
-------------- ------------- ------------
Current:
Federal.................... $ 187 $ 144 $ 291
State...................... 42 17 277
Deferred:
Federal.................... -- -- --
-------------- ------------- ------------
Provision for income taxes.... $ 229 $ 161 $ 568
============== ============= ============
48
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The difference between the effective rates reflected in the provision for
income taxes and the amounts which would be determined by applying the statutory
federal tax rate to earnings (loss) before income taxes are analyzed below
(dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Provision (benefit) for income taxes at statutory rate $ (2,997) $ 158 $ (616)
Increases (reductions) resulting from:
Effect of undistributed earnings of corporate
joint operations......................................... 12 125 (167)
Effect of liquidating distribution of corporate
joint operations......................................... -- 18 258
Federal income taxes of corporate joint
operations and foreign sales corporations................ 231 157 357
State income taxes, net.................................... 42 12 202
Earnings of foreign sales corporations..................... (609) (485) (518)
Goodwill recognized on sale of assets...................... -- 604 --
Tax in excess of book basis on sale of
interests in joint operations............................ (334) -- --
Net operating loss carryforward for financial
reporting purposes not currently utilizable.............. 3,742 -- 1,039
Net operating loss carryforward for financial
reporting purposes currently utilizable.................. -- (449) --
Other, net................................................. 142 21 13
----------- ----------- ----------
Provision for income taxes...................................... $ 229 $ 161 $ 568
=========== =========== ==========
</TABLE>
49
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. Temporary differences and carryforwards which give rise to these
deferred tax assets and liabilities at January 31, 1996 and 1995 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------------
1996 1995
------------- -------------
Deferred tax assets:
<S> <C> <C>
Deferred compensation.............................................. $ 776 $ 824
Reserves not currently deductible for tax.......................... 512 523
Net operating loss and other tax carryforwards .................... 7,524 6,267
Asset write-downs.................................................. 2,193 --
Deferred gain on sold property..................................... 441 --
Other.............................................................. 187 264
------------ ------------
11,633 7,878
------------ ------------
Deferred tax liabilities:
Gain on involuntary conversion
of a property................................................... 899 899
Depreciation....................................................... 1,343 1,225
------------ ------------
2,242 2,124
------------ ------------
Net deferred tax asset............................................... 9,391 5,754
Valuation allowance.................................................. (9,391) (5,754)
------------- -------------
Net............................................................... $ -- $ --
============= ============
</TABLE>
The Company has net operating loss carryforwards at January 31,
1996 for regular tax and alternative minimum tax reporting purposes of
approximately $19.2 million and $10.0 million, respectively. The net operating
loss carryforwards expire at various dates through 2011. The Company also has
alternative minimum tax credit and investment tax credit carryforwards of
approximately $0.7 million and $0.2 million, respectively, which expire at
various dates.
8. STOCKHOLDERS' EQUITY
HOLDING COMPANY STRUCTURE. Effective February 28, 1996, the Company was
formed as a holding company and succeeded to the ownership of all the assets and
businesses previously owned by the former Proler International Corp. All issued
shares of common stock were automatically converted into shares of common stock
of the Company on a share-for-share basis. The new common and preferred stock
have the same designations, rights and preferences as before, and the Company
adopted the plans described below with identical terms and provisions. The
Company has authorized 500,000 shares of $1 par value preferred stock of which
50,000
50
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
shares have been designated as Series A Junior Participating Preferred Stock. No
shares have been issued under this authorization.
STOCKHOLDER RIGHTS PLAN. In September, 1988, Proler International Corp.
adopted a stockholder rights plan and declared a dividend distribution of
preferred stock purchase rights which, after adjustment, entitle holders of each
share of common stock to one-third of one preferred stock purchase right. In
connection with the adoption of the holding company structure in February, 1996,
the preferred stock purchase rights were redeemed for one cent per right, and
the Company adopted an identical plan to the 1988 Plan.
Under the terms of the stockholder rights plan, preferred stock
purchase rights may become exercisable if a person or group acquires 20% or more
of the Company's common stock or announces an offer to acquire 30% or more of
the common stock. Each right initially will entitle stockholders to buy one
one-hundredth of a share of the Company's Series A Junior Participating
Preferred Stock, $1 par value per share, at a price of $200.
If the Company is acquired in a merger or other business combination at
any time after the rights become exercisable and the Company is not the
surviving corporation, or its common stock is changed or exchanged, or 50% or
more of the Company's assets or earning power is sold or transferred, each such
right will entitle its holder to purchase common shares of the acquiring company
having a market value of twice the exercise price of each right (i.e., at a 50%
discount). If a 20% or greater holder acquires the Company and the Company is
the surviving corporation and its common stock is not changed or exchanged, or
such holder engages in one or more "self-dealing" transactions as set forth in
the Rights Agreement or increases its beneficial ownership of the Company by
more than one percent in a transaction involving the Company, each right will
entitle its holder, other than the acquiror, to purchase common stock of the
Company (or under certain circumstances to receive cash, preferred stock, or
other securities of the Company), at a similar 50% discount from market value at
that time.
Prior to acquisition by a person or group of beneficial ownership of
20% or more of the Company's common stock, the rights are redeemable for one
cent per right at the option of the Board of Directors. In addition, the rights
may be redeemed by stockholder action at one cent per right when certain
procedures are complied with in connection with an acquisition proposal.
1988 STOCK OPTION PLAN. The Company has a stock option plan whereby key
employees may be granted options to purchase up to 280,000 shares of the
Company's common stock at a price, determined by a committee of the Board of
Directors, which cannot be less than 50% of the fair market value of the common
stock on the date of grant. No options have been granted at less than 100% of
the fair market value of the common stock on the date of the grant. At
51
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
January 31, 1996 and 1995, 113,845 and 94,844 options were exercisable and a
total of 65,155 and 151,155 options remained available for grant under the plan.
A summary of activity relating to stock options is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
-------------
<S> <C>
Outstanding, January 31, 1993 ($5.375 to $23.00 per share) 111,865
Granted ($8.00 to $10.875 per share)................................ 53,000
Exercised........................................................... --
Cancelled (1)....................................................... (18,020)
------------
Outstanding, January 31, 1994 ($5.375 to $23.00 per share) 146,845
Granted ............................................................ --
Exercised........................................................... --
Cancelled (1)....................................................... (18,000)
------------
Outstanding, January 31, 1995 ($5.375 to $23.00 per share) 128,845
Granted ($7.00 to $7.875 per share)................................. 86,000
Exercised........................................................... --
------------
Outstanding, January 31, 1996 ($5.375 to $23.00 per share) 214,845
============
</TABLE>
(1) These cancelled options of former employees are available for
reissuance under the stock option plan.
1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. The Company has a stock
option plan whereby an aggregate of 30,000 shares of the Company's common stock
may be granted to non-employee directors of the Company. The options are
exercisable six months after the date of grant at an exercise price equivalent
to the fair market value of the underlying common stock as of the date of grant.
In fiscal 1996 and 1995 options for 3,000 and 6,000 shares, respectively, were
granted. At January 31, 1996, 3,000 of the options granted were exercisable at
$7.875 per share and 6,000 were exercisable at $8.375 per share.
1993 INCENTIVE COMPENSATION PLAN. The Company has a plan whereby key
employees have the opportunity to earn annual bonus awards based on their
achievement of performance goals approved by the Compensation Committee of the
Board of Directors. Under the plan, a portion of each award (twenty-five percent
for fiscal 1994 and none for 1995 and 1996) may be payable in restricted shares
of common stock. One-third of the shares of stock awarded vests each year on the
anniversary of the last day of the fiscal year to which the award pertains. The
issuance of the shares is contingent upon the employee remaining employed by the
Company on each vesting date, subject to the exceptions provided in the Plan.
Cash awards of $226,000 and $219,000 were awarded to seven employees in fiscal
1995 and fiscal 1994, respectively. In
52
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
addition, 9,590 shares were awarded in fiscal 1994. No cash or stock awards were
made from this plan in fiscal 1996. The Company issued 3,198 shares from
treasury stock on each of January 31, 1996 and 1995 for payment of the vested
portion of the fiscal 1994 stock award.
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS. As a joint venturer, the Company is jointly and severally
liable for the liabilities of the Company's unincorporated joint operations.
The joint operations lease certain tracts of real estate and
improvements under cancelable and non-cancelable agreements. Total rent expense
was approximately $2,114,000, $2,600,000, and $2,800,000 in 1996, 1995, and
1994, respectively, related to these lease agreements. The Company and its joint
operations' minimum rental commitments (100% basis) under non-cancelable leases
as of January 31, 1996 are as follows (dollars in thousands):
Year Ending
JANUARY 31,
1997................................... $ 858
1998................................... 872
1999 .................................. 775
2000 .................................. 481
2001................................... 174
------------
$ 3,160
============
Certain of these leases provide for additional rentals based on
increases of the fair market value of the property leased and call for payment
of property taxes by the lessee. In addition, most leases contain renewal
clauses.
The Company and its subsidiaries lease certain tracts of real estate
under cancelable agreements. Total rent expense for such leases was
approximately $186,000, $172,000 and $133,000 in fiscal 1996, 1995, and 1994
respectively.
The Company has an agreement to purchase inventory through February,
1997 for a specified price. Future minimum purchase commitments total
approximately $1,700,000.
CONTINGENCIES. Certain materials resulting from the Company's
operations must be handled consistent with federal and state environmental laws
and regulations. Compliance with such laws and regulations were an area of
concern to the Company as questions were being raised as to whether automobile
shredder residue, ("ASR" or "fluff") contains excessive concentrations
53
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
of certain heavy metals, polychlorinated biphenyls ("PCBs") and other
contaminants. A 1988 United States Environmental Protection Agency ("EPA") study
released in 1990 concerning potential contamination in ASR indicated that the
potential risk depends on the constituent make up of the fluff and the
management practices at the sites where the fluff is generated. Pending further
study, the EPA recognized that shredding operations that are well managed and
conducted in an environmentally sound manner provide valuable environmental
benefits. The Company has successfully implemented source control programs to
identify and to reduce the sources of lead and certain other heavy metals in
ASR. To date, tests of ASR generated by the Company and its joint operations
indicate that levels of PCBs, lead, cadmium, and other contaminants are
generally within acceptable levels under EPA and state procedures. The Company
continues to evaluate additional methods of further reducing contaminants in
ASR. As with any business that produces significant amounts of industrial
wastes, the Company could face substantial additional costs if past or present
disposal practices would no longer be deemed acceptable by Federal or state
regulatory agencies, although it does not currently expect this result. The
Company could also be required to clean-up sites now or formerly used in their
operations.
As reported earlier, the EPA contacted MRI Corporation, an indirect
wholly-owned subsidiary of the Company, in August 1989 regarding testing for
possible contamination at a site in Tampa, Florida previously operated by MRI.
The EPA took split soil and groundwater samples from the site for
analysis. The Company learned that in late 1990, an EPA consultant issued a
report recommending that further consideration be given to possibly ranking this
site using the EPA's hazardous ranking package. Based on that recommendation,
the EPA took additional samples at the site in 1992. The EPA has recently
visited the site to observe site conditions. MRI had previously conducted
extensive clean-up operations at the Tampa site when it was closed in 1988. The
financial implications of any agency action are uncertain at this time and the
Company is continuing to evaluate whether any further corrective action is
necessary or appropriate.
Hugo Neu-Proler Company ("HNP"), a 50% owned joint operation of the
Company, and the Port of Los Angeles (the "Port") are in the final stages of
negotiating a renewal of HNP's lease, the original term of which expired on
August 30, 1994. In December, 1992, HNP signed a Memorandum of Understanding
with the Port related to the lease renewal and in fiscal 1994 and 1995 provided
letters of credit totaling $9.78 million ($4.89 million each from the Company
and HNP's other owner) to secure HNP's remediation obligations under the lease.
The Port is developing an Environmental Impact Report in connection with the
lease renewal. Under the current lease, HNP would be responsible for remediating
certain environmental conditions on the property caused by HNP, the extent and
cost of which are uncertain. Currently, HNP estimates that it will incur capital
expenditures of a minimum of $4.0 million to $5.0 million in connection with
environmental control facilities at the Terminal Island location over the next
three to four
54
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
years. HNP has accrued approximately $0.9 million to cover the costs of
anticipated remediation at this site.
On April 17, 1996, a Los Angeles Grand Jury subpoena was issued by the
Antitrust Division of the United States Department of Justice ("DOJ") requiring
the production of certain documents and information principally concerning the
purchase of scrap metal by HNP. HNP intends fully to cooperate with the DOJ, and
toward that end, HNP and its joint venture partners will be engaged in the
process of assembling relevant information. At this time HNP is not aware of any
of the specifics underlying this investigation.
The Company is also subject to certain other litigation and claims
arising in the ordinary course of business. In the opinion of management, the
disposition of these claims and lawsuits will not have a material adverse effect
on the Company's financial position or results of operations.
10. RELATED PARTY TRANSACTIONS
Certain joint operations sell scrap metal overseas through foreign
sales corporations. To facilitate these sales, two of the other joint
operations' partners act as agents and are paid commission expenses which
totaled approximately $1,575,000, $1,377,000 and $1,651,000 for the years ended
January 31, 1996, 1995 and 1994, respectively, net to the Company.
The Company received funds in excess of costs for various items sold to
the joint operations which amounted to approximately $187,000, $97,000 and
$308,000 for the years ended January 31, 1996, 1995 and 1994, respectively.
During 1996, the Company recorded legal fees of approximately $228,000
for services rendered by a law firm in which one of the Company's directors has
an ownership interest, and during 1995 and 1994, the Company recorded legal and
professional fees of $501,000 and $459,000 for services rendered by firms of
which two of the Company's directors have an ownership interest.
11. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
Excluding the Company's share of the joint operations, sales to
unaffiliated customers which exceeded 10% of total consolidated net sales were
made to four, five, and two customers in fiscal 1996, 1995 and 1994,
respectively. Sales to these customers were: 1996 - 31%, 21%, 19% and 11%; 1995
- - 19%, 17%, 16%, 12% and 11%; and 1994 - 15% and 27% of total sales.
55
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The table below summarizes for the last three fiscal years the
Company's export sales (including its share of the export sales of each joint
operation in which it owns an interest) to customers by geographical area
(dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
----------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
Far and Near East.................................... $ 120,635 $ 104,852 $ 122,086
Europe............................................... 4,719 3,450 --
Canada............................................... 5,059 3,268 4,961
Mexico............................................... 33 1,737 --
South America........................................ -- 1,122 3,044
Other Export Customers............................... 13 -- 2,003
--------------- -------------- --------------
Total Export Sales................................... $ 130,459 $ 114,429 $ 132,094
=============== ============== ==============
</TABLE>
12. EMPLOYEE BENEFIT PLANS
TAX DEFERRED SAVINGS AND RETIREMENT PLAN AND TRUST
The Company has a Tax Deferred Savings and Retirement Plan and Trust
(401K) Plan for the employees of the Company. Eligible employees may contribute
up to 15% of their compensation to this plan and their contributions are matched
by the Company at an amount equal to 50% of each employee's contribution up to
$1,000, 25% of each employee's contribution from $1,001 to $2,000 and 10% of
each employee's contribution in excess of $2,000 up to the statutory limit. The
Company contributed approximately $37,000, $41,000 and $55,000 to this plan for
the years ended January 31, 1996, 1995 and 1994, respectively.
DEFERRED COMPENSATION PLANS
The Company has deferred compensation plans (the "Plans") covering
selected key executives. The Company accrues the estimated present value of the
future payments to be made to each of the plans' participants. The Plans exclude
prior service, and benefits are equal to a percentage of each participant's
annual salary.
Net periodic deferred compensation costs for the years ended January
31, 1996, 1995 and 1994 included the following components (dollars in
thousands):
56
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
----------------------------------------
1996 1995 1994
---------- ----------- ------------
<S> <C> <C> <C>
Service cost-benefits earned during the period.................... $ 46 $ 47 $ 151
Interest cost on projected benefit obligation..................... 231 213 221
Net amortization and deferral..................................... 95 95 95
---------- ----------- ------------
Net periodic deferred compensation costs.......................... $ 372 $ 355 $ 467
========== =========== ============
</TABLE>
The unfunded obligations for plan benefits and the amount recognized in
the Company's balance sheets at January 31, 1996 and 1995 are reconciled as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------------- ---------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Projected benefit obligation...................................... $ 3,006 $ 3,142
Unrecognized prior service cost................................... (507) (580)
Unrecognized net gain (loss)...................................... (85) 12
Unrecognized transition obligation................................ (129) (150)
Adjustment required to recognize minimum liability 721 718
------------- --------------
Deferred compensation liability................................... $ 3,006 $ 3,142
============= ==============
</TABLE>
The assumed discount rate used to compute the present value of benefit
obligations was 7.0% and 8.0% for fiscal 1996 and 1995, respectively. The vested
portion of the projected benefit obligation as of January 31, 1996 and 1995 was
$2,710,000 and $2,938,000, respectively.
13. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of quarterly financial results for fiscal
1996 and 1995 (dollars in thousands except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1995 1995 1995 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales......................................... $ 3,525 $ 2,939 $ 3,970 $ 2,998
=========== =========== =========== ==========
Gross profit (loss)............................... $ 182 $ (122) $ (34) $ (678)
=========== =========== =========== ==========
Earnings (loss) from joint operations............. $ 1,753 $ 2,308 $ 2,167 $ (2,653)
=========== =========== =========== ==========
Asset write-downs and other charges............... $ -- $ -- $ -- $ (6,451)
=========== =========== =========== ==========
Gain on sale of assets, net....................... $ -- $ 318 $ -- $ --
=========== =========== =========== ========
Net income (loss)................................. $ 474 $ 655 $ 707 $ (10,880)
=========== =========== =========== ==========
Net income (loss) per share....................... $ .10 $ .14 $ .15 $ (2.31)
=========== =========== =========== ==========
</TABLE>
57
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1994 1994 1994 1995
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales......................................... $ 7,823 $ 3,581 $ 3,699 $ 3,507
========= ========== =========== ==========
Gross profit (loss)............................... $ 495 $ 299 $ (130) $ 56
========= ========== =========== ==========
Earnings (loss) from joint operations............. $ (995) $ 1,646 $ (488) $ 2,811
========= ========== =========== ==========
Gain on sale of assets, net....................... $ 2,894 $ -- $ -- $ --
========= ========== =========== ==========
Net income (loss)................................. $ 424 $ 145 $ (2,647) $ 2,381
========= ========== =========== ==========
Net income (loss) per share....................... $ .09 $ .03 $ (.56) $ .50
========= ========== =========== ==========
</TABLE>
58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Proler International Corp.
We have audited the combined balance sheets of Proler International
Corp.'s Joint Operations as of January 31, 1996 and 1995, and the related
combined statements of operations, stockholders' and partners' equity, and cash
flows for each of the three years in the period ended January 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits. We did not audit the financial statements of certain joint
operations which statements reflect total assets of approximately 27% and 24% of
the related combined assets as of January 31, 1996 and 1995, respectively, and
net sales of approximately 23%, 21% and 22% of the related combined total net
sales for the years ended January 31, 1996, 1995 and 1994, respectively. Those
statements were audited by another auditor whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for such
joint operations, is based solely upon the reports of the other auditor.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditor provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of the other
auditor, the financial statements referred to above present fairly, in all
material respects, the combined financial position of Proler International
Corp.'s Joint Operations as of January 31, 1996 and 1995, and the combined
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1996, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 29, 1996
59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Prolerized Schiabo-Neu Company
We have audited the accompanying consolidated balance sheets of the
Prolerized Schiabo-Neu Company and its wholly-owned subsidiary, Prolerized
Schiabo Neu Foreign Sales Corporation, as of December 31, 1995 and 1994, and the
related consolidated statements of income, equity balances, and cash flows for
each of the three years in the period ended December 31, 1995, (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Prolerized Schiabo-Neu Company and its wholly-owned subsidiary, Prolerized
Schiabo Neu Foreign Sales Corporation as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
LA GUARDIA & PETRELLA, L.L.C.
March 18, 1996
Bridge Plaza Building
Fort Lee, New Jersey
60
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Dover Barge Company
We have audited the accompanying balance sheets of Dover Barge Company
as of January 31, 1996 and 1995, and the related statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended January 31, 1996, (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Dover Barge Company
at January 31, 1996 and 1995, and the results of its operations and cash flows
for each of the three years in the period ended January 31, 1996, in conformity
with generally accepted accounting principles.
LA GUARDIA & PETRELLA, L.L.C.
February 26, 1996
Bridge Plaza Building
Fort Lee, New Jersey
61
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
COMBINED BALANCE SHEETS
JANUARY 31, 1996 AND 1995
1996 1995
------------- --------------
ASSETS (in thousands)
Current assets:
Cash and cash equivalents................ $ 913 $ 1,933
Accounts receivable:
Trade.................................. 4,645 5,443
Affiliates............................. 17,592 5,683
Other.................................. 441 1,991
Inventories.............................. 57,185 34,623
Prepaid expenses and other............... 1,345 1,067
-------------- -------------
Total current assets................... 82,121 50,740
Property, plant and equipment, net.......... 32,834 25,985
Deferred charges and other assets........... 431 415
-------------- -------------
Total assets....................... $ 115,386 $ 77,140
============== =============
LIABILITIES AND STOCKHOLDERS' AND PARTNERS' EQUITY
Current liabilities:
Accounts payable:
Trade.................................. $ 6,938 $ 4,633
Affiliates............................. 171 38
Accrued liabilities...................... 4,707 4,113
Current maturities of notes payable....... 664 98
-------------- -------------
Total current liabilities.............. 12,480 8,882
Long-term portion of notes payable.......... 2,739 323
Other liabilities........................... -- 113
Commitments and contingencies
Stockholders' and partners' equity.......... 100,167 67,822
-------------- -------------
Total liabilities and stockholders'
and partners' equity...................... $ 115,386 $ 77,140
============== =============
The accompanying notes are an integral part of the combined
financial statements.
62
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ---------------- ---------------
(in thousands)
<S> <C> <C> <C>
Net sales.............................................. $ 309,090 $ 267,063 $ 307,455
Cost of sales ......................................... 292,681 253,756 294,360
--------------- --------------- ---------------
Gross profit...................................... 16,409 13,307 13,095
Selling, general and administrative expense 8,906 8,366 8,658
--------------- --------------- ----------------
Operating income.................................. 7,503 4,941 4,437
--------------- --------------- ---------------
Gain on sale of assets................................. -- -- 1,003
--------------- --------------- ---------------
Other income (expense):
Interest income................................... 31 30 94
Interest expense.................................. (72) (280) (84)
Litigation settlement costs, net of
insurance recoveries........................... -- -- (1,400)
Other, net........................................ 832 2,438 1,254
--------------- --------------- ---------------
Total other................................... 791 2,188 (136)
--------------- --------------- ---------------
Earnings.................................. $ 8,294 $ 7,129 $ 5,304
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
63
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
COMBINED STATEMENTS OF STOCKHOLDERS' AND PARTNERS' EQUITY
FOR THE THREE YEARS ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
RETAINED
EARNINGS AND
COMMON PARTNERSHIP
STOCK CAPITAL TOTAL
--------------- ---------------- ---------------
(in thousands)
<S> <C> <C> <C>
Balances at January 31, 1993......................... $ 167 $ 98,372 $ 98,539
Earnings............................................. -- 5,304 5,304
Distributions, net of advances....................... -- (38,929) (38,929)
--------------- ---------------- ---------------
Balances at January 31, 1994......................... 167 64,747 64,914
Earnings............................................. -- 7,129 7,129
Distributions, net of advances....................... -- (4,221) (4,221)
--------------- ---------------- ---------------
Balances at January 31, 1995......................... 167 67,655 67,822
Earnings............................................. -- 8,294 8,294
Advances, net of distributions....................... -- 30,919 30,919
Dissolution of joint operation....................... (100) 101 1
Elimination of joint operations...................... -- (6,869) (6,869)
--------------- ---------------- ---------------
Balances at January 31, 1996......................... $ 67 $ 100,100 $ 100,167
=============== ================ ===============
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
64
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Earnings.................................................. $ 8,294 $ 7,129 $ 5,304
Adjustments to reconcile earnings to cash:
Depreciation......................................... 4,281 5,335 5,132
Gain on sale of assets............................... -- -- (1,003)
Litigation settlement costs.......................... -- -- 1,400
Advances (distributions), net........................ 30,919 -- --
Changes in assets and liabilities:
(Increase) decrease in receivables................... (9,561) 5,326 (6,846)
(Increase) decrease in inventories................... (22,562) (7,427) 36,834
(Increase) decrease in prepaid
expenses and other assets.......................... (294) (440) 622
Increase (decrease) in current liabilities........... 3,032 (826) 1,708
Increase (decrease) in other liabilities............. (113) (203) 387
----------- ----------- -----------
Net cash provided by operating activities................. 13,996 8,894 43,538
----------- ----------- -----------
Cash flows from investing activities:
Purchases and transfers of property,
plant and equipment.................................... (10,112) (5,588) (4,123)
Proceeds from sales of property, plant
and equipment.......................................... 2,152 684 1,822
Dissolution of joint operation............................ 1 -- --
Elimination of joint operations........................... (6,869) -- --
(Distributions) advances, net............................. -- (4,221) (38,929)
----------- ----------- ------------
Net cash used in investing activities..................... (14,828) (9,125) (41,230)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of equipment notes.............................. (188) -- --
Net affiliate repayments of borrowings.................... -- -- (2,100)
----------- ----------- -----------
Net cash used in financing activities..................... (188) -- (2,100)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents....................................... (1,020) (231) 208
Cash and cash equivalents at beginning of year 1,933 2,164 1,956
----------- ------------ ------------
Cash and cash equivalents at end of year...................... $ 913 $ 1,933 $ 2,164
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
65
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements include all joint operations
(collectively the "Company") of Joint Venture Operations, Inc., a subsidiary of
Proler International Corp. ("Proler") as presented below. The Company is
primarily engaged in buying, processing and selling ferrous and other scrap
metals and primarily makes export sales. All significant balances and
transactions between the combined joint operations have been eliminated in
combination.
<TABLE>
<CAPTION>
Interest Of
Proler
Form Of International
Commenced Business Corp. And Interests
Joint Operation Operation Organization Subsidiaries Of Others
--------------- --------- ------------ ------------ ---------
<S> <C> <C>
Hugo Neu-Proler Company.................. 1962 Partnership 50% Hugo Neu Corporation
-50%
Prolerized Chicago Corporation (1) 1963 Corporation 50% M.S. Kaplan Company
-50%
Prolerized New England
Company (3)............................. 1966 Partnership 50% Hugo Neu Steel
Products, Inc.-50%(2)
Prolerized Schiabo-Neu Company........... 1967 Partnership 331/3% Hugo Neu Corporation
-331/3%
Schiavone-Bonomo
Corp.-331/3%
Dover Barge Company.................... 1967 Corporation 331/3% Hugo Neu Corporation
-331/3%
Schiavone-Bonomo
Corp.-331/3%
Worcester Recycling, Inc. (3)............ 1972 Corporation 50% Hugo Neu Steel
Products, Inc.-50%(2)
Pacific Bulk Loading, Inc................ 1972 Corporation 50% Hugo Neu Corporation
-50%
H. Finkelman, Inc.(3).................. 1977 Corporation 50% Hugo Neu Steel
Products, Inc.-50%(2)
Alameda Street Metal Corp................ 1985 Corporation 50% Hugo Neu Corporation
-50%
HPI (1).................................. 1989 Partnership 49% Hugo Neu Corporation
-49%
Intercontinent Chartering
Corporation-2%
HPNJ (1)................................. 1989 Partnership 50% Hugo Neu Corporation
-50%
</TABLE>
(1) See Note 4 to the combined financial statements.
(2) A subsidiary of Hugo Neu Corporation.
(3) Proleride Transport Systems, Inc., a wholly-owned subsidiary of Joint
Venture Operations, Inc., is the Partner in this venture.
66
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
Amounts are included as of December 31, and the years then ended for
all joint operations except for Dover Barge Company which is as of January 31,
and for the years then ended.
Approximately $45,460,000 and $31,149,000 of stockholders' and
partners' equity at January 31, 1996 and 1995, respectively, and approximately
$3,575,000, $2,974,000 and $2,768,000 of earnings for the years ended January
31, 1996, 1995 and 1994, respectively, are attributable to Proler International
Corp. and one of its subsidiaries based upon their ownership interests. The
remaining equity and net earnings are attributable to the other owners and
partners.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined using the last-in, first-out (LIFO) and the first-in, first-out
(FIFO) methods, for the joint operations as follows (dollars in thousands):
JANUARY 31,
------------------------------------
1996 1995
-------------- --------------
First-in, first out:
Processed.............. $ 14,240 $ 9,778
Unprocessed............ 245 625
-------------- --------------
14,485 10,403
-------------- --------------
Last-in, first out:
Processed.............. 40,322 23,010
Unprocessed............ 2,378 1,210
-------------- --------------
42,700 24,220
-------------- --------------
$ 57,185 $ 34,623
============== ==============
The excess of replacement cost over LIFO value was approximately
$24,288,000 and $19,092,000 at January 31, 1996 and 1995, respectively.
REVENUE RECOGNITION
The Company recognizes revenues from product sales when goods are
shipped or when ownership is assumed by the customer.
67
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
INCOME TAXES
Some of the joint operations are organized as partnerships and others
as corporations. There is no provision for income taxes reflected in the
combined statements of operations.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed using the straight-line method for the
majority of the joint operations' assets. Lives used in computing depreciation
fall within the following ranges:
YEARS
----------
Machinery and equipment............... 3 to 14
Buildings and yard improvements....... 4 to 25
Furniture and fixtures................ 5 to 10
When assets are retired or otherwise disposed, the costs and related
accumulated depreciation are removed from the accounts and any gains or losses
are reflected in earnings (loss).
COMBINED STATEMENTS OF CASH FLOWS
For the purposes of the Combined Statements of Cash Flows, the
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash paid for income taxes was
approximately $585,000, $439,000 and $475,000 for fiscal 1996, 1995 and 1994,
respectively.
CONCENTRATIONS OF CREDIT
The Company sells its products primarily to steel mills in the Far
and Near East. The Company performs ongoing credit evaluations of its customers
and requires letters of credit on all foreign sales. The Company maintains
reserves for potential credit losses and such losses have been within
management's expectations.
The Company invests its excess cash in deposits with major banks and
in money market securities of companies from a variety of industries. These
securities typically mature within 90 days. The Company has not experienced any
losses on its money market investments.
68
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company includes fair value information in the notes to combined
financial statements when the fair value of its financial instruments are
different from the book value. The carrying value of cash and cash equivalents,
receivables and accounts payable approximate fair value due to the short term
maturities of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARD
In March, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of."
This Statement requires that long-lived assets and certain identifiable
intangibles to be held by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable from future cash flows. This statement is effective for
financial statements for fiscal years beginning after December 15, 1995. The
adoption of SFAS No. 121 is not expected to have a material impact on the
Company's financial position or results of operations.
2. RELATED PARTY TRANSACTIONS
Certain joint operations sell scrap metal overseas through foreign
sales corporations. To facilitate these sales, two of the joint operations'
partners other than Proler act as agents and are paid commissions of 1% of the
gross contract sales price.
Commission expenses totaled approximately $3,376,000, $2,933,000 and
$3,540,000 for the years ended January 31, 1996, 1995 and 1994, respectively.
69
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS (DOLLARS IN THOUSANDS)
JANUARY 31,
1996 1995
------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land.................................... $ 5,255 $ 5,065
Machinery and equipment................. 63,420 63,630
Buildings and yard improvements......... 21,203 20,950
Furniture and fixtures.................. 704 1,033
Construction in process................. 3,591 222
------------- -------------
94,173 90,900
Less accumulated depreciation.... (61,339) (64,915)
------------- -------------
$ 32,834 $ 25,985
============= =============
ACCRUED LIABILITIES
Environmental accruals.................. $ 1,165 $ 615
Benefit plan contributions.............. 579 670
Taxes................................... 316 792
Litigation settlement costs............. -- 400
Salaries and wages...................... 472 431
Other................................... 2,175 1,205
------------- -------------
$ 4,707 $ 4,113
============= =============
4. SALES OF ASSETS
In October, 1993, substantially all of the assets of Prolerized Chicago
Corporation ("PCC") were sold to an unrelated third party for an aggregate
consideration of approximately $2.4 million. The sale resulted in a gain of
approximately $1.0 million. Net sales of PCC were $5.3 million and cost of sales
were $5.2 million in fiscal 1994. In 1995, PCC was dissolved.
In October, 1995, Proler sold its interest in HPI and HPNJ, joint
ventures engaged in a scrap metal processing business in Newark, New Jersey,
operating under the name of Metro Metal Recycling, to Hugo Neu Corporation, a
partner in the ventures. Proler received $3.3 million in cash from the sale of
its interests and an additional $4.4 million in cash representing
70
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
reimbursement of advances made to the joint ventures. The net sales of these
ventures were $33.2 million and $35.2 million and cost of sales were $36.6
million and $35.5 million for fiscal 1995 and 1994, respectively. Due to the
insignificance of the fiscal 1996 operating results of these ventures to Proler,
the capital accounts of such ventures were eliminated from the Combined
Financial Statements as of February 1, 1995.
5. EMPLOYEE BENEFIT PLANS
Six of the joint operations of the Company have adopted the employee
defined contribution plan of Hugo Neu Corporation. Contributions by the joint
operations to the trustee of the plan amounted to approximately $639,000,
$634,000 and $639,000 for fiscal 1996, 1995 and 1994 respectively.
In addition to the above plan, the processing and yard employees of
several of the joint operations are covered under union-administered plans.
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS. The joint operations lease certain tracts of real estate
and improvements under cancelable and non-cancelable agreements. Total rental
expense was approximately $2,114,000, $2,600,000 and $2,800,000 in fiscal years
1996, 1995, and 1994, respectively. Minimum rental commitments under
non-cancelable leases as of January 31, 1996 are as follows (dollars in
thousands):
YEAR ENDING
JANUARY 31,
-----------
1997.......................................... $ 665
1998.......................................... 665
1999.......................................... 665
2000.......................................... 449
2001.......................................... 174
-------------
$ 2,618
=============
Certain of these leases provide for additional rentals based on
increases of the fair market value of the property leased and call for payment
of property taxes by the lessee. In addition, most leases contain renewal
clauses.
71
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
CONTINGENCIES. Certain materials resulting from the Company's
operations must be handled consistent with federal and state environmental laws
and regulations. Compliance with such laws and regulations were an area of
concern to the Company as questions were being raised as to whether automobile
shredder residue, ("ASR" or "fluff") contains excessive concentrations of
certain heavy metals, polychlorinated biphenyls ("PCBs") and other contaminants.
A 1988 Environmental Protection Agency ("EPA") study released in 1990 concerning
potential contamination in ASR indicated that the potential risk depends on the
constituent make up of the fluff and the management practices at the sites where
the fluff is generated. Pending further study, the EPA recognized that shredding
operations that are well managed and conducted in an environmentally sound
manner provide valuable environmental benefits. The Company has successfully
implemented source control programs to identify and to reduce the sources of
lead and certain other heavy metals in ASR. To date, tests of ASR generated by
the Company indicate that levels of PCBs, lead, cadmium, and other contaminants
are generally within acceptable levels under EPA and state procedures. The
Company continues to evaluate additional methods of further reducing
contaminants in ASR. As with any business that produces significant amounts of
industrial wastes, the Company could face substantial additional costs if past
or present disposal practices would no longer be deemed acceptable by the
Federal or state regulatory agencies, although it does not currently expect this
result. The Company could also be required to clean-up its sites now or formerly
used in their operations.
Hugo Neu-Proler Company ("HNP"), a 50% owned joint operation of Proler,
and the Port of Los Angeles (the "Port") are in the final stages of negotiating
a renewal of HNP's lease, the original term of which expired on August 30, 1994.
In December, 1992, HNP signed a Memorandum of Understanding with the Port
relating to the lease renewal and in fiscal 1994 and 1995 provided letters of
credit totaling $9.78 million ($4.89 million each from Proler and HNP's other
owner) to secure HNP's remediation obligations under the lease. The Port is
developing an Environmental Impact Report in connection with the lease renewal.
Under the current lease, HNP would be responsible for remediating certain
environmental conditions on the property caused by HNP, the extent and cost of
which are uncertain. Currently, HNP estimates that it will incur capital
expenditures of a minimum of $4.0 million to $5.0 million in connection with
environmental control facilities at the Terminal Island location over the next
three to four year period. HNP has accrued approximately $0.9 million to cover
the costs of anticipated remediation at this site.
On April 17, 1996, a Los Angeles Grand Jury subpoena was issued by the
Antitrust Division of the United States Department of Justice ("DOJ") requiring
the production of certain documents and information principally concerning the
purchase of scrap metal by HNP. HNP intends fully to cooperate with the DOJ, and
toward that end, HNP and its joint venture partners
72
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
will be engaged in the process of assembling relevant information. At this time
HNP is not aware of any of the specifics underlying this investigation.
The Company is also subject to certain other litigation and claims
arising in the ordinary course of business. In the opinion of management, the
disposition of these claims and lawsuits will not have a material adverse effect
on the Company's financial position or results of operations.
7. NOTES PAYABLE
In fiscal 1996 and 1994, the Company financed approximately $3,168,000
and $525,000, respectively, of equipment purchases. The notes are payable in
monthly principal and interest installments and bear interest at rates ranging
from 7.9% to 10%. Each note is collateralized by the equipment purchased.
Scheduled maturities of the notes are as follows:
YEAR ENDING
JANUARY 31,
-----------
1997............... $ 664
1998............... 721
1999............... 762
2000............... 657
2001............... 599
----------------
$ 3,403
================
8. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company is principally engaged in the processing of ferrous and
non-ferrous metals for recycling. Sales to unaffiliated customers which exceeded
10% of total consolidated net sales were made to one customer in fiscal 1996;
two customers in fiscal 1995 and two customers in fiscal 1994. Sales to these
customers were: 13% in fiscal 1996; 12% and 11% in fiscal 1995; and 15% and 11%
in fiscal 1994 of total sales.
73
PROLER INTERNATIONAL CORP.'S JOINT OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
The table below summarizes the export sales to customers by geographic
area (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Far and Near East.............. $ 259,877 $ 223,157 $ 263,661
Europe......................... 11,215 7,335 --
Canada......................... 10,363 6,535 10,009
Mexico......................... -- 5,212 --
South America.................. -- 2,441 6,572
Other Export Customers......... 26 -- 4,005
--------------- --------------- ---------------
Total Export Sales........ $ 281,481 $ 244,680 $ 284,247
=============== =============== ===============
</TABLE>
74
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
3.1 Certificate of Incorporation of Proler International Corp. as amended
to date. (Filed as Exhibit 3.1 to the Company's Registration Statement
on Form 8-B, Registration No. 1-05276, dated March 11, 1996 and
incorporated herein by reference.)
3.2 By-laws of Proler International Corp. as amended to date. (Filed as
Exhibit 3.2 to the Company's Registration Statement on Form 8-B,
Registration No. 1-05276, dated March 11, 1996 and incorporated herein
by reference.)
4.1 Rights Agreement dated as of February 28, 1996 between Proler
International Corp. and KeyCorp Shareholder Services, Inc. (Filed as
Exhibit 4.1 to the Company's Registration Statement on Form 8-B,
Registration No. 1-05276, dated March 11, 1996 and incorporated herein
by reference.)
10.1 Joint Venture Agreement dated January 5, 1962, between Hugo Neu
Corporation and Proler Steel Corporation, related to Hugo Neu-Proler
Company. (Filed as Exhibit 13.1 to the Company's Registration Statement
No. 2-24928 and incorporated herein by reference.)
10.2 Amendments to Joint Venture Agreement dated January 5, 1962. (Filed as
Exhibit 13.1(a) to the Company's Registration Statement No. 2-40782 and
incorporated herein by reference.)
10.3 Joint Venture Agreement dated October 13, 1965, between Hugo Neu-Steel
Products, Inc. and Proleride Transport Systems, Inc., related to
Prolerized New England Company. (Filed as Exhibit 13.15 to the
Company's Registration Statement No. 2-24928 and incorporated herein by
reference.)
10.4 Amendments to Joint Venture Agreement dated October 13, 1965. (Filed as
Exhibit 13.2(a) to the Company's Registration Statement No. 2-40782 and
incorporated herein by reference.)
10.5 Guaranty Agreement dated October 13, 1965, relating to Prolerized New
England Company. (Filed as Exhibit 13.2(b) to the Company's
Registration Statement No. 2-40782 and incorporated herein by
reference.)
75
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
10.6 Joint Venture Agreement dated June 27, 1966, between Proler Steel
Corporation, Hugo Neu Corporation and Schiavone-Bonomo Corporation
related to Prolerized Schiabo-Neu Company. (Filed as Exhibit 13.22 to
the Company's Registration Statement No. 2-24928 and incorporated
herein by reference.)
10.7 Amendments to Joint Venture Agreement dated June 27, 1966. (Filed as
Exhibit 13.4(a) to the Company's Registration Statement No. 2-40782 and
incorporated herein by reference.)
10.8 Lease Agreement dated August 1, 1974 between The City of Los Angeles
and Hugo Neu & Sons, Inc. and Proler Steel Corporation. (Filed as
Exhibit X.12 to Company's Form 10-K for the fiscal year ended January
31, 1981 and incorporated herein by reference.)
10.9 Split Dollar Agreement between Proler International Corp. and Elaine
Proler, effective as of September 12, 1980. (Filed as Exhibit X.15 to
Company's Form 10-K for the year ended January 31, 1982 and
incorporated herein by reference.)*
10.10 Proler International Corp. Medical Reimbursement Plan as amended and
restated effective February 1, 1991. (Filed as Exhibit X.12 to the
Company's Form 10-K for the fiscal year ended January 31, 1992 and
incorporated herein by reference.)*
10.11 Order No. 5472 dated November 6, 1985, approved the first amendment to
permit No. 266 to Hugo Neu-Proler Company and resets compensation to be
paid under the lease agreement dated August 1, 1974 for the period
commencing August 31, 1984 through August 30, 1989. (Filed as Exhibit
X.15 to Company's Form 10-K for the year ended January 31, 1986 and
incorporated herein by reference.)
10.12 Amendment to Joint Venture Agreement dated August 2, 1962. (Filed as
Exhibit 13.5 to the Company's Registration No. 2-24928 and incorporated
herein by reference.)
10.13 Proler International Corp. Deferred Compensation Agreement for Herman
Proler dated December 22, 1987, as amended December 21, 1989. (Filed as
Exhibit X.19 to the Company's Form 10-K for the fiscal year ended
January 31, 1990 and incorporated herein by reference.)*
76
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
10.14 Proler International Corp. Executive Deferred Compensation Plan dated
December 31, 1989. (Filed as Exhibit X.20 to the Company's Form 10-K
for the fiscal year ended January 31, 1990 and incorporated herein by
reference.)*
10.15 Proler International Corp. 1988 Stock Option Agreement. (Filed as
Exhibit X.23 to PIC's Form 10-K for the fiscal year ended January 31,
1991 and incorporated herein by reference.)
10.16 Amendment to the Proler International Corp. 1988 Stock Option Plan
dated June 17, 1994. (Filed as Exhibit 10.25 to PIC's Form 10-Q for the
Quarter ended July 31, 1994 and incorporated herein by reference.) *
10.17 Fourth Amended and Restated Credit Agreement among Joint Venture
Operations, Inc. (formerly known as Proler International Corp.) and
Proler International Corp., as Borrowers, and Joint Venture Operations,
Inc., Proleride Transport Systems, Inc., Proler Environmental Services,
Inc., Proler International Corp., Proler Industries, Inc., Proler
Steel, Inc., Proler Power Marketing, Inc., Proler Properties, Inc., and
Proler Recycling, Inc., as Guarantors, and Texas Commerce Bank National
Association, dated effective as of February 28, 1996. (Filed as Exhibit
10.17 to the Company's Registration Statement on Form 8-B, Registration
No. 1-05276, dated March 11, 1996 and incorporated herein by
reference.)
10.17.1 First Amendment to Fourth Amended and Restated Credit Agreement among
Joint Venture Operations, Inc. (formerly known as Proler International
Corp.) and Proler International Corp., as Borrowers, and Joint Venture
Operations, Inc., Proleride Transport Systems, Inc., Proler
Environmental Services, Inc., Proler International Corp., Proler
Industries, Inc., Proler Steel, Inc., Proler Power Marketing, Inc.,
Proler Properties, Inc., and Proler Recycling, Inc., as Guarantors, and
Texas Commerce Bank National Association, dated effective as of April
26, 1996.
10.18 Second Amended and Restated Credit Agreement, $5,000,000 Line of Credit
Facility and $6,500,000 Letter of Credit Facility, among Joint Venture
Operations, Inc. (formerly known as Proler International Corp.) and
Proler International Corp., as Borrowers, and Joint Venture Operations,
Inc., Proler Industries, Inc., Proler Steel, Inc., Proler Power
Marketing, Inc., Proleride Transport Systems, Inc., Proler
Environmental Services, Inc., Proler International
77
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
Corp., Proler Properties, Inc., and Proler Recycling, Inc., as
Guarantors, and Texas Commerce Bank National Association, dated
effective as of April 26, 1996.
10.19 Proler International Corp. Deferred Compensation Agreement for Norman
Bishop dated effective April 16, 1993. (Filed as Exhibit X to PIC's
Form 10-Q for the Quarter ended April 30, 1993 and incorporated herein
by reference.)*
10.20 Proler International Corp. 1993 Incentive Compensation Plan. (Filed as
Exhibit 10.24 to PIC's Form 10-K for the fiscal year ended January 31,
1994 and incorporated herein by reference.)
10.21 Proler International Corp. Deferred Compensation Agreement for Steven
Gilliland dated effective February 6, 1995. (Filed as Exhibit No. 10.23
to PIC's Form 10- K for the fiscal year ended January 31, 1995 and
incorporated herein by reference).*
10.22 Proler International Corp. 1994 Non-Employee Director Stock Option
Plan. (Filed as Exhibit No. 10.1 to PIC's Form 10-Q for the Quarter
ended July 31, 1994 and incorporated herein by reference).
21 Subsidiaries of Registrant.
23 Consents of Accountants.
27 Financial Data Schedules.
99 Joint Venture Interest Purchase Agreement dated September 27, 1995 by
and among Hugo Neu Corporation and Proler International Corp. (Filed as
Exhibit 99.1 to PIC's Form 8-K dated October 2, 1995 and incorporated
herein by reference).
* Indicates an agreement with management.
78
FIRST AMENDMENT TO FOURTH AMENDED AND
RESTATED CREDIT AGREEMENT
This FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED
CREDIT AGREEMENT (this "AGREEMENT"), effective as of April 26,1996, is entered
into by and among is entered into by and among JOINT VENTURE OPERATIONS, INC., a
Delaware corporation (formerly known as Proler International Corp.)
("OPERATIONS") and PROLER INTERNATIONAL CORP., a Delaware corporation
("INTERNATIONAL", each individually, a "BORROWER" and collectively, the
"BORROWERS"), PROLERIDE TRANSPORT SYSTEMS, INC., PROLER ENVIRONMENTAL SERVICES,
INC., PROLER INDUSTRIES, INC., PROLER STEEL, INC., PROLER POWER MARKETING, INC.,
and PROLER RECYCLING, INC., each a Delaware corporation, and PROLER PROPERTIES,
INC., a Texas corporation (collectively, together with each of Operations and
International acting in its capacity as a guarantor hereunder, the "GUARANTORS"
and together with the Borrowers collectively, the "CREDIT PARTIES"), and TEXAS
COMMERCE BANK NATIONAL ASSOCIATION, a national banking association (the "BANK").
PRELIMINARY STATEMENT
The Credit Parties and the Bank entered into that certain
Fourth Amended And Restated Credit Agreement ("CREDIT AGREEMENT") dated
effective as of February 28, 1996 under the terms of which the Bank agreed to
make available to the Borrowers a revolving line of credit not to exceed, in the
aggregate, $23,000,000. All capitalized terms used herein and not otherwise
defined shall have the meaning as defined in the Credit Agreement.
The Credit Parties have requested that the Bank modify certain
terms of the Credit Agreement. The Bank has agreed to do so, provided Credit
Parties ratify and confirm all of their obligations under the Credit Agreement
and the Security Documents.
NOW THEREFORE, in consideration of the foregoing and the
mutual covenants and premises herein contained, Proler International Corp. and
Joint Venture Operations, Inc. (each individually as a Borrower and also as a
Guarantor), the Guarantors and the Bank do hereby agree as follows:
Section 1. AMENDMENT TO SECTION 1.01. Section 1.01 of the
Credit Agreement is hereby amended by amending the definitions of "Commitment",
"Commitment Fee", "Eligible Joint Venture Inventory", "Eligible Joint Venture
Receivables", "Facility Fee", "Margin" and "Termination Date" to read as
follows:
"'COMMITMENT' means (a) $23,000,000 from and including the Effective
Date to and including July 30, 1996, (b) $20,000,000 from and including
July 31, 1996 to and including August 30, 1996, (c) $17,500,000 from
and including August 31, 1996 to and including September 29, 1996, (d)
$15,000,000 from and including September 30, 1996 to and including
December 30, 1996, (e) $12,500,000 from and including December 31, 1996
to and including January 30, 1997 and (f) $10,000,000 from and
including January 31, 1997 to the "Termination Date."
'COMMITMENT FEE' is defined in SECTION 2.19(A).
'ELIGIBLE JOINT VENTURE INVENTORY' means, as to each Joint Venture, the
Eligible Inventory of such Joint Venture (excluding any Inventory of
any Joint Venture in which such Joint Venture has granted any lien or
security interest to secure Indebtedness for money borrowed) MULTIPLIED
BY the aggregate percentage that all Credit Parties own in the equity
or, if different, the right to the profits of such Joint Venture
pursuant to the applicable Joint Venture Agreement; PROVIDED, that the
total of all items making up a part of the Borrowing Base that consist
either of Eligible Joint Venture Inventory or Eligible Joint Venture
Receivables shall not exceed, for any Joint Venture, the maximum amount
allowed to be distributed to the Bank in any Consent executed in
respect of such Joint Venture.
'ELIGIBLE JOINT VENTURE RECEIVABLES' means, as to each Joint Venture,
the Eligible Receivables of such Joint Venture (excluding any
Receivables of any Joint Venture in which such Joint Venture has
granted any lien or security interest to secure Indebtedness for money
borrowed) MULTIPLIED BY the aggregate percentage that all Credit
Parties own in the equity or, if different, the right to the profits of
such Joint Venture pursuant to the applicable Joint Venture Agreement;
PROVIDED, that the total of all items making up a part of the Borrowing
Base that consist either of Eligible Joint Venture Inventory or
Eligible Joint Venture Receivables shall not exceed, for any Joint
Venture, the maximum amount allowed to be distributed to the Bank in
any Consent executed in respect of such Joint Venture.
'FACILITY FEE' is defined in SECTION 2.19(B).
'MARGIN' means, in respect to Eurodollar Rate Advances, 3.75% and, in
respect of Prime Rate Advances, 1%."
Section 2. AMENDMENT TO SECTION 2.05. Section 2.05 of the
Credit Agreement is hereby amended by restating in their entirety subclauses (a)
and (b) thereof to read as follows:
"(a) Subject to the provisions of SECTIONS 2.05(E) and 9.11, each Prime
Rate Advance shall bear interest on the unpaid principal amount thereof
at a rate per annum equal to the lesser of (i) the Prime Rate plus the
Margin in respect of Prime Rate Advances and (ii) the Highest Lawful
Rate. Accrued and unpaid interest on the Prime Rate Advances shall be
due and payable (A) quarterly in arrears on the last day of each
calendar quarter occurring after the Effective Date and on the
Termination Date, (B) with respect to the principal amount of any
voluntary or mandatory repayment on the date of such voluntary or
mandatory repayment and (C) at maturity (whether by acceleration or
otherwise) and, after maturity, on demand.
(b) Subject to SECTIONS 2.05(E) and 9.11, each Eurodollar Rate Advance
shall bear interest on the unpaid principal amount thereof from the
date of such Advance at a rate per annum (computed on the basis of the
actual number of days elapsed over a year of 360 days) which shall,
during each Interest Period applicable thereto, be equal to the lesser
of (i) the Highest Lawful Rate and (ii) the applicable Eurodollar Rate
for such Interest Period plus the Margin in respect of Eurodollar Rate
Advances. The applicable Eurodollar Rate and the Margin shall be fixed
for each Interest Period and shall not change during said Interest
Period. Interest on each Eurodollar Rate Advance shall be payable (A)
on the last day of the Interest Period applicable thereto, (B) with
respect to the principal amount of any voluntary or mandatory repayment
on the date of such voluntary or mandatory repayment, or on the date of
any conversion or continuance and (C) at maturity (whether by
acceleration or otherwise) and, after maturity, on demand.
Section 3. AMENDMENT TO SECTION 2.19. Section 2.19 of the
Credit Agreement is hereby amended in its entirety to read as follows:
"(a) International agrees to pay to the Bank a commitment fee (the
"COMMITMENT FEE") for the period from and including the date hereof to
but not including the Termination Date, computed at a rate equal to
one-half of one percent (1/2%) per annum on the daily average of the
Unutilized Commitment. Such Commitment Fee shall be due and payable in
arrears on the last Business Day of each calendar quarter and on the
Termination Date.
(b) International agrees to pay to the Bank a facility fee ("FACILITY
FEE"), payable April 29, 1996 in the amount of $86,250."
Section 4. AMENDMENT TO SECTION 7.03. Section 7.03 of the
Credit Agreement is hereby amended by restating in their entirety subclauses
(a), (b) and (c) thereof to read as follows:
"(a) International shall not permit the ratio of (i) Consolidated
Current Assets to (ii) Consolidated Current Liabilities to be less than
1.6 to 1.0 at the end of any fiscal quarter of International, PROVIDED,
notwithstanding the definition of Joint Ventures or anything else
herein contained, for purposes of this Section 7.03(a) only (but not
any other sections or subsections of Section 7.03), Consolidated
Current Assets and Consolidated Current Liabilities shall include that
portion of the current assets and current liabilities of the Joint
Ventures equal to that portion of the Credit Parties' ownership
interest therein.
(b) International shall not permit Consolidated Net Worth as of the end
of each fiscal quarter, commencing with the fiscal quarter ending
January 31, 1996, to be less than $43,000,000.00 plus 50% of
Consolidated Net Income (excluding any non-cash write downs or
impairment losses not to exceed $10,000,000.00 in the aggregate at any
such time) earned commencing August 1, 1995 and thereafter.
(c) International shall not permit EBITDA (i) for the fiscal quarter
ending April 30, 1996 to be less than $(2,500,000.00), and (ii) for
each fiscal quarter ending thereafter, to be less than $1,000,000.00,
based on the results of such quarter measured as of the end of such
fiscal quarter."
Section 5. AMENDMENT TO SECTION 7.04. Section 7.04 of the
Credit Agreement is hereby amended by restating in their entirety subclauses (a)
and (b), and deleting in its entirety subclause (c) thereof to read as follows:
"(a) any Credit Party (other than International) may merge into or
consolidate with any Credit Party or with any other Subsidiary of any
Credit Party, PROVIDED that a Credit Party is the survivor; and
(b) any Subsidiary of a Credit Party may merge into or consolidate with
any other Subsidiary of any Credit Party, PROVIDED, that, if a
wholly-owned Subsidiary of a Credit Party is a party to such merger or
consolidation, a wholly-owned Subsidiary of a Credit Party is the
survivor, and PROVIDED, FURTHER, that if the outstanding shares of
stock of a Subsidiary that is a party to such a merger or consolidation
are pledged to the Bank under the Pledge Agreement, then the shares of
such surviving Subsidiary which are held by any Credit Party or any
Subsidiary of a Credit Party shall be pledged to the Bank under the
Pledge Agreement."
Section 6. AMENDMENT TO SECTION 7.09. Sections 7.09(f) and
7.09(g) of the Credit Agreement are hereby amended in their entirety to read as
follows:
"(f) Investments in Joint Ventures and Credit Parties; PROVIDED
Investments in Proler Environmental Services, Inc. shall be limited as
set forth in subclause (g) below.
(g) Investments in the stock or assets of other Persons not to exceed
$3,000,000.00 if made in or to Proler Environmental Services, Inc. by
any other Credit Party for the purpose of funding the construction or
pre-construction costs, research, development, marketing, feasibility
studies, demonstration projects or similar items by Proler
Environmental Services, Inc. or a non-Credit Party Affiliate thereof of
a gasification plant for which no recourse exists to any other Credit
Party."
Section 7. AMENDMENT TO SECTION 7.10. Section 7.10 of the
Credit Agreement is hereby amended in its entirety to read as follows:
"SALE AND LEASEBACK. International shall not, and shall not permit any
of its Subsidiaries to, enter into any arrangement with any Person
providing for the leasing by International or a Subsidiary of
International of real or personal property which has been or is to be
sold or transferred by International or such Subsidiary to such Person
or to any other Person to whom funds have been or are to be advanced by
such Person on the security of such property or rental obligations of
International or such Subsidiary, other than leases entered into in
connection with any project financed in whole or in part by
Indebtedness permitted by SECTION 7.02(D), which shall be without
recourse to any Credit Party other than Proler Environmental Services,
Inc. and which together with all other Indebtedness incurred in respect
of such project, shall not exceed $20,000,000.00 in the aggregate."
Section 8. AMENDMENT TO SECTION 7.11. Section 7.11 of the
Credit Agreement is hereby amended in its entirety to read as follows:
"CAPITAL EXPENDITURES. International shall not incur Consolidated
Capital Expenditures (exclusive of (A) any Consolidated Capital
Expenditures attributable to capital expenditures made by International
or Proler Environmental Services, Inc. in connection with any project
financed in whole or in part by Indebtedness permitted by SECTIONS
7.02(D), 7.02(E), 7.02(F) or 7.10, which expenditures shall be a part
of, and may not exceed the amount permitted by SECTIONS 7.02(D),
7.02(E) or 7.02(F) and (B) exclusive of Investments permitted by
SECTION 7.09) in an aggregate amount in excess of $1,000,000 for any
fiscal quarter during the term of this Agreement, which
Consolidated Capital Expenditures shall not exceed $4,000,000 for the
fiscal year ending January 31, 1997."
Section 9. AMENDMENT TO SECTION 7.13. Section 7.13 of the
Credit Agreement is hereby amended in its entirety to read as follows:
"RESTRICTED PAYMENTS. Except as contemplated or permitted by the Rights
Agreement dated as of February 28, 1996, as amended or modified,
International shall not directly or indirectly declare, order, pay,
make or set apart any Restricted Payment without the prior written
consent of the Bank."
Section 10. RATIFICATION. (a) Each Borrower acknowledges that
the liens and security interests of each of the Security Documents and all terms
thereof are hereby brought forward for the benefit of the Bank and remain in
full force and effect.
(b) Except as amended and modified by this Agreement, (i) the
Credit Agreement, the International Note and the Security Documents shall
continue in full force and effect and (ii) nothing in this Agreement releases
any right, claim, lien, security interest or entitlement of the Bank created by
or contained in any of such documents nor is either Borrower released from any
covenant, warranty or obligation created by or contained therein.
Section 11. REPRESENTATIONS AND WARRANTIES. Each Borrower
hereby represents and warrants to the Bank that (a) this Agreement has been duly
executed and delivered on behalf of such Borrower, (b) this Agreement
constitutes a valid and legally binding agreement enforceable against such
Borrower in accordance with its terms, (c) the representations and warranties
contained in the Credit Agreement, as amended hereby, and the Security Documents
are true and correct on and as of the date hereof in all material respects as
though made as of the date hereof except as heretofore otherwise disclosed in
writing to the Bank (other than those of such representations and warranties
which by their express terms speak to a date on or before the date hereof), (d)
no Default exists under the Credit Agreement, as amended hereby, or any of the
Security Documents and (e) the execution, delivery and performance of this
Agreement has been duly authorized by each Borrower.
Section 12. COUNTERPARTS. This Agreement may be signed in any
number of counterparts, each of which shall be construed as an original, but all
of which together shall constitute one and the same instrument.
Section 13. GUARANTORS RATIFICATION. The Guarantors execute
this Agreement for the purpose of acknowledging and approving same, ratifying
the Guaranty of each of them and reaffirming that the Guaranty is in full force
and effect and remain the joint and several liability of each Guarantor,
notwithstanding the amendments made herein.
Section 14. CHOICE OF LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas, except to the
extent that the laws of the United States of America and any rules, regulations
or orders issued or promulgated thereunder applicable to the affairs and
transactions of the Bank otherwise preempt Texas law, in which event such
federal law shall control.
Section 15. EFFECTIVENESS. This Agreement shall become
effective as of the date first written above when the Borrowers, the Guarantors
and the Bank shall have executed a counterpart of this Agreement.
Section 16. FINAL AGREEMENT OF THE PARTIES. THIS AGREEMENT,
AND THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN
AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS AND COMMERCE
CODE, AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first above written.
BORROWERS:
PROLER INTERNATIONAL CORP.
By: /S/ MICHAEL F. LOY
Michael F. Loy
Vice President - Finance
JOINT VENTURE OPERATIONS, INC.
By: /S/ MICHAEL F. LOY
Michael F. Loy
Vice President - Finance
<PAGE>
GUARANTORS:
PROLER INTERNATIONAL CORP.
PROLERIDE TRANSPORT SYSTEMS, INC.
JOINT VENTURE OPERATIONS, INC.
PROLER RECYCLING, INC.
PROLER INDUSTRIES, INC.
PROLER STEEL, INC.
PROLER POWER MARKETING, INC.
PROLER PROPERTIES INC.
PROLER ENVIRONMENTAL
SERVICES, INC.
By: /S/ MICHAEL F. LOY
Michael F. Loy
Vice President - Finance
BANK:
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
By: /S/ CURTIS D. KARGES
Curtis D. Karges
Senior Vice President
EXHIBIT 10.18
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
$5,000,000.00 LINE OF CREDIT FACILITY
$6,500,000.00 LETTER OF CREDIT FACILITY
AMONG
JOINT VENTURE OPERATIONS, INC.
(FORMERLY KNOWN AS PROLER INTERNATIONAL CORP.)
AND
PROLER INTERNATIONAL CORP.,
AS BORROWERS
AND
JOINT VENTURE OPERATIONS, INC.
PROLER INDUSTRIES, INC.
PROLER STEEL, INC.
PROLER POWER MARKETING, INC.
PROLERIDE TRANSPORT SYSTEMS, INC.,
PROLER ENVIRONMENTAL SERVICES, INC.,
PROLER INTERNATIONAL CORP.
PROLER PROPERTIES, INC.
PROLER RECYCLING, INC.,
AS GUARANTORS
AND
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
DATED EFFECTIVE AS APRIL 26, 1996
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I - DEFINITIONS, ACCOUNTING TERMS AND MISCELLANEOUS.....................................................1
Section 1.01. Certain Defined Terms....................................................................1
Section 1.02. Accounting Terms........................................................................18
Section 1.03. Types of Advances.......................................................................18
ARTICLE II - COMMITMENT AND TERMS OF CREDIT....................................................................18
Section 2.01. The Commitment; Letters of Credit; Existing Letters of Credit...........................18
Section 2.02. The Notes...............................................................................19
Section 2.03. Making the Advances..........................................................20
Section 2.04. Conversions and Continuances............................................................20
Section 2.05. Interest Rate and Interest Payment Dates................................................20
Section 2.06. Interest Periods........................................................................22
Section 2.07. Interest Rate Not Ascertainable.........................................................23
Section 2.08. Principal Payments of Advances..........................................................23
Section 2.09. Computations; Payments on Non-Business Days.............................................23
Section 2.10. Set-Off, Counterclaims and Taxes........................................................23
Section 2.11. The Borrowers Unconditionally Liable....................................................24
Section 2.12. Change in Legality......................................................................24
Section 2.13. Reserve Requirements; Change in Circumstances...........................................25
Section 2.14. Eurodollar Advance Prepayment and Default Penalties....................................26
Section 2.15. Use of Letters of Credit and Proceeds of Advances.......................................27
Section 2.16. Voluntary Prepayments...................................................................27
Section 2.17. Mandatory Prepayments...................................................................28
Section 2.18. Reduction of the Commitment.............................................................28
Section 2.19. Fees....................................................................................28
Section 2.20. Letters of Credit and Existing Letters of Credit........................................29
Section 2.21. Ratification............................................................................31
ARTICLE III - GUARANTY.........................................................................................32
Section 3.01. Guaranty................................................................................32
Section 3.02. Continuing Guaranty.....................................................................33
Section 3.03. Effect of Debtor Relief Laws............................................................34
Section 3.04. Waiver of Subrogation...................................................................34
Section 3.05. Subordination...........................................................................34
Section 3.06. Waiver..................................................................................35
Section 3.07. Full Force and Effect...................................................................35
ARTICLE IV - CONDITIONS PRECEDENT..............................................................................35
Section 4.01. Conditions Precedent to the Initial Letter of Credit....................................35
Section 4.02. Conditions Precedent to All Credit Events...............................................38
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ARTICLE V - REPRESENTATIONS AND WARRANTIES.....................................................................39
Section 5.01. Organization............................................................................39
Section 5.02. Authority...............................................................................39
Section 5.03. No Conflict.............................................................................40
Section 5.04. Consents................................................................................40
Section 5.05. Financial Condition; No Material Adverse Change.........................................40
Section 5.06. Litigation; Material Adverse Effect.....................................................41
Section 5.07. Indebtedness............................................................................41
Section 5.08. No Margin Stock.........................................................................41
Section 5.09. Accuracy and Completeness of Information................................................41
Section 5.10. ERISA...................................................................................42
Section 5.11. Government Regulation...................................................................42
Section 5.12. Property................................................................................42
Section 5.13. Payment of Taxes........................................................................42
Section 5.14. Insurance...............................................................................42
Section 5.15. Subsidiaries; Joint Ventures............................................................43
Section 5.16. Patents.................................................................................43
Section 5.17. Compliance with Statutes................................................................43
Section 5.18. Labor Relations; Collective Bargaining Agreements.......................................44
Section 5.19. Liabilities.............................................................................45
Section 5.20. Solvency................................................................................45
ARTICLE VI - AFFIRMATIVE COVENANTS.............................................................................45
Section 6.01. Reporting Requirements..................................................................45
Section 6.02. Existence...............................................................................48
Section 6.03. Maintenance of Properties; Insurance....................................................48
Section 6.04. Notice of Litigation....................................................................48
Section 6.05. Taxes; Claims...........................................................................49
Section 6.06. Notice of Default.......................................................................49
Section 6.07. Inspections.............................................................................49
Section 6.08. Compliance with Laws; Notices...........................................................49
Section 6.09. Books and Records; Accounting Systems and Principles....................................50
Section 6.10. Ownership of Credit Parties.............................................................50
Section 6.11. Further Assurances......................................................................50
Section 6.12. Performance of Loan Documents...........................................................51
Section 6.13. Activities of Joint Venture.............................................................51
Section 6.14. Dividends.............................................................................51
ARTICLE VII - NEGATIVE COVENANTS...............................................................................51
Section 7.01. Liens...................................................................................51
Section 7.02. Indebtedness............................................................................53
Section 7.03. Financial Covenants.....................................................................54
Section 7.04. Consolidation, Mergers and Acquisitions; Fundamental Changes............................54
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Section 7.05. Transactions with Affiliates............................................................55
Section 7.06. Use of Proceeds.........................................................................55
Section 7.07. Compliance with ERISA...................................................................55
Section 7.08. Limitation on Negative Pledge Clauses...................................................56
Section 7.09. Investments.............................................................................56
Section 7.10. Sale and Leaseback......................................................................56
Section 7.11. Capital Expenditures....................................................................57
Section 7.12. Limitation on Restrictions Affecting Subsidiaries.......................................57
Section 7.13. Restricted Payments.....................................................................57
Section 7.14. Other Business..........................................................................57
Section 7.15. Joint Venture Agreements................................................................58
Section 7.16. No Transfers to Affiliates..............................................................58
ARTICLE VIII - DEFAULT AND REMEDIES............................................................................58
Section 8.01. Events of Default.......................................................................58
Section 8.02. Set-Off in Event of Default.............................................................61
ARTICLE IX - MISCELLANEOUS.....................................................................................61
Section 9.01. Amendments..............................................................................61
Section 9.02. Notices.................................................................................62
Section 9.03. Costs, Expenses and Taxes...............................................................63
Section 9.04. Binding Effect; Successors and Assigns..................................................63
Section 9.05. Independence of Covenants...............................................................63
Section 9.06. Survival of Representations and Warranties..............................................63
Section 9.07. Separability............................................................................64
Section 9.08. No Waiver; Remedies.....................................................................64
Section 9.09. Counterparts............................................................................64
Section 9.10. Governing Law...........................................................................64
Section 9.11. Limitation on Interest..................................................................65
Section 9.12. Indemnification.........................................................................66
Section 9.13. Notice and Defense of Claims............................................................67
Section 9.14. Limitation by Law.......................................................................69
Section 9.15. Interpretation..........................................................................69
Section 9.16. Waiver of Texas Deceptive Trade Practices Act...........................................70
Section 9.17. Releases................................................................................71
Section 9.18. Final Agreement of the Parties..........................................................71
</TABLE>
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EXHIBITS AND SCHEDULES:
Exhibit 1.01-A Borrowing Base Certificate
Exhibit 1.01-B Outstanding Letters of Credit and Acceptances
Exhibit 1.01-C Consent
Exhibit 2.02-A Note A
Exhibit 2.02-B Note C
Exhibit 2.03 Borrowing Request
Exhibit 2.20 Letter of Credit Request
Exhibit 5.06 Litigation
Exhibit 5.07 Indebtedness
Exhibit 5.15 Corporations and Joint Ventures
Exhibit 5.18 Collective Bargaining Agreements
Exhibit 7.01(b) Liens
Exhibit 7.09 Investments
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SECOND AMENDED AND RESTATED CREDIT AGREEMENT
This SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this
"AGREEMENT") dated effective as of April 26, 1996, is entered into by and among
JOINT VENTURE OPERATIONS, INC., a Delaware corporation (formerly known as Proler
International Corp.) ("OPERATIONS") and PROLER INTERNATIONAL CORP., a Delaware
corporation ("INTERNATIONAL", each individually, a "BORROWER" and collectively,
the "BORROWERS"), PROLER ENVIRONMENTAL SERVICES, INC., PROLER INDUSTRIES, INC.,
PROLER POWER MARKETING, INC., PROLER RECYCLING, INC., PROLER STEEL, INC.,
PROLERIDE TRANSPORT SYSTEMS, INC, each a Delaware corporation, PROLER
PROPERTIES, INC., a Texas corporation (collectively, together with each of
Operations and International acting in its capacity as a guarantor hereunder,
the "GUARANTORS" and together with the Borrowers collectively, the "CREDIT
PARTIES"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking
association (the "BANK").
PRELIMINARY STATEMENT
The Credit Parties entered into that certain Amended and
Restated Credit Agreement dated effective as of February 28, 1996 (the "PRIOR
CREDIT AGREEMENT'), under the terms of which the Bank agreed to issue letters of
credit for the account of the Borrowers and to maintain certain issued and
outstanding letters of credit for the account of Operations.
The Borrowers have requested that the Bank extend a line of
credit up to $5,000,000.00 to International, the proceeds of which shall be used
for working capital and other general business purposes.
Therefore, the parties wish to amend and restate the Prior
Credit Agreement in its entirety. In consideration of the foregoing and the
mutual covenants and premises herein contained, Proler International Corp. and
Joint Venture Operations, Inc. (each individually as a Borrower and also as a
Guarantor), the other Guarantors and the Bank do hereby agree as follows:
ARTICLE I
DEFINITIONS, ACCOUNTING TERMS AND MISCELLANEOUS
Section 1.01. CERTAIN DEFINED TERMS. As used in this
Agreement, the following terms shall have the following meanings:
"ADVANCES" is defined in SECTION 2.01(A).
"AFFILIATE" means, when used with respect to any Person, any
other Person which controls or is controlled by or is under common
control with such Person. As used in this
-1-
definition, "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management or
policies of such Person (whether through ownership of securities or
partnership or ownership interests or otherwise).
"AGREEMENT" means this Second Amended and Restated Credit
Agreement, as the same may from time to time be amended, supplemented,
modified or restated.
"APPLICATION" means an application, in such form as the Bank
may specify from time to time, requesting the Bank to open a Letter of
Credit.
"APPRAISAL" means, collectively, an appraisal of each of the
Mortgaged Properties in form and substance satisfactory to the Bank.
"ASSURANCE" means, as to any Person, all obligations,
contingent or otherwise, of such Person guaranteeing or in effect
guaranteeing in any manner, whether directly or indirectly, any
Indebtedness of any other Person (the "primary obligor") including,
without limitation, obligations of such Person, direct or indirect, (a)
to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or to purchase (or to advance or supply
funds for the purchase of) any direct or indirect security therefor,
(b) to purchase property, securities or services for the purpose of
assuring the owner of such Indebtedness of the payment of such
Indebtedness, (c) to maintain working capital, equity capital or other
financial statement condition of the primary obligor so as to enable
the primary obligor to pay such Indebtedness or otherwise to protect
the owner thereof against loss in respect thereof; PROVIDED that such
obligations are entered into by such Person directly with the primary
obligee or (d) entered into for the purpose of assuring in any manner
the owner of such Indebtedness of the payment of such Indebtedness or
to protect such owner against loss in respect thereof; PROVIDED that
the term Assurance shall not include endorsements for collection or
deposit, in either case in the ordinary course of business.
"AUTHORIZED OFFICER" means the Chief Executive Officer, Chief
Financial Officer, Controller, Chief Operating Officer or Treasurer of
the respective Credit Party or such other officer approved by the Bank
for the task indicated.
"BANK" is defined in the introduction to this Agreement.
"BOARD" means the Board of Governors of the Federal Reserve
System of the United States.
"BOARD OF DIRECTORS" means as to any Credit Party the Board of
Directors of such Credit Party.
"BORROWER" is defined in the introduction to this Agreement.
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"BORROWING BASE" means, at any date of determination (a) for
Advances (other than for purposes of issuing a Letter of Credit or an
Existing Letter of Credit), an amount equal to the sum of (x)(a) 50% of
the Market Value of all Eligible Proler Inventory or Eligible Joint
Venture Inventory consisting of Processed Scrap, PLUS (b) $25.00 per
Gross Ton of all other Eligible Proler Inventory or Eligible Joint
Venture Inventory, PLUS (c) 50% of the Eligible Joint Venture
Receivables, PLUS (d) 80% of the Eligible Proler Receivables; PROVIDED,
that the Borrowing Base calculation shall be reduced by an additional
33% in respect of any assets of any Joint Venture which becomes a Joint
Venture in accordance with the definition thereof after the Effective
Date and the Joint Venture Agreement with respect to which requires the
consent of the venture partner for the collateral assignment of the
right to receive distributions from the Joint Venture, unless and until
a fully executed original of a consent by the venture partner of the
relevant Joint Venture substantially in the form of EXHIBIT 1.01(C)
hereto is delivered to the Bank (the "CONSENT") and an appropriate
amendment to this Agreement, the Security Agreement, the UCC-1
financing statements and such other documents as the Bank may
reasonably request, granting to the Bank a lien and security interest,
consistent with the relevant Consent, in the right to distributions of
cash and profits by said Joint Venture of the appropriate Credit Party
is delivered to the Bank, minus (y) the principal amount of
Indebtedness outstanding under the Revolving Credit Facility; PROVIDED,
HOWEVER, that in determining the Borrowing Base for Advances, the
provisos in the definitions of Eligible Joint Venture Inventory and
Eligible Joint Venture Receivables shall not apply; and
(b) for issuance (but not funding) of a Letter of
Credit or any Existing Letter of Credit, an amount equal to 60% of the
sum of (i) the market value, as set forth in the Appraisals, of all of
the Mortgaged Properties, PLUS (ii) the outstanding principal amount of
that certain promissory note dated July 26, 1995 made by Harridan
Limited Partnership payable to Proler International Corp. in the
original principal amount of $4,200,000; PLUS (iii) if such Borrowing
Base for issuance of Letters of Credit is fully utilized, an amount
equal to (x) the sum of (a) 50% of the Market Value of all Eligible
Proler Inventory or Eligible Joint Venture Inventory consisting of
Processed Scrap, PLUS (b) $25.00 per Gross Ton of all other Eligible
Proler Inventory or Eligible Joint Venture Inventory, PLUS (c) 50% of
the Eligible Joint Venture Receivables, PLUS 80% of the Eligible Proler
Receivables; PROVIDED, that the Borrowing Base calculation shall be
reduced by an additional 33% in respect of any assets of any Joint
Venture which becomes a Joint Venture in accordance with the definition
thereof after the Effective Date and the Joint Venture Agreement with
respect to which requires the consent of the venture partner for the
collateral assignment of the right to receive distributions from the
Joint Venture, unless and until a fully executed original of a consent
by the venture partner of the relevant Joint Venture substantially in
the form of EXHIBIT 1.01(C) hereto is delivered to the Bank (the
"CONSENT") and an appropriate amendment to this Agreement, the Security
Agreement, the UCC-1 financing statements and such other documents as
the Bank may reasonably request, granting to the Bank a lien and
security interest, consistent with the relevant Consent, in the right
to distributions of cash and
-3-
profits by said Joint Venture of the appropriate Credit Party is
delivered to the Bank, MINUS (y) the principal amount of Indebtedness
outstanding under the Revolving Credit Facility.
"BORROWING BASE CERTIFICATE" means a certificate in the form
of EXHIBIT 1.01-A hereto, duly completed and executed by an Authorized
Officer and accompanied by an accounts receivable aging schedule and a
description by type and amount of the inventory included in the
Borrowing Base, in each case in form and substance satisfactory to the
Bank.
"BORROWING BASE DEFICIENCY" means, at any time, (a) with
respect to Advances, the amount, if any, by which (i) the aggregate
principal amount of all Advances then outstanding exceeds (ii) the
Borrowing Base for Advances and (b) with respect to Letters of Credit
and Existing Letters of Credit, the amount, if any, by which (i) the
sum of the undrawn amount of all outstanding Letters of Credit and
Existing Letters of Credit exceeds (ii) the Borrowing Base for Letters
of Credit.
"BORROWING DATE" means, when used with respect to any Advance
or Letter of Credit, the date upon which the proceeds of such Advance
are made available to International, or the date upon which any Letter
of Credit is issued.
"BORROWING REQUEST" is defined in SECTION 2.03.
"BUSINESS DAY" means a day of the year on which national
banking associations are not authorized or required to close in
Houston, Texas.
"CAPITAL LEASE", as applied to any Person, means any lease of
any property (whether real, personal or mixed) in respect of which such
Person's obligations as lessee under such lease or rental agreement
constitute obligations which shall have been or should be, in
accordance with GAAP, capitalized on the balance sheet of such Person.
"CLAIM" is defined in SECTION 9.17.
"CODE" means the Internal Revenue Code of 1986, as amended, or
any successor statute.
"COMMERCIAL LETTER OF CREDIT" is defined in SECTION 2.20(A).
"COMMITMENT" means, $5,000,000.00 subject to the limitations
of the Borrowing Base; PROVIDED that during the Commitment Period, the
Bank shall also issue Letters of Credit up to the amount of the L/C
Limit pursuant to the terms hereof and such issuance shall not
constitute a reduction of the Commitment.
"COMMITMENT FEE" is defined in SECTION 2.19(A).
-4-
"COMMITMENT PERIOD" is defined in SECTION 2.01(A).
"COMMONLY CONTROLLED ENTITY" means, with respect to any
Person, any Person which is a member of a controlled group of
corporations and trades or businesses (whether or not incorporated) (as
such term is used in ss. 414(b) or ss. 414(c) of the Code) of which
such Person is also a member.
"COMMUNICATIONS" is defined in SECTION 9.02.
"CONSENT" is defined in the definition of Borrowing Base.
"CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the
aggregate of all expenditures (whether paid in cash or accrued as
liabilities and including in all events all amounts expended or
capitalized under Capital Leases but excluding any amount representing
capitalized interest) by International and its Subsidiaries during such
period that are required to be included in property, plant or equipment
reflected in the consolidated balance sheet of International and its
Subsidiaries.
"CONSOLIDATED CURRENT ASSETS" means, at any time, the current
assets of International and its Subsidiaries determined on a
consolidated basis.
"CONSOLIDATED CURRENT LIABILITIES" means, at any time, the
current liabilities of International and its Subsidiaries determined on
a consolidated basis.
"CONSOLIDATED NET INCOME" means, for any period, the
consolidated net income (or loss) of International and its Subsidiaries
for such period taken as a single accounting period computed in
accordance with GAAP.
"CONSOLIDATED NET WORTH" means, at any date of determination
thereof, the consolidated net worth of International and its
Subsidiaries on the Effective Date computed in accordance with GAAP
plus cumulative Consolidated Net Income for the period (taken as one
accounting period) from the Effective Date to such date.
"CREDIT EVENT" means and includes the making of an Advance or
the issuance of any Letter of Credit
"CREDIT PARTIES" is defined in the introduction to this
Agreement.
"DEBTOR RELIEF LAWS" means the Bankruptcy Code of the United
States and all other applicable state or federal dissolution,
liquidation, conservatorship, bankruptcy, moratorium,
-5-
readjustment of debt, compromise, rearrangement, receivership,
insolvency, reorganization or similar debtor relief laws from time to
time in effect affecting the rights of creditors generally.
"DEEDS OF TRUST" means those certain Deeds of Trust covering
the Mortgaged Properties executed by the appropriate Credit Parties
dated as of August 31, 1992, as amended and modified from time to time.
"DEFAULT" means an event which with the giving of notice or
the lapse of time or both could, unless cured or waived, become an
Event of Default.
"DEFAULT RATE" is defined in SECTION 2.05(E).
"EBITDA" means, for any period, the Consolidated Net Income
for such period, before non-cash asset writedowns or impairment losses
not to exceed $10,000,000 in the aggregate during the term hereof,
interest income, interest expense, depreciation, amortization and
provision for taxes and without giving effect to any extraordinary
gains or gains from sales of assets (other than sales of inventory in
the ordinary course of business).
"EFFECTIVE DATE" means the time and Business Day on which the
conditions set forth in ARTICLE IV are satisfied or waived pursuant to
SECTION 9.01.
"ELIGIBLE INVENTORY" means, with respect to any Person at the
time any determination thereof is to be made, Inventory of such Person
consisting of Processed Scrap or Unprocessed Scrap which meets each of
the following criteria at such time:
(a) such Person shall have good title to such Inventory;
(b) the Bank shall have been granted a perfected first
priority security interest in such Inventory except for Eligible Joint
Venture Inventory, it being agreed that the Bank shall not have a
security interest therein; and
(c) such Inventory shall be within the United States or the
Virgin Islands.
"ELIGIBLE JOINT VENTURE INVENTORY" means, as to each Joint
Venture, the Eligible Inventory of such Joint Venture (excluding any
Inventory of any Joint Venture in which such Joint Venture has granted
any lien or security interest to secure Indebtedness for money
borrowed) MULTIPLIED BY the aggregate percentage that all Credit
Parties own in the equity or, if different, the right to the profits of
such Joint Venture pursuant to the applicable Joint Venture Agreement;
PROVIDED, that the total of all items making up a part of the Borrowing
-6-
Base that consist either of Eligible Joint Venture Inventory or
Eligible Joint Venture Receivables shall not exceed, for any Joint
Venture, the maximum amount allowed to be distributed to the Bank in
any Consent executed in respect of such Joint Venture.
"ELIGIBLE JOINT VENTURE RECEIVABLES" means, as to each Joint
Venture, the Eligible Receivables of such Joint Venture (excluding any
Receivables of any Joint Venture in which such Joint Venture has
granted any lien or security interest to secure Indebtedness for money
borrowed) MULTIPLIED BY the aggregate percentage that all Credit
Parties own in the equity or, if different, the right to the profits of
such Joint Venture pursuant to the applicable Joint Venture Agreement;
PROVIDED, that the total of all items making up a part of the Borrowing
Base that consist either of Eligible Joint Venture Inventory or
Eligible Joint Venture Receivables shall not exceed, for any Joint
Venture, the maximum amount allowed to be distributed to the Bank in
any Consent executed in respect of such Joint Venture.
"ELIGIBLE PROLER INVENTORY" means all of the Eligible
Inventory of International and its Subsidiaries, excluding any Joint
Venture.
"ELIGIBLE PROLER RECEIVABLES" means all of the Eligible
Receivables of International and its Subsidiaries, excluding any Joint
Venture.
"ELIGIBLE RECEIVABLE" means, with respect to any Person at the
time any determination thereof is to be made, a Receivable of such
Person which complies with each of the following criteria at such time:
(a) which remains unpaid less than 60 days from the date of
invoice thereof, it being agreed that funds due from account debtors
and collected by Hugo Neu Corporation are not deemed paid until funds
are received from Hugo Neu Corporation;
(b) which is due from an account debtor whose principal place
of business is located within the United States or the Virgin Islands
unless (i) such Receivable is backed 100% by a letter of credit issued
or confirmed by a bank having a long term debt rating of at least BBB
or better by Standard & Poor's Ratings Group or Baa or better by
Moody's Investors Services or (ii) such account debtor has previously
been approved in a writing (which approval has not been withdrawn) by
the Bank as an eligible foreign account debtor for purposes of this
Agreement;
(c) which is not due from a Subsidiary or an Affiliate of such
Person;
(d) which is payable in U. S. Dollars;
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(e) which is not due from an account debtor who is insolvent
or is the subject of any proceeding under any Debtor Relief Laws;
(f) as to which the Bank has a perfected first priority
security interest except for Eligible Joint Venture Receivables, it
being agreed that the Bank shall not have a security interest therein;
and
(g) as to which Receivable the account debtor shall have not
asserted a default on the part of such Person or otherwise indicated a
dispute or refusal to make payments on such Receivable.
"ENVIRONMENTAL CLAIMS" means any and all administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigations (other
than internal reports prepared by International or any of its
Subsidiaries solely in the ordinary course of such Person's business
and not in response to any third party action or request of any kind)
or proceedings relating in any way to any Environmental Law or any
permit issued, or any approval given, under any such Environmental Law
(hereafter, "applicable claims"), including (a) any and all applicable
claims by governmental or regulatory authorities for enforcement,
cleanup, removal, response, remedial or other actions or damages
pursuant to any applicable Environmental Law and (b) any and all
applicable claims by any third party seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief
resulting from Hazardous Materials arising from alleged injury or
threat of injury to health, safety or the environment.
"ENVIRONMENTAL LAWS" means any and all laws, statutes, rules,
ordinances, codes, licenses, permits, regulations, orders, approvals
authorizations, judgments, decisions or determinations of any
governmental authority pertaining to health or the environment in
effect in any and all jurisdictions in which the property of
International or any of its Subsidiaries is located, including, the
Clean Air Act, 42 U.S.C. ss.ss. 7401-7626, the Comprehensive
Environmental, Response, Compensation, and Liability Act, 42 U.S.C.
ss.ss. 9601-9675, the Hazardous Materials Transportation Act, 49 U.S.C.
ss.ss. 1801-1813 the Occupational Safety and Health Act, 29 U.S.C.
ss.ss. 651-678, the Resource Conservation and Recovery Act, 42 U.S.C.
ss.ss. 6901-6992, the Safe Drinking Water Act, 42 U.S.C. ss.ss. 300f-
300j, the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601-2671, the
Superfund Amendment and Reauthorization Act of 1986 and other
environmental conservation and environmental protection laws, as any of
the same may be amended from time to time.
"ENVIRONMENTAL REPORTS" means, collectively, a Phase I
environmental audit and report of each of the Mortgaged Properties in
form and substance satisfactory to the Bank.
-8-
"ERISA" means the United States Employee Retirement Income
Security Act of 1974, as amended from time to time.
"EUROCURRENCY LIABILITIES" has the meaning specified in
Regulation D in effect from time to time.
"EURODOLLAR LENDING OFFICE" means the office designated by the
Bank from time to time as its Eurodollar Lending Office.
"EURODOLLAR RATE" means, with respect to any Eurodollar Rate
Advance, the rate (rounded to the nearest 1/16 of 1%) at which dollar
deposits approximately equal in principal amount to the entire portion
of such Advance and for a maturity equal to the applicable Interest
Period are offered in immediately available funds to the Bank by prime
banks in whatever Eurodollar interbank market may be selected by the
Bank in its sole and absolute discretion at the time of determination
and in accordance with the then usual practice in such market at
approximately 10:00 a.m. (Houston, Texas time) two Business Days prior
to the commencement of such Interest Period.
"EURODOLLAR RATE ADVANCE" means any Advance bearing interest
at a rate determined by reference to the Eurodollar Rate.
"EVENTS OF DEFAULT" is defined in SECTION 8.01.
"EXECUTION DATE" means the date of execution of this Agreement
by all of the parties hereto.
"EXISTING LETTERS OF CREDIT" means the letters of credit in
the total maximum amount of $6,254,635.00 heretofore issued by the Bank
and listed on EXHIBIT 1.01B hereto.
"EXISTING L/C OBLIGATIONS" means, at any time, an amount equal
to the sum at such time of (a) the aggregate undrawn amount of the
Existing Letters of Credit PLUS (b) the aggregate amount of drawings
under Existing Letters of Credit which have not then been reimbursed
pursuant to SECTION 2.20.
"EXTENDED TERMINATION DATE" is defined in the term
"Termination Date."
"GAAP" means Generally Accepted Accounting Principles,
consistently applied.
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"GOVERNMENT SECURITIES" means readily marketable direct full
faith and credit obligations of the United States or obligations
unconditionally guaranteed by the full faith and credit of the United
States.
"GROSS TON" means a unit of weight equal to 2,240 pounds.
"GUARANTEED OBLIGATIONS" is defined in SECTION 3.01.
"GUARANTORS" is defined in the introduction to this Agreement.
"GUARANTY" means the guaranty contained in ARTICLE III.
"HAZARDOUS MATERIALS" means (a) any petroleum or petroleum
products, radioactive materials, asbestos in any form that is or could
become friable, urea formaldehyde foam insulation, transformers or
other equipment that contain or contained electric fluid containing
polychlorinated biphenyls, and radon gas, (b) any chemicals, materials
or substances defined as or included in the definition of "hazardous
substances," "hazardous waste," "hazardous materials," "extremely
hazardous waste," "restricted hazardous waste," "toxic substances,"
"toxic pollutants," "contaminants," or "pollutants," or words of
similar import, under any applicable Environmental Law and (c) any
other chemical, material or substance, exposure to which is prohibited,
limited or regulated by any governmental authority.
"HIGHEST LAWFUL RATE" means, at any date, the maximum
nonusurious interest rate that may under applicable law then be
contracted for, charged, received, taken or reserved by the Bank in
connection with the Obligations.
"INDEBTEDNESS" of any Person means, without duplication: (a)
any obligation of such Person for borrowed money, including: (i) any
obligation of such Person evidenced by bonds, debentures, notes or
other similar debt instruments, (ii) any obligation of such Person in
respect of letters of credit and (iii) any obligation for borrowed
money which is non-recourse to the credit of such Person to the extent
that it is secured by any asset of such Person, (b) all obligations of
such Person under conditional sale or other title retention agreements
relating to property purchased by such Person, (c) any obligation of
such Person for the deferred purchase price of any property or
services, except accounts payable arising in the ordinary course of
such Person's business that have been outstanding less than ninety (90)
days since the date of the related invoice or, if longer, which are, in
good faith, being disputed by the obligor, and for which appropriate
reserves have been set aside, (d) the present value at ten percent
(10%) per annum of all Capital Leases of such Person, (e) Assurances of
such Person, (f) any Indebtedness of another Person to the extent
secured
-10-
by a Lien on any asset of such first Person, whether or not such
Indebtedness is assumed by such first Person and (g) any Indirect
Indebtedness of such Person.
"INDEMNIFIED PERSONS" is defined in SECTION 9.12.
"INDIRECT INDEBTEDNESS" of a Person means (a) the Indebtedness
of a partnership in which such Person is a general partner and (b) the
amount of any liability of such Person created by the Indebtedness of a
joint venture in which such Person is a joint venturer.
"INTEREST PERIOD" has the meaning specified in SECTION 2.06.
"INVENTORY" means, with respect to any Person as of the date
of any determination thereof, all "inventory" (as defined in the
Uniform Commercial Code in effect in any jurisdiction) in which such
Person may now or hereafter have an interest wherever located, and
shall also mean and include all goods, merchandise, raw materials and
other materials and supplies, work in process, finished goods and any
products made or processed therefrom and all substances, if any,
commingled therewith or added thereto, and other tangible personal
property presently existing or hereafter acquired by such Person and
held for sale or lease or furnished or to be furnished under contracts
for services or used or consumed in the business of such Person.
"INVESTMENT" means any investment so classified under GAAP
made by stock purchase, capital contribution, loan or advance or by
purchase of property or otherwise.
"JOINT VENTURE AGREEMENTS" is defined in SECTION 5.15(B).
"JOINT VENTURES" means the joint ventures and corporations in
existence on the date hereof and set forth on EXHIBIT 5.15 hereof and
each other joint venture or other similar business entity in which the
Borrower or any of its wholly-owned Subsidiaries becomes a participant
from and after the Effective Date, in each case, for so long as any
such joint venture, corporation or other business entity shall remain
in existence and International or any of its Subsidiaries has an
interest therein.
"L/C FEES" means the fees described in SECTION 2.19(B).
"L/C LIMIT" means, subject to the limitations of the Borrowing
Base in respect of Letters of Credit, an amount equal to $6,500,000.00.
"L/C OBLIGATIONS" means, at any time, an amount equal to the
sum at such time of (a) the aggregate undrawn amount of the Existing
Letters of Credit or Letters of Credit then
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outstanding PLUS (b) the aggregate amount of drawings under Existing
Letters of Credit or Letters of Credit which have not then been
reimbursed pursuant to SECTION 2.20(C).
"LETTER OF CREDIT REQUEST" is defined in SECTION 2.20(B).
"LETTERS OF CREDIT" is defined in SECTION 2.01(A).
"LIEN" means, when used with respect to any Person, any
mortgage, lien, charge, pledge, security interest or encumbrance of any
kind (whether voluntary or involuntary, affirmative or negative, and
whether imposed or created by operation of law or otherwise) upon, or
pledge of, any of its property or assets, whether now owned or
hereafter acquired, or any conditional sale agreement, Capital Lease or
other title retention agreement.
"LOAN DOCUMENTS" means this Agreement, the Notes, the
Applications, the Security Documents and all other agreements,
instruments and documents, including security agreements, notes,
warrants, guaranties, mortgages, deeds of trust, subordination
agreements, pledges, powers of attorney, consents, assignments,
collateral assignments, letter agreements, contracts, notices, leases,
amendments, financing statements, letter of credit applications and
reimbursement agreements and all other writings heretofore, now or
hereafter executed by or on behalf of any Credit Party, any of their
respective Affiliates or any other Person in connection with or
relating to this Agreement, the Letters of Credit and the Existing
Letters of Credit.
"MARGIN" means, in respect of Eurodollar Rate Advances, 3.75%
and in respect of Prime Rate Advances, 1%.
"MARKET VALUE" means, at the time of determination, the weekly
shredded scrap price composite and the weekly steel scrap price
composite published in the most recent daily American Metal Market
publication available.
"MASTER RATIFICATION AGREEMENT" means that one certain Master
Ratification, Security and Pledge Agreement-New Credit Agreement
executed by the Company and the Guarantors in connection with that
certain Credit Agreement dated as of December 11, 1995 granting to, and
ratifying certain liens in favor of the Bank as collateral for the
Obligations of said Credit Agreement.
"MATERIAL ADVERSE EFFECT" means (a) a material adverse effect
upon the business, operations, properties, assets, business prospects
or financial condition of the Credit Parties, taken as a whole, or (b)
the material impairment of the ability of the Credit Parties, taken as
-12-
a whole, to perform timely their Obligations under the Loan Documents
to which they are a party.
"MORTGAGED PROPERTIES" means the real properties described in
the Deeds of Trust which are still owned by any of the Credit Parties.
"MORTGAGEE POLICIES" is defined in SECTION 4.01(H).
"NEW PLEDGE AGREEMENT" means that certain Pledge Agreement
(Amended and Restated Credit Agreement) dated as of February 28, 1996
executed by the Credit Parties therein named, pledging and granting to
the Bank a lien and security interest in and to the shares in certain
subsidiaries of said Credit Parties as therein described.
"NEW SECURITY AGREEMENT" means that certain Security Agreement
(Amended and Restated Credit Agreement) dated as of February 28, 1996
executed by each of the Credit Parties in favor of the Bank granting to
the Bank a lien and security interest in and to substantially all of
the assets of each of the Credit Parties as therein described.
"NOTE A" is defined in SECTION 2.02(A).
"NOTE A MATURITY DATE" means June 30, 1996 or the earlier
termination in whole of the Commitment of the Bank pursuant to SECTION
2.18(A) or SECTION 8.01.
"NOTE B" means that certain Revolving Credit Note dated August
31, 1992 in the original principal amount of $10,000,000, executed by
Operations and made payable to the order of the Bank, as amended by the
Note and Deed of Trust Modification Agreement, together with all other
modifications, extensions, renewals and rearrangements thereof.
"NOTE C" is defined in SECTION 2.02(B).
"NOTE AND DEED OF TRUST MODIFICATION AGREEMENT" means that
certain Promissory Note and Deed of Trust Modification and Extension
Agreement dated as of February 28, 1996, executed in connection
herewith by the appropriate Credit Parties and in form and substance
satisfactory to the Bank extending and modifying Note B.
"NOTES" and "NOTE" mean, collectively, (a) Note A, (b) Note B
and (c) Note C and individually any of the Notes referred to in (a),
(b) and (c) above.
"NOTICE OF CONVERSION" is defined in SECTION 2.04.
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"OBLIGATIONS" means all present and future obligations of
every kind or nature of any Credit Party at any time and from time to
time owed to the Bank under the Loan Documents (including the L/C
Obligations and the Existing L/C Obligations), whether due or to become
due, matured or unmatured, liquidated or unliquidated, or contingent or
non-contingent, including obligations of performance as well as
obligations of payment, and including, to the extent permitted by
applicable Debtor Relief Laws, interest that accrues after the
commencement of any proceeding under any Debtor Relief Law by or
against any Credit Party.
"PATENT SECURITY AGREEMENT" means that certain Patent Security
Agreement dated as of August 31, 1992 by and between Proler
Environmental Services, Inc. and the Bank.
"PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA.
"PERFECTION CERTIFICATE" is defined in the Security Agreement.
"PERMITTED INVESTMENTS" means, when used in connection with
any Person, the Person's Investments in:
(a) Government Securities due within one year of the making of
the Investment;
(b) readily marketable direct obligations of any state of the
United States or any political subdivision of any such state given on
the date of such investment a credit rating of at least Aa by Moody's
Investors Service or AA by Standard & Poor's Ratings Group, in each
case, due within one year from the making of the Investment;
(c) certificates of deposit issued by or money market deposits
with the Bank or with any other bank or trust company organized under
the laws of the United States or any state thereof or Canada and having
combined capital, surplus and undivided profits of not less than
$500,000,000 (as of the date of its most recent financial statements);
(d) commercial paper rated at least P-1 or A-1 by Moody's
Investors Service or Standard & Poor's Ratings Group, respectively; or
(e) mutual funds regularly traded within the United States
whose investments are limited to those described in (a) through (d),
above.
"PERMITTED LIENS" means (a) those liens, encumbrances and
other matters affecting title to any Mortgaged Property listed in the
Mortgagee Policies in respect thereof and found
-14-
acceptable by the Bank in its sole discretion, (b) as to any particular
Mortgaged Property at any time, such easements, encroachments,
covenants, rights of way, minor defects, irregularities or encumbrances
on title which are not unusual with respect to property similar in
character to such Mortgaged Property and which do not, in the
reasonable opinion of the Bank, materially impair such Mortgaged
Property for the purpose for which it is held by the mortgagor thereof,
or the Lien held by the Bank, (c) municipal and zoning ordinances,
which are not violated by the existing improvements and the present use
made by the mortgagor thereof of the Premises (as defined in the
respective Deeds of Trust), (d) general real estate taxes and
assessments not yet delinquent, (e) Liens permitted under SECTION 7.01
except for subparagraph (f) thereof and to the extent and only for the
period affecting the respective Mortgaged Property or assets and (f)
such other items as the Bank may consent to.
"PERSON" means an individual, corporation, partnership,
limited liability company, joint venture, trust or unincorporated
organization, or a government or any agency or political subdivision
thereof.
"PLAN" means any employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding
standards under Section 412 of the Code and in respect of which the
Borrower or a Commonly Controlled Entity is an "employer" as defined in
Section 3(5) of ERISA.
"PRIME RATE" means, as of any particular date, the prime rate
per annum most recently determined by the Bank as its prime rate of
interest per annum and thereafter entered in the minutes of the Bank's
loan and discount committee automatically fluctuating upward or
downward, as the case may be, on the day of each determination without
special notice to the Borrowers or any other Person. The Borrowers
acknowledge that the Prime Rate may not be the Bank's best or lowest
rate, or favored rate, and any statement, representation or warranty in
that regard or to that effect is hereby expressly disclaimed by the
Bank.
"PRIME RATE ADVANCE" means any Advance bearing interest at the
Prime Rate.
"PROCESSED SCRAP" means scrap metal which has been prepared,
sheared, cleaned and/or separated into its ferrous and non-ferrous
components and is available for sale in its present condition.
"RECEIVABLE" means, as to any Person as at any date of
determination thereof, the unpaid principal portion of the obligation
of any customer of such Person to pay to such Person in respect of any
services performed by such Person or Inventory purchased from and
shipped or caused to be shipped by such Person, net of any credits,
rebates or offsets owed to such customer by such Person. For purposes
hereof, a credit or rebate paid by check or
-15-
draft of such Person shall be deemed to be outstanding until such check
or draft shall have been debited to the respective account of such
Person on which such check or draft was drafted or drawn.
"REGULATION D" means Regulation D of the Board (respecting
reserve requirements), as the same is from time to time in effect, and
all official rulings and interpretations thereunder or thereof.
"REGULATION G" means Regulation G of the Board (respecting
margin credit extended by Persons other than banks, brokers and
dealers), as the same is from time to time in effect, and all official
rulings and interpretations thereunder or thereof.
"REGULATION U" means Regulation U of the Board (respecting
margin credit extended by banks), as the same is from time to time in
effect, and all official rulings and interpretations thereunder or
thereof.
"REGULATION X" means Regulation X of the Board (respecting the
borrowers who obtain margin credit) as the same is from time to time in
effect, and all official rulings and interpretations thereunder or
thereof.
"REPORTABLE EVENT" means any of the events set forth in
Section 4043(b) of ERISA or the regulations thereunder.
"RESERVE PERCENTAGE" means, for any Interest Period, the
reserve percentage applicable during such Interest Period under
regulations issued from time to time by the Board (or if more than one
such percentage is so applicable, the daily average for such
percentages for those days in such Interest Period during which any
such percentage shall be so applicable) for determining the maximum
reserve requirement (including any marginal, supplemental or emergency
reserves) for the Bank in respect of liabilities or assets consisting
of or including Eurocurrency Liabilities.
"RESTRICTED PAYMENT" means, with respect to any Person:
(a) the declaration of any dividend on, or the incurrence of
any liability to make any other payment or distribution in respect of,
any shares of such Person (other than one payable solely in its
shares); or
(b) (i) any payment or distribution on account of the
purchase, redemption or other retirement of any shares of such Person,
or of any warrant, option or other right to acquire such shares, or any
other payment or distribution (other than pursuant to a dividend
-16-
theretofore declared or liability theretofore incurred as specified in
subsection (a)), made in respect thereof, either directly or
indirectly, or (ii) the purchase, redemption or other retirement of
shares of such Person in exchange for, or out of the net cash proceeds
received by such Person from a substantially concurrent sale of, other
shares of such Person.
"REVOLVING CREDIT FACILITY" means that certain Fourth Amended
and Restated Credit Agreement dated as of February 28, 1996 among the
Borrowers, the Guarantors and the Bank, as amended by that certain
First Amendment to Fourth Amended and Restated Credit Agreement dated
as of this date among the Borrowers, the Guarantors and the Banks.
"SECURITY DOCUMENTS" means the Patent Security Agreement, the
Deeds of Trust, the Master Ratification Agreement, the New Pledge
Agreement, the New Security Agreement and the Note and Deed of Trust
Modification Agreement.
"STANDBY LETTER OF CREDIT" is defined in SECTION 2.20(A).
"SUBSIDIARY" of any Person means and includes (a) any
corporation or limited liability company more than 50% of whose stock
is at the time owned by such Person directly or indirectly through its
Subsidiaries and (b) any partnership, association or other entity in
which such Person, directly or indirectly through Subsidiaries, has
more than a 50% equity interest at the time, but specifically excluding
any Joint Ventures.
"TERMINATION DATE" means June 30, 1997 or the earlier
termination in whole of the Bank's obligation to issue Letters of
Credit pursuant to SECTION 8.01; PROVIDED, HOWEVER, if on June 30, 1997
any Existing Letter of Credit or Letter of Credit outstanding on such
date contains an expiration date later than such date, the Termination
Date shall be extended to the latest expiration date of any such Letter
of Credit but not later than December 31, 1997 (such date being the
"EXTENDED TERMINATION DATE") solely for the purpose of funding drawings
under SECTION 2.20(C) hereof, paid by the Bank pursuant to any such
Existing Letter of Credit or Letter of Credit.
"UNIFORM CUSTOMS" means the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500, as the same may be revised from time to time.
"UNITED STATES" and "U.S." each means the United States of
America.
"UNPROCESSED SCRAP" means scrap metal which has been purchased
but has not been processed for sale in its present condition.
-17-
"UNUTILIZED COMMITMENT" means, at any time, an amount equal to
the Commitment minus the outstanding Advances.
Section 1.02. ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP
consistent with those applied in the preparation of the financial statements
referred to in SECTION 5.05. The books and records of International shall be
kept, and all financial data submitted pursuant to this Agreement shall be
prepared, in accordance with GAAP.
Section 1.03. TYPES OF ADVANCES. Advances hereunder are
distinguished by "Type". The Type of an Advance refers to the determination of
whether such Advance is a Eurodollar Rate Advance or a Prime Rate Advance.
ARTICLE II
COMMITMENT AND TERMS OF CREDIT
Section 2.01. THE COMMITMENT; LETTERS OF CREDIT; EXISTING
LETTERS OF CREDIT. (a) The Bank agrees, on the terms and conditions and relying
upon the representations and warranties herein set forth, to make advances
("ADVANCES") to International from time to time on one or more Business Days
during the period from the Effective Date up to the Note A Maturity Date (the
"COMMITMENT PERIOD"), which Advances shall, at the option of International, be
made as Prime Rate Advances or Eurodollar Rate Advances. Each Eurodollar Rate
Advance shall be in an original principal amount of not less than $1,000,000.00
and an integral multiple of $100,000.00 and each Prime Rate Advance shall be in
an original principal amount of not less than $200,000.00 and integral multiples
of $100,000.00. Within the limits set forth in this Section 2.01 and subject to
the terms and conditions of this Agreement, during the period from the date
hereof until the Note A Maturity Date, International may borrow under this
Section and prepay at any time and from time to time without premium or penalty
and reborrow under this Section.
(b) The Bank agrees, on the terms and conditions and relying
upon the representations herein set forth, to issue additional standby or
commercial letters of credit for the account of International or Operations (the
"LETTERS OF CREDIT") from time to time on any one or more Business Days during
the period from the Effective Date up to the Termination Date and to honor all
Existing Letters of Credit; PROVIDED, HOWEVER, no Letter of Credit shall be
issued after the Termination Date and all Letters of Credit shall expire on or
prior to the Extended Termination Date. Pursuant to SECTION 2.20(C), fundings of
any Letter of Credit by the Bank shall be reimbursed immediately.
-18-
(c) Notwithstanding any other term or provision hereof, (A) no
Advance shall be made if after giving effect to the making of such Advance the
aggregate amount of outstanding Advances would exceed the lesser of (1) the
Borrowing Base with respect to making Advances and (2) the Commitment and (B) no
Letter of Credit shall be issued if after giving effect to the issuance of such
Letter of Credit the aggregate amount of all L/C Obligations would exceed the
lesser of (1) the Borrowing Base with respect to the issuance of Letters of
Credit and (2) the L/C Limit.
(d) The Existing Letters of Credit and any renewals or
extensions thereof during the term hereof shall be deemed to be issued under
this Agreement and shall be a part of the Commitment. Pursuant to SECTION
2.20(C), fundings of any Existing Letter of Credit by the Bank shall be
reimbursed immediately.
(e) The expiration date of an Existing Letter of Credit shall
not be extended beyond the Extended Termination Date.
Section 2.02. THE NOTES. (a) All cash Advances shall be
evidenced by a single Note date of even date herewith (said Note, together with
all modifications, extensions, renewals and rearrangements thereof, "NOTE A") of
International payable to the order of the Bank in the principal amount of the
Commitment, substantially in the form of EXHIBIT 2.02-A.
(b) The Obligations of International with respect to any
Letter of Credit issued for its account, if any, shall be evidenced by a single
Note dated of even date herewith (said Note, together with all modifications,
extensions, renewals and rearrangements thereof "NOTE C") of International
payable to the order of the Bank in the principal amount of the Commitment,
substantially in the form of EXHIBIT 2.02-B; PROVIDED that, notwithstanding
anything herein contained, International shall not be liable as a maker for any
amounts drawn under any Existing Letter of Credit or Letter of Credit issued for
the account of Operations or paid in respect of any such Existing Letter of
Credit or Letter of Credit, including any indebtedness evidenced by Note B, or
for any amounts that would constitute interest under applicable law thereon, or
any other amounts owing in connection therewith, but shall be liable for any and
all such amounts as a Guarantor. Any sums outstanding under Note C shall be
payable on demand.
(c) The Obligations of Operations with respect to the Existing
Letters of Credit or any Letter of Credit issued for its account, if any, shall
be evidenced by Note B; PROVIDED, that, notwithstanding anything herein
contained, Operations shall not be liable as a maker for any amounts drawn under
any Letter of Credit issued for the account of International or paid in respect
of any such Letter of Credit, including any indebtedness evidenced by Note C, or
for any amounts that would constitute interest under applicable law thereon, or
any other amounts owing in connection therewith, but shall be liable for any and
all such amounts as a Guarantor. Any sums
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outstanding under Note B shall be payable on demand. It is agreed that no sums
are outstanding under Note B as of the date hereof.
Section 2.03. MAKING THE ADVANCES. Each Advance shall be made
upon the request of an Authorized Officer of International and confirmed
immediately in writing by International, in substantially the form of EXHIBIT
2.03 hereto (a "BORROWING REQUEST"). Each Borrowing Request shall, in the case
of Prime Rate Advances, be given to the Bank not later than 10:00 a.m. (Houston,
Texas time), via telecopy or hand delivery on the Borrowing Date for such
Advance, and, in the case of Eurodollar Rate Advances, not later than 10:00 a.m.
(Houston, Texas time) not later than three (3) days prior to the requested
Advance. Each Borrowing Request shall specify (a) the proposed Borrowing Date
(which shall be a Business Day), (b) the amount of the proposed Advance, (c) the
Type of Advance, (d) the availability of such Advance under the Commitment and
(e) if such Advance is to be a Eurodollar Rate Advance, the initial Interest
Period (as defined below in SECTION 2.06) to be applicable thereto. Each
Borrowing Request shall be irrevocable by International. Upon satisfaction of
the applicable conditions set forth in ARTICLE IV hereof, the Bank will make the
proceeds of each Advance available to International at the office of the Bank
(or such other reasonable place designated by International in advance) on the
date specified in the Borrowing Request.
Section 2.04. CONVERSIONS AND CONTINUANCES. International
shall have the option to convert on any Business Day all or a portion of the
outstanding principal amount of one Type of Advance into another Type of
Advance, PROVIDED, no Advances may be converted into or continued as Eurodollar
Rate Advances if a Default or Event of Default is in existence on the date of
the conversion. Each such conversion shall be effected by International's giving
the Bank written notice (each a "NOTICE OF CONVERSION") prior to 10:00 a.m.
(Houston, Texas time) at least (a) three (3) Business Days prior to the date of
such conversion in the case of conversion into or continuance as Eurodollar Rate
Advances and (b) prior to 10:00 a.m. (Houston, Texas time) one (1) Business Day
prior to the date of conversion in the case of a conversion into Prime Rate
Advances, specifying each Advance (or portions thereof) to be so converted and,
if to be converted into or continued as Eurodollar Rate Advances, the Interest
Period to be applicable thereto.
Section 2.05. INTEREST RATE AND INTEREST PAYMENT DATES.
International shall pay interest on the unpaid principal amount of each Advance
made by the Bank from the date of such Advance until such principal amount shall
be paid in full, on the dates and at the rates per annum specified below:
(a) Subject to the provisions of SECTIONS 2.05(E) AND 9.11,
each Prime Rate Advance shall bear interest on the unpaid principal amount
thereof at a rate per annum equal to the lesser of (i) the Prime Rate plus the
Margin in respect of Prime Rate Advances and (ii) the Highest Lawful Rate.
Accrued and unpaid interest on the Prime Rate Advances shall be due and payable
(A)
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quarterly in arrears on the last day of each calendar quarter occurring after
the Effective Date and on the Note A Maturity Date, (B) with respect to the
principal amount of any voluntary or mandatory repayment on the date of such
voluntary or mandatory repayment and (C) at maturity (whether by acceleration or
otherwise) and, after maturity, on demand.
(b) Subject to SECTIONS 2.05(E) and 9.11, each Eurodollar Rate
Advance shall bear interest on the unpaid principal amount thereof from the date
of such Advance at a rate per annum (computed on the basis of the actual number
of days elapsed over a year of 360 days) which shall, during each Interest
Period applicable thereto, be equal to the lesser of (i) the Highest Lawful Rate
and (ii) the applicable Eurodollar Rate for such Interest Period plus the Margin
in respect of Eurodollar Rate Advances. The applicable Eurodollar Rate and the
Margin shall be fixed for each Interest Period and shall not change during said
Interest Period. Interest on each Eurodollar Rate Advance shall be payable (A)
on the last day of the Interest Period applicable thereto, (B) with respect to
the principal amount of any voluntary or mandatory repayment on the date of such
voluntary or mandatory repayment, or on the date of any conversion or
continuance and (C) at maturity (whether by acceleration or otherwise) and,
after maturity, on demand.
(c) The Bank, upon determining the Eurodollar Rate for any
Interest Period, shall notify International thereof. Each such determination
shall, absent manifest error, be final and conclusive and binding on all parties
hereto. In addition, prior to the due date for the payment of interest on any
Eurodollar Rate Advances set forth in the immediately preceding paragraph, the
Bank shall notify International of the amount of interest due by International
on all outstanding Eurodollar Rate Advances on the applicable due date, but any
failure of the Bank to so notify International shall not reduce International's
liability for the amount owed.
(d) International shall pay to the Bank, so long as the Bank
shall be required under regulations of the Board to maintain reserves with
respect to liabilities or assets consisting of or including Eurocurrency
Liabilities, additional interest on the unpaid principal amount of each
Eurodollar Rate Advance, from the date of such Advance until such principal
amount is paid in full, at an interest rate per annum equal at all times during
each Interest Period for such Advance to the lesser of (i) the Highest Lawful
Rate and (ii) the remainder obtained by subtracting (A) the Eurodollar Rate for
such Interest Period from (B) the rate obtained by dividing such Eurodollar Rate
referred to in clause (A) above by that percentage equal to 100% minus the
Reserve Percentage of the Bank for such Interest Period. Such additional
interest shall be determined by the Bank as incurred and shall be payable upon
demand therefor by the Bank to International. Each determination by the Bank of
additional interest due under this Section shall be PRIMA FACIE evidence thereof
for all purposes in the absence of manifest error.
(e) Any amount of principal or, to the extent permitted by
applicable law, interest which is not paid when due including, without
limitation, any fundings of Letters of Credit or
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Existing Letters of Credit for which the Bank is not reimbursed (whether by
application of the proceeds of Advances under SECTION 2.20(C) or otherwise)
immediately by the Borrower for the account of which such Letter of Credit or
Existing Letter of Credit was issued (whether at stated maturity, by
acceleration or otherwise) shall bear interest from the date on which such
amount is due until such amount is paid in full at a rate per annum equal at all
times to the Prime Rate plus four percent (4%) per annum but in no event to
exceed the Highest Lawful Rate (the "DEFAULT RATE") and shall be payable upon
demand.
(f) Each Borrower shall, at the time of making each payment of
principal and/or interest hereunder and under the Notes, specify to the Bank the
Advances or other sums payable by such Borrower hereunder or under the Notes to
which such payment is to be applied and in the event that such Borrower fails to
so specify, the Bank may apply such payment to such Borrower's Obligations as it
may elect in its sole discretion.
Section 2.06. INTEREST PERIODS. (a) At the time International
gives any Borrowing Request or Notice of Conversion in respect of the making of,
or conversion into, a Eurodollar Rate Advance, International shall have the
right to elect, by giving the Bank on the dates and at the times specified in
SECTION 2.03 or SECTION 2.04, as the case may be, notice of the interest period
(each an "INTEREST PERIOD") applicable to such Eurodollar Rate Advance, which
Interest Period shall be either a one, two or three month period; PROVIDED,
that:
(i) the initial Interest Period for any Eurodollar Rate
Advance shall commence on the date of such Eurodollar Rate Advance
(including the date of any conversion thereto or continuance thereof
pursuant to SECTION 2.04); each Interest Period occurring thereafter in
respect of such Eurodollar Rate Advance shall commence on the day
following the expiration date of the immediately preceding Interest
Period;
(ii) if any Interest Period relating to a Eurodollar Rate
Advance begins on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period, such
Interest Period shall end on the last Business Day of such calendar
month;
(iii) if any Interest Period would otherwise expire on a day
which is not a Business Day, such Interest Period shall expire on the
next succeeding Business Day; PROVIDED, that if there are no more
Business Days in that month, the Interest Period shall expire on the
preceding Business Day; and
(iv) no Interest Period for Advances shall extend beyond the
Note A Maturity Date.
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(b) If, upon the expiration of any Interest Period applicable
to a Eurodollar Rate Advance, International has failed to elect a new Interest
Period to be applicable to such Advance as provided above, International shall
be deemed to have elected to convert such Advance into a Prime Rate Advance
effective as of the day following the expiration date of such current Interest
Period.
Section 2.07. INTEREST RATE NOT ASCERTAINABLE. In the event
that the Bank shall determine (which determination shall, absent manifest error,
be final, conclusive and binding upon all parties) that on any date for
determining the Eurodollar Rate for any Interest Period, by reason of any
changes arising after the date of this Agreement affecting the Eurodollar
interbank market or the Bank's position in such market, adequate and fair means
do not exist for ascertaining the applicable interest rate on the basis provided
for in the definition of Eurodollar Rate, then, and in any such event, the Bank
shall forthwith give notice to International of such determination. Until the
Bank notifies International that the circumstances giving rise to the suspension
described herein no longer exist, the obligations of the Bank to make Eurodollar
Rate Advances shall be suspended.
Section 2.08. PRINCIPAL PAYMENTS OF ADVANCES. The unpaid
principal balance of the Advances, together with all accrued and unpaid interest
thereon, shall be due and payable on the Note A Maturity Date, subject to the
mandatory prepayments required pursuant to SECTION 2.17.
Section 2.09. COMPUTATIONS; PAYMENTS ON NON-BUSINESS DAYS. (a)
All payments by a Borrower of principal and interest hereunder, under the Notes
and the other Loan Documents shall be made in U.S. Dollars to the Bank at its
office at 712 Main Street, Houston, Texas in immediately available funds not
later than 12:00 Noon (Houston, Texas time) on the date when due.
(b) Interest on the Prime Rate Advances shall be computed by
the Bank on the actual number of days elapsed over a year of 365 days, unless
such computation would cause the interest contracted for, charged or received to
exceed the Highest Lawful Rate, in which event, interest shall be computed for
the actual number of days elapsed over a year of 365 or 366 days, as the case
may be. Determination by the Bank of an interest rate hereunder shall be PRIMA
FACIE evidence of its accuracy.
(c) Whenever any payment hereunder (other than payments of
interest on Eurodollar Rate Advances) shall be stated to be due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day and such extension of time shall in such case be included in the computation
of payment of interest, the Commitment Fee, the L/C Fees and all other amounts
due under the Loan Documents, as the case may be.
Section 2.10. SET-OFF, COUNTERCLAIMS AND TAXES. All payments
of principal, interest, expenses, reimbursements, compensation and any other
amount from time to time due hereunder, under the Notes or any other Loan
Document shall be made by a Borrower without set-off or
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counterclaim and shall be made free and clear of and without deduction for any
present or future tax, levy, impost or any other charge, if any, of any nature
whatsoever now or hereafter imposed by any taxing authority upon either
Borrower. If the making of such payments by a Borrower is prohibited by law
unless such a tax, levy, impost or other charge is deducted or withheld
therefrom, such Borrower shall pay to the Bank, on the date of each such
payment, such additional amounts as may be necessary in order that the net
amounts received by the Bank after such deduction or withholding shall equal the
amounts which would have been received if such deduction or withholding were not
required; PROVIDED, HOWEVER, that all amounts payable under this Agreement which
constitute interest under applicable law shall not exceed an amount which would
result in the payment of interest at a rate in excess of the Highest Lawful
Rate.
Section 2.11. THE BORROWERS UNCONDITIONALLY LIABLE. Subject to
the provisions of SECTIONS 2.02(B) AND (C) and 9.11, each Borrower shall (to the
extent set forth herein) be unconditionally liable to the Bank for the principal
amount of any and all Advances made to it under its Note A, Note B or Note C, as
the case may be, any and all L/C Obligations with respect to Letters of Credit
issued for such Borrower's account, interest due thereon, the L/C Fees relating
thereto, the Commitment Fee, and all other amounts due to the Bank from such
Borrower hereunder or under any other agreement or security document executed in
connection herewith, and shall make prompt and punctual payment when due of such
amounts.
Section 2.12. CHANGE IN LEGALITY. (a) Notwithstanding anything
to the contrary herein contained, if any change in any law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration or interpretation thereof shall make it unlawful for the Bank or
its Eurodollar Lending Office to make or maintain any Eurodollar Rate Advance or
to give effect to its obligations as contemplated hereby with respect to
Eurodollar Rate Advances, then, by prompt written notice to International, the
Bank may:
(i) declare that Eurodollar Rate Advances will not thereafter
be made by the Bank hereunder, whereupon International shall be
prohibited from requesting Eurodollar Rate Advances from the Bank
hereunder unless such declaration is subsequently withdrawn; and
(ii) in the event that the maintenance of any Eurodollar Rate
Advance(s) shall have been made unlawful, require that all outstanding
Eurodollar Rate Advance(s) made by the Bank be converted to Prime Rate
Advances, in which event (A) all such Eurodollar Rate Advances shall be
automatically converted to Prime Rate Advances as of the effective date
of such notice as provided in paragraph (b) below and (B) all payments
and prepayments of principal which would otherwise have been applied to
repay the converted Eurodollar Rate Advances shall instead be applied
to repay the Prime Rate Advances resulting from the conversion of such
Eurodollar Rate Advances.
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(b) For purposes of this Section, a notice to International by
the Bank pursuant to paragraph (a) above shall be effective on the date of
receipt thereof by International.
Section 2.13. RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES.
(a) It is understood that the cost to the Bank of making or maintaining any
Advance, Existing Letter of Credit or Letter of Credit may fluctuate as a result
of the applicability of, or changes in, reserve requirements imposed by the
Board. Each Borrower agrees to pay to the Bank from time to time, as provided in
paragraph (d) below, such amounts as shall be necessary to compensate the Bank,
prospectively from the date of demand, for the portion of the cost of making or
maintaining any Advance, Existing Letter of Credit or Letter of Credit made to
or issued for the account of such Borrower resulting from any such reserve
requirements to the extent set forth in this Section.
(b) Notwithstanding any other provision herein, if after the
date of this Agreement the introduction of any applicable law or regulation or
any change in applicable law or regulation or in the interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof, or compliance by the Bank with any
applicable guideline or request from any central bank or governmental authority
(whether or not having the force of law) (i) shall change the basis of taxation
of payments to the Bank of the principal of or interest on any Advance made by
the Bank, any Existing L/C Obligations, any L/C Obligations or any other fees or
amounts payable hereunder (other than (x) taxes imposed on the overall net
income of the Bank or its applicable lending office by any jurisdiction or by
any political subdivision or taxing authority therein (or any tax which is
enacted or adopted by any such jurisdiction, political subdivision or taxing
authority as a direct substitute for any such taxes) or (y) any tax, assessment
or other governmental charge that would not have been imposed but for the
failure of the Bank to comply with any certification, information, documentation
or other reporting requirement), (ii) shall impose, modify or deem applicable
any reserve, special deposit or similar requirement against assets of, deposits
with or for the account of, or credit extended by, the Bank (without duplication
of any amounts paid pursuant to SECTION 2.05(D)), or (iii) shall impose on the
Bank any other condition affecting this Agreement or any Advance made by the
Bank, and the result of any of the foregoing shall be to increase the cost to
the Bank of maintaining the Commitment or of making or maintaining any Advance
or issuing or maintaining any Existing Letter of Credit or Letter of Credit or
to reduce the amount of any sum received or receivable by the Bank hereunder
(whether of principal, interest or otherwise) in respect thereof by an amount
deemed in good faith by the Bank to be material, then each Borrower shall pay to
the Bank such additional amount or amounts as will compensate the Bank for such
increase or reduction relating to any Commitment available to, or any Advance
made to, or any Letter of Credit or Existing Letter of Credit issued for the
account of such Borrower, upon demand by the Bank. Notwithstanding the
foregoing, in no event shall the Bank be permitted to receive any compensation
hereunder constituting interest in excess of the Highest Lawful Rate.
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(c) If the Bank shall have determined in good faith that any
law, rule, regulation or guideline adopted pursuant to or arising out of the
July 1988 Report of the Basle Committee on Banking Regulations and Supervisory
Practices entitled "International Convergence of Capital Measurement and Capital
Standards" or that the adoption of any applicable law, rule, regulation or
guideline regarding capital adequacy, or any change in any of the foregoing or
in the interpretation or administration thereof by any central bank or other
governmental authority charged with the interpretation or administration
thereof, or compliance by the Bank with any request or directive regarding
capital adequacy (whether or not having the force of law) of any such central
bank or governmental authority, affects or would affect the amount of capital
required or expected to be maintained by the Bank or any corporation controlling
the Bank and that the amount of such capital is increased by or based upon the
existence of the Commitment hereunder and other commitments of this type, then
International shall from time to time pay to the Bank upon demand additional
amounts sufficient to compensate the Bank or such corporation in the light of
such circumstances, to the extent that the Bank reasonably determines such
increase in capital to be allocable to the existence of the Commitment
hereunder.
(d) If while any Existing Letter of Credit or any Letter of
Credit is outstanding, any law, executive order or regulation is enforced,
adopted or interpreted by any central bank or other governmental authority so as
to affect any Borrower's obligations or the compensation to the Bank in respect
of the Existing Letters of Credit or the Letters of Credit or the cost to the
Bank of establishing or maintaining the Existing Letters of Credit or the
Letters of Credit, then the Borrower for the account of which such Letter of
Credit or Existing Letter of Credit was issued shall from time to time upon
demand, reimburse or indemnify the Bank with respect thereto so that the Bank
shall be in the same position as if there had been no such enforcement, adoption
or interpretation. Notwithstanding the foregoing, in no event shall the Bank be
permitted to receive any compensation hereunder constituting interest in excess
of the Highest Lawful Rate.
(e) The Bank will notify the Borrowers of any event occurring
after the date of this Agreement which will entitle the Bank to compensation
pursuant to this SECTION 2.13. A certificate of the Bank setting forth in
reasonable detail (i) such amount or amounts as shall be necessary to compensate
the Bank as specified in paragraph (a), (b), (c) or (d) above as the case may
be, and (ii) the calculation of such amount or amounts shall be simultaneously
delivered to the Borrower owing such amount or amounts and shall be PRIMA FACIE
evidence of its accuracy. Such Borrower shall pay to the Bank the amount shown
as due on any such certificate within ten (10) days after such Borrower's
receipt of the same. The failure of the Bank to demand increased compensation
with respect to any Interest Period shall not constitute a waiver of the right
to demand compensation thereafter.
Section 2.14. EURODOLLAR ADVANCE PREPAYMENT AND DEFAULT
PENALTIES. Subject to SECTION 9.11, International shall indemnify the Bank
against any reasonable loss or expense which
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it may actually sustain or incur as a consequence of (a) an Advance of, or a
conversion from or into, Eurodollar Rate Advances that does not occur on the
date specified therefor in a Borrowing Request or Notice of Conversion (except
by reason of SECTION 2.12) or (b) any payment, prepayment or conversion of a
Eurodollar Rate Advance required by any other provision of this Agreement or
otherwise made on a date other than the last day of the applicable Interest
Period (except for any conversion under SECTION 2.12). Such loss or expense
shall include an amount equal to the excess determined by the Bank of (i) its
actual cost of obtaining the funds for the Advance being paid, prepaid or
converted or not borrowed (based on the Eurodollar Rate) for the period from the
date of such payment, prepayment or conversion or failure to borrow to the last
day of the Interest Period for such Advance (or, in the case of a failure to
borrow, the Interest Period for the Advance which would have commenced on the
date of such failure to borrow) OVER (ii) the amount of interest (as reasonably
determined by the Bank) that would be realized in reemploying the funds so paid,
prepaid or converted or not borrowed for such period or Interest Period, as the
case may be. The Bank will notify International of any loss or expense which
will entitle the Bank to compensation pursuant to this Section, as promptly as
possible after it becomes aware thereof, but failure to so notify shall not
affect International's liability therefor. A certificate of the Bank setting
forth any amount which it is entitled to receive pursuant to this Section shall
be delivered to International and shall be PRIMA FACIE evidence of its accuracy.
International shall pay to the Bank the amount shown as due on any certificate
within ten (10) days after its receipt of the same. Without prejudice to the
survival of any other obligations of International hereunder, the obligations of
International under this Section shall survive the termination of this Agreement
and the assignment of any of the Notes.
Section 2.15. USE OF LETTERS OF CREDIT AND PROCEEDS OF
ADVANCES. International will use the proceeds of all Advances made hereunder for
working capital and general business purposes of International and its
Subsidiaries and will use all Letters of Credit issued hereunder for general
business purposes of International and its Subsidiaries; PROVIDED, that any
Letter of Credit issued in support of any Investment by Proler Environmental
Services, Inc. in any facility shall be considered an Investment subject to the
limitations of SECTION 7.09(G).
Section 2.16. VOLUNTARY PREPAYMENTS. Upon at least three (3)
Business Days' prior written notice, International shall have the right to
voluntarily prepay Advances in whole or in part from time to time on the
following terms and conditions: (a) no Eurodollar Rate Advance may be prepaid
prior to the last day of its Interest Period unless, simultaneously therewith,
International pays to the Bank all sums necessary to compensate the Bank for all
costs and expenses resulting from such prepayment, as reasonably determined by
the Bank, described in SECTIONS 2.05(D), 2.13, and 2.14 hereof and (b) each
prepayment pursuant to this Section shall be applied first, to the payment of
accrued and unpaid interest, and then, to the outstanding principal of such
Advances as shall be designated by International.
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Section 2.17. MANDATORY PREPAYMENTS. (a) If any Borrowing Base
Certificate shall disclose the existence of a Borrowing Base Deficiency,
International, on the day that the delivery of such Borrowing Base Certificate
is required by SECTION 6.01(F), shall prepay a principal amount of outstanding
Advances equal to such Borrowing Base Deficiency.
(b) If, on any day, the market valuation of the Inventory of
International, its Subsidiaries and the Joint Ventures included in the Borrowing
Base, based on the American Metals Market Composite Valuation or such other
source of value acceptable to the Bank, is less than or equal to ninety percent
(90%) of the market valuation of such Inventory as disclosed in the most recent
Borrowing Base Certificate required to be delivered pursuant to SECTION 6.01(F),
the Borrowing Base shall be recalculated by International as of such date using
such market valuations as of such date and, if such recalculation results in a
Borrowing Base Deficiency, International, on the third business day following
the date of such recalculation shall deliver a new Borrowing Base Certificate
and, as required by SECTION 6.01(F), shall prepay a principal amount of
outstanding Advances equal to such Borrowing Base Deficiency.
Section 2.18. REDUCTION OF THE COMMITMENT. (a) International
shall have the right, upon at least three (3) Business Days' notice to the Bank,
to terminate in whole or reduce in part the Unutilized Commitment; PROVIDED,
that each partial reduction shall be in the aggregate amount of $250,000.00 and
an integral multiple of $250,000.00 in excess thereof.
(b) On the Note A Maturity Date the Commitment shall be zero
and on the Termination Date the L/C Limit shall be zero; PROVIDED, HOWEVER, if
any one or more Existing Letters of Credit or Letters of Credit outstanding on
the Termination Date have a later expiration date, then the L/C Limit shall
reduce to a level equal to the sum of the undrawn face amount of each of the
then outstanding Existing Letters of Credit and Letters of Credit (reducing by
the amount of any expiring Existing Letter of Credit or Letter of Credit as it
expires) and shall, in any event, terminate in its entirety on the Extended
Termination Date.
Section 2.19. FEES. (a) International agrees to pay to the
Bank a commitment fee (the "COMMITMENT FEE") for the period from and including
the date hereof to but not including the Note A Maturity Date, computed at a
rate equal to one-half of one percent (1/2%) per annum on the daily average of
the Unutilized Commitment. Such Commitment Fee shall be due and payable in
arrears on the last Business Day of each calendar quarter and on the Termination
Date.
(b) Each Borrower shall pay to the Bank a letter of credit
commission with respect to each Existing Letter of Credit and Letter of Credit
issued for the account of such Borrower payable in advance and computed for the
period from the Effective Date or date of such payment to the date upon which
the next such payment is due hereunder at the rate of one percent (1%) per annum
(which shall be calculated on the basis of one-quarter of one percent (1/4%) for
each 90 day
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period or any part thereof) of the aggregate amount available to be drawn under
such Existing Letter of Credit and Letter of Credit on the date on which such
fee is calculated or the then minimum letter of credit insurance fee charged by
the Bank, whichever is greater; PROVIDED, HOWEVER, with respect to each Existing
Letter of Credit, the amount of such commission payable to the Bank shall be
paid at this rate from and after the Effective Date but shall be reduced by the
amount of the commissions already paid to the Bank with respect to such Existing
Letter of Credit with respect to any period from and after the Effective Date,
if any. Such commissions shall be payable in advance on the last day of each
calendar quarter and shall be nonrefundable.
(c) In addition to the foregoing fees and commissions, each
Borrower shall pay or reimburse the Bank for such normal and customary costs and
expenses as are incurred or charged by the Bank in issuing, effecting payment
under, amending or otherwise administering any Existing Letter of Credit or any
Letter of Credit issued for the account of such Borrower.
Section 2.20. LETTERS OF CREDIT AND EXISTING LETTERS OF
CREDIT. (a)(i) Subject to the terms and conditions hereof, the Bank agrees to
issue Letters of Credit for the account of either Borrower on any Business Day
from the Effective Date to the Termination Date in such form as may be approved
from time to time by the Bank; PROVIDED that the Bank shall have no obligation
to issue any Letter of Credit if, after giving effect to such issuance, the L/C
Obligations would exceed the L/C Limit. Each Letter of Credit shall (A) be
denominated in U. S. Dollars and shall be either (1) a standby letter of credit
issued to support obligations of International or one or more of its
Subsidiaries, contingent or otherwise (a "STANDBY LETTER OF CREDIT") or (2) a
documentary letter of credit in respect of the purchase of goods or services by
International or one or more of its Subsidiaries in the ordinary course of
business (a "COMMERCIAL LETTER OF CREDIT") and (B) expire no later than the
Extended Termination Date.
(ii) Each Letter of Credit shall be subject to the Uniform
Customs and, to the extent not inconsistent therewith, the laws of the
State of Texas.
(iii) The Bank shall not at any time be obligated to issue any
Letter of Credit hereunder if such issuance would conflict with, or
cause the Bank to exceed any limits imposed by, any applicable law or
regulation.
(b) (i) Either Borrower may from time to time request that the
Bank issue a Letter of Credit by delivering to the Bank at its address for
notices specified herein a request (a "LETTER OF CREDIT REQUEST") in the form
set forth as EXHIBIT 2.20 hereof and an Application therefor, completed to the
satisfaction of the Bank, and such other certificates, documents and other
papers and information as the Bank may reasonably request. The Bank shall not be
required to issue any Letter of Credit earlier than three (3) Business Days
after its receipt of the Letter of Credit Request and related Application
therefor and all such other certificates, documents and other papers and
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information relating thereto. Upon receipt of any Letter of Credit Request and
related Application from either Borrower, the Bank will process such Application
and the certificates, documents and other papers and information delivered to it
in connection therewith in accordance with its customary procedures and, upon
satisfaction of the applicable terms and conditions set forth in ARTICLE IV,
shall promptly issue the original of the Letter of Credit requested to the
beneficiary thereof or as otherwise may be agreed by the Bank and such Borrower.
The Bank shall furnish a copy of each Letter of Credit issued hereunder to each
Borrower promptly following the issuance thereof.
(ii) In respect of any Letters of Credit or Existing Letters
of Credit, if any, outstanding on the Termination Date, assuming no
Default or Event of Default has occurred, the Borrower for the account
of which any of such Letters of Credit or Existing Letters of Credit
were issued may, at its option, provide to the Bank collateral in the
form of cash or a certificate of deposit issued by the Bank in the
amount of such Letters of Credit or Existing Letters of Credit and any
expenses reasonably anticipated by the Bank in connection therewith,
whereupon, when all such Letters of Credit or Existing Letters of
Credit are so secured, the Bank shall release its Liens on all other
collateral hereunder or under any of the Loan Documents. In no event
shall any Letters of Credit or Existing Letters of Credit be
outstanding beyond the Extended Termination Date. Each Borrower shall
remain liable in respect of the Letters of Credit or Existing Letters
of Credit issued for its account on terms consistent with the terms
hereof, but for all other purposes of this Agreement and the other Loan
Documents, the Obligations will be deemed paid in full and not
outstanding and the Commitment and the L/C Limit shall be deemed
terminated.
(c) Each Borrower agrees to reimburse the Bank on each date on
which the Bank notifies such Borrower of the date and amount of a draft
presented under any Existing Letter of Credit or Letter of Credit issued for its
account and paid by the Bank for the amount of (i) such draft so paid and (ii)
any taxes, fees, charges or other costs or expenses incurred by the Bank in
connection with such payment. Upon the presentment of any draft for honor under
any Existing Letter of Credit or Letter of Credit by the beneficiary thereof
which the Bank determines is in compliance with the condition for payment
thereunder, the Bank shall promptly notify the Borrower for the account of which
such Letter of Credit or Existing Letter of Credit was issued. In the event the
Bank makes any payment pursuant to a draft presented under an Existing Letter of
Credit or a Letter of Credit, the Borrower for the account of which such Letter
of Credit or Existing Letter of Credit was issued shall immediately, upon
demand, pay said amount to the Bank in cash plus any interest due thereon from
the date when due at the Default Rate as provided in SECTION 2.05(E). Any
amounts owing and unpaid by International shall be obligations of International
evidenced by Note C. Any amounts owing and unpaid by Operations shall be
obligations of Operations evidenced by Note B.
(d) Each Borrower's obligations under this Section shall be
absolute and unconditional under any and all circumstances and irrespective of
any set-off, counterclaim or
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defense to payment which either Borrower may have or have had against the Bank
or any beneficiary of an Existing Letter of Credit or a Letter of Credit. Each
Borrower also agrees with the Bank that the Bank shall not be responsible for,
and such Borrower's reimbursement obligations under SECTION 2.20(C) above shall
not be affected by, among other things, the validity or genuineness of documents
or of any endorsements thereon, even through such documents shall in fact prove
to be invalid, fraudulent or forged, or any dispute between or among either
Borrower and any beneficiary of any Existing Letter of Credit or Letter of
Credit or any other party to which such Existing Letter of Credit or Letter of
Credit may be transferred or any claims whatsoever of either Borrower against
any beneficiary of such Existing Letter of Credit or Letter of Credit or any
such transferee. The Bank shall not be liable for any error, omission,
interruption or delay in transmission, dispatch or delivery of any message or
advice, however transmitted, in connection with any Existing Letter of Credit or
Letter of Credit, except for errors or omissions caused by the Bank's gross
negligence or willful misconduct. Each Borrower agrees that any action taken or
omitted by the Bank under or in connection with any Existing Letter of Credit or
Letter of Credit issued for the account of such Borrower or the related drafts
or documents, if done in the absence of gross negligence or willful misconduct
and in accordance with the standards of care specified in the Uniform Customs
and, to the extent not inconsistent therewith, the Uniform Commercial Code of
the State of Texas, shall be binding on such Borrower and shall not result in
any liability of the Bank to such Borrower.
(e) The responsibility of the Bank to a Borrower in connection
with any draft presented for payment under any Existing Letter of Credit or
Letter of Credit shall, in addition to any payment obligation expressly provided
for in such Existing Letter of Credit or Letter of Credit be limited to
determining that the documents (including each draft) delivered under such
Existing Letter of Credit or Letter of Credit in connection with such
presentment are in conformity with such Existing Letter of Credit or Letter of
Credit.
(f) To the extent that any provision of any Application,
certificate, document or other papers related to any Existing Letter of Credit
or Letter of Credit is inconsistent with the provisions of this Agreement, the
provisions of this Agreement shall control and no such Application, certificate,
document or other paper shall give the Bank or any Borrower any greater rights
than the Bank or such Borrower would otherwise have under this Agreement.
Section 2.21. RATIFICATION. Each Credit Party hereby confirms
and ratifies the terms of the Security Documents to which it is a party and the
creation of the Liens thereunder to secure the Obligations of the Borrowers to
the Bank as more fully set forth therein and further agrees and acknowledges (a)
that, except as otherwise set forth in the Note and Deed of Trust Modification
Agreement, the Liens of the Security Documents to which it is a party extend to
and expressly secure the Obligations of the Borrowers under this Agreement, the
Notes and the other Loan Documents and (b) that the Security Documents to which
it is a party and the Liens created thereunder are valid and subsisting and
shall remain enforceable against such Credit Party in
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accordance with their terms and shall not be reduced or limited or impaired by
the execution of this Agreement and the Notes; PROVIDED, HOWEVER, that nothing
herein or in any other Loan Document has granted, or shall be deemed to grant,
any lien or security interest as collateral security for any of the Obligations
in any Joint Venture interest (as defined in the Security Agreement) of any
Credit Party in Hugo Neu Proler Company or Prolerized New England Company,
including, without limitation, any right, title or interest of any Credit Party
in and to distributions under the Joint Venture Agreement of either such Joint
Venture. The Bank hereby agrees to promptly release the Liens under the Security
Documents on all property and assets of Proler Environmental Services, Inc., but
not any other Credit Parties, to the extent but only to the extent of any
project financed by Indebtedness permitted by SECTION 7.02(D), but not
otherwise.
ARTICLE III
GUARANTY
Section 3.01. GUARANTY. (a) In consideration of, and in order
to induce the Bank to make Advances and issue Letters of Credit hereunder, each
Guarantor hereby absolutely, unconditionally and irrevocably, jointly and
severally guarantees the punctual payment and performance when due, whether at
stated maturity, by acceleration or otherwise, of all obligations and covenants
of each Borrower now or hereafter existing under this Agreement, the Notes
and/or any of the other Loan Documents to which such Borrower is a party whether
for principal, interest (including interest accruing or becoming owing both
prior to and subsequent to the commencement of any proceeding against or with
respect to a Borrower under any chapter of the Bankruptcy Code of the United
States (11 U.S.C. ss. 101 ET SEQ.) or any other Debtor Relief Law, fees,
commissions, expenses (including reasonable counsel fees and expenses) or
otherwise, and all reasonable costs and expenses, if any, incurred by the Bank
in connection with enforcing any rights under this Guaranty (all such
obligations being the "GUARANTEED OBLIGATIONS"). This Guaranty is an absolute,
unconditional, present and continuing guaranty of payment and not of
collectibility and is in no way conditioned upon any attempt to collect from the
Borrowers or any other action, occurrence or circumstance whatsoever. Nothing
herein is intended to provide that a Borrower shall be liable as a Guarantor for
any Obligations for which such Borrower is primarily liable, but each Borrower
shall be liable as a Guarantor for any Obligations for which such Borrower is
not primarily liable.
(b) Each Guarantor hereby, jointly and severally, agrees to
pay and to indemnify the Bank harmless from and against any damage, loss, cost
or expense (including reasonable attorneys' fees) that the Bank may incur or be
subject to as a consequence, direct or indirect, of (i) any breach by such
Guarantor or any other Credit Party of any warranty, covenant, term or condition
in, or the occurrence of any default under, this Guaranty, this Agreement or any
other Loan Document, together with all reasonable expenses resulting from the
compromise or defense of any
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claims or liabilities arising as a result of any such breach or default and (ii)
any legal action commenced to challenge the validity of this Guaranty, this
Agreement or any other Loan Document.
Section 3.02. CONTINUING GUARANTY. Each Guarantor guarantees
that the Guaranteed Obligations will be paid strictly in accordance with the
terms of this Agreement, the Notes and the other Loan Documents. Each Guarantor
agrees that the Guaranteed Obligations and Loan Documents may be extended or
renewed, and that it will remain bound upon this Guaranty notwithstanding any
extension, renewal or other alteration of any Guaranteed Obligations or Loan
Documents. The obligations of each Guarantor under this Guaranty shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms hereof under any circumstances whatsoever, including:
(a) any extension, renewal, modification, settlement,
compromise, waiver or release in respect of any Guaranteed Obligations,
including any reduction or termination of all or a portion of the Commitment;
(b) any extension, renewal, amendment, modification,
rescission, waiver or release in respect of any Loan Documents;
(c) any release, exchange, substitution, non-perfection or
invalidity of, or failure to exercise rights or remedies with respect to, any
direct or indirect security for any Guaranteed Obligations, including the
release of any Guarantor or other Person liable on any Guaranteed Obligations;
(d) any change in the corporate existence, structure or
ownership of a Borrower, any Guarantor, or any insolvency, bankruptcy,
reorganization or other similar proceeding affecting a Borrower, such Guarantor,
any other Guarantor or any of their respective assets;
(e) the existence of any claim, defense, set-off or other
rights or remedies which such Guarantor at any time may have against a Borrower,
or a Borrower or such Guarantor may have at any time against the Bank, any other
Guarantor or any other Person, whether in connection with this Guaranty, the
Loan Documents, the transactions contemplated thereby or any other transaction;
(f) any invalidity or unenforceability for any reason of this
Agreement or other Loan Documents, or any provision of law purporting to
prohibit the payment or performance by a Borrower, such Guarantor or any other
Guarantor of the Guaranteed Obligations or Loan Documents, or of any other
obligation to the Bank; or
(g) any other circumstances or happening whatsoever, whether
or not similar to any of the foregoing.
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Section 3.03. EFFECT OF DEBTOR RELIEF LAWS. If after receipt
of any payment of, or proceeds of any security applied (or intended to be
applied) to the payment of all or any part of the Guaranteed Obligations, the
Bank is for any reason compelled to surrender or voluntarily surrenders, such
payment or proceeds to any Person (a) because such payment or application of
proceeds is or may be avoided, invalidated, declared fraudulent, set aside,
determined to be void or voidable as a preference, fraudulent conveyance,
fraudulent transfer, impermissible set-off or a diversion of trust funds, or (b)
for any other reason, including (i) any judgment, decree or order of any court
or administrative body having jurisdiction over the Bank or any of its
properties or (ii) any settlement or compromise of any such claim effected by
the Bank with any such claimant (including a Borrower), then the Guaranteed
Obligations or part thereof intended to be satisfied shall be reinstated and
continue, and this Guaranty shall continue in full force as if such payment or
proceeds have not been received, notwithstanding any revocation thereof or the
cancellation of any Note or any other instrument evidencing any Guaranteed
Obligations or otherwise; and the Guarantors, jointly and severally, shall be
liable to pay the Bank, and hereby do indemnify the Bank and hold it harmless
for the amount of such payment or proceeds so surrendered and all expenses
(including reasonable attorneys' fees, court costs and expenses attributable
thereto) incurred by the Bank in the defense of any claim made against it that
any payment or proceeds received by the Bank in respect of all or part of the
Guaranteed Obligations must be surrendered. The provisions of this paragraph
shall survive the termination of this Guaranty, and any satisfaction and
discharge of a Borrower by virtue of any payment, court order or any federal or
state law.
Section 3.04. WAIVER OF SUBROGATION. Notwithstanding any
payment or payments made by any Guarantor hereunder, or any set-off or
application by the Bank of any security or of any credits or claims, no
Guarantor will assert or exercise any rights of the Bank or of such Guarantor
against a Borrower or any other Guarantor to recover the amount of any payment
made by such Guarantor to the Bank hereunder by way of subrogation,
reimbursement, contribution, indemnity, or otherwise arising by contract or
operation of law, until such time as the Obligations have been satisfied and the
Bank shall have no Commitment. If any amount shall nevertheless be paid to a
Guarantor by a Borrower or another Guarantor prior to payment in full of the
Guaranteed Obligations, such amount shall be held in trust for the benefit of
the Bank and shall forthwith be paid to the Bank to be credited and applied to
the Guaranteed Obligations, whether matured or unmatured.
Section 3.05. SUBORDINATION. Each Guarantor hereby
subordinates all indebtedness owing to it from a Borrower to all indebtedness of
each of the Borrowers to the Bank, and agrees that it shall not accept any
payment on the same until payment in full of the obligations of each Borrower
under this Agreement, the Notes, the Letters of Credit, the Existing Letters of
Credit and all other Loan Documents, and shall in no circumstance whatsoever
attempt to set-off or reduce any obligations hereunder because of such
indebtedness. If any amount shall nevertheless be paid to a Guarantor by a
Borrower or another Guarantor prior to payment in full of the Guaranteed
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Obligations, such amount shall be held in trust for the benefit of the Bank and
shall forthwith be paid to the Bank to be credited and applied to the Guaranteed
Obligations, whether matured or unmatured.
Section 3.06. WAIVER. Each Guarantor hereby waives promptness,
diligence, notice of acceptance and any other notice with respect to any of the
Guaranteed Obligations and this Guaranty and waives presentment, demand of
payment, notice of intent to accelerate, notice of dishonor or nonpayment and
any requirement that the Bank institute suit, collection proceedings or take any
other action to collect the Guaranteed Obligations, including any requirement
that the Bank protect, secure, perfect or insure any Lien against any property
subject thereto or exhaust any right or take any action against a Borrower or
any other Person or any collateral (it being the intention of the Bank and each
Guarantor that this Guaranty is to be a guaranty of payment and not of
collection). It shall not be necessary for the Bank, in order to enforce any
payment by any Guarantor hereunder, to institute suit or exhaust its rights and
remedies against a Borrower, any other Guarantor or any other Person, including
others liable to pay any Guaranteed Obligations, or to enforce its rights
against any security ever given to secure payment thereof. Each Guarantor hereby
expressly waives each and every right to which it may be entitled by virtue of
the suretyship laws of the State of Texas, including, without limitation, any
and all rights it may have pursuant to Rule 31, Texas Rules of Civil Procedure,
Section 17.001 of the Texas Civil Practice and Remedies Code and Chapter 34 of
the Texas Business and Commerce Code. Each Guarantor hereby waives marshaling of
assets and liabilities, notice by the Bank of any indebtedness or liability to
which the Bank applies or may apply any amounts received by the Bank, and of the
creation, advancement, increase, existence, extension, renewal, rearrangement
and/or modification of the Guaranteed Obligations. Each Guarantor expressly
waives, to the extent permitted by applicable law, the benefit of any and all
laws providing for exemption of property from execution or for valuation and
appraisal upon foreclosure.
Section 3.07. FULL FORCE AND EFFECT. This Guaranty is a
continuing guaranty and shall remain in full force and effect until payment in
full of the Obligations of the Borrowers under this Agreement, the Notes and all
other Loan Documents and all other amounts payable under this Guaranty.
ARTICLE IV
CONDITIONS PRECEDENT
Section 4.01. CONDITIONS PRECEDENT TO THE INITIAL LETTER OF
CREDIT. The obligation of the Bank to make its initial Advance, to maintain any
Existing Letter of Credit or to issue the initial Letter of Credit hereunder is
subject to the conditions precedent that the Bank shall have received on or
before the Execution Date, to the extent same have not previously been received
all of the following, in form and substance satisfactory to the Bank and in such
number of counterparts as may be reasonably requested by the Bank:
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(a) the Notes each duly executed and delivered by the relevant
Borrower;
(b) this Agreement duly executed and delivered by the Credit
Parties;
(c) the Note and Deed of Trust Modification Agreements duly
executed and delivered by the relevant Credit Parties to the Bank;
(d) the New Security Agreement duly executed and delivered by
the Credit Parties;
(e) the Patent Security Agreement duly executed and delivered
by Proler Environmental Services, Inc.;
(f) the New Pledge Agreement duly executed and delivered by
the appropriate Credit Parties party thereto;
(g) the Deeds of Trust duly executed and delivered by all of
the parties holding title to the Mortgaged Properties;
(h) Mortgagee title insurance policies issued by title
insurers satisfactory to the Bank in amounts satisfactory to the Bank (the
"MORTGAGEE POLICIES") and assuring the Bank that the Deeds of Trust in respect
of the Mortgaged Properties are valid and enforceable first priority mortgages
on the respective Mortgaged Properties, free and clear of all defects and
encumbrances except Permitted Liens. Such Mortgagee Policies shall be in form
and substance reasonably satisfactory to the Bank;
(i) Appropriate endorsements to Mortgagee Policies in form and
substance satisfactory to the Bank to reflect the extended Termination Date of
Note B and the applicability thereto of the Mortgagee Policies;
(j) the Appraisal, if required by Bank;
(k) the Environmental Reports and, depending upon the content
and conclusion thereof, additional environmental reports, Phase II Audits and
such other related information concerning the Mortgaged Properties as the Bank
may require;
(l) (i) executed financing statements for all jurisdictions as
may be necessary or, in the reasonable opinion of the Bank, desirable to perfect
the security interests created by the Security Documents and (ii) evidence that
all other actions necessary or, in the reasonable opinion of the Bank, desirable
to perfect and protect the Liens created by the Security Documents have been
taken;
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(m) copies of surveys satisfactory to the Bank covering, all
together, each tract or parcel of land (including all appurtenant easements)
subject to the Deeds of Trust, satisfactory in form and substance to the Bank.
In addition, the Bank shall have received such officer's certificates and other
similar instruments relating to survey matters as the Bank may request;
(n) a Uniform Commercial Code search, tax search and judgment
report of the appropriate records of the States of Texas, Delaware, and all
other states in which a Borrower or any Joint Venture is conducting business
satisfactory in form and substance to the Bank;
(o) all of the issued and outstanding stock of the Guarantors
owned by any Credit Party together with related stock powers executed by the
pledgor of such stock;
(p) a certificate of the president or a vice president and of
the secretary or an assistant secretary of each Credit Party certifying, INTER
ALIA, (i) true and correct copies of resolutions adopted by the Board of
Directors of each such Credit Party, (A) authorizing the execution, delivery and
performance by each such Credit Party of the Loan Documents to which it is or
will be a party and, in the case of each Borrower, the borrowings thereunder,
(B) approving the forms of the Loan Documents to which it is a party and which
will be delivered at or prior to the Execution Date and (C) authorizing officers
of each such Credit Party to execute and deliver the Loan Documents to which it
is or will be a party and any related documents, (ii) true and correct copies of
the bylaws of each Credit Party that is a corporation, as amended to the date of
such certificate, (iii) the incumbency and specimen signatures of the officers
of each such Credit Party executing any documents on behalf of it, (iv) the
truth of the representations and warranties made by such Credit Party in any
Loan Document to which it is a party and which will be delivered at or prior to
the date of the initial Letter of Credit, (v) the absence of any proceedings for
the dissolution or liquidation of each such Credit Party, (vi) the absence of
the occurrence and continuance of any Default or Event of Default with respect
to each such Credit Party and (vii) that no event or condition has occurred
since January 31, 1996 that would constitute a Material Adverse Effect;
(q) the favorable, signed opinion of Mayor, Day, Caldwell &
Keeton, L.L.P., counsel for the Credit Parties, addressed to the Bank, as to
such matters as the Bank may reasonably request;
(r) a Perfection Certificate executed by an Authorized Officer
of each Credit Party;
(s) Supplemental Deeds of Trust covering the Mortgaged
Properties executed by the appropriate Credit Parties dated as of the date
hereof securing all of the Obligations;
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(t) payment of all reasonable fees and out-of-pocket expenses
of the Bank and of Andrews & Kurth L.L.P., counsel to the Bank, and any local
counsel retained by it;
(u) a Borrowing Base Certificate for Note A, Note B and Note
C;
(v) copies of certificates of good standing and existence for
each of the Credit Parties in the jurisdiction of its incorporation and
certificates of authority to conduct business in each jurisdiction in which the
failure to obtain same would constitute a Material Adverse Effect; and
(w) such other documents as the Bank may reasonably request
relating to the existence and good standing of each Credit Party, the
authorization, execution and delivery of this Agreement and the other Loan
Documents, and all other matters relevant hereto and thereto, all in form and
substance reasonably satisfactory to the Bank.
Section 4.02. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS. The
obligation of the Bank to make any Advance, including the initial Advance, and
to issue any Letter of Credit, shall be subject to the further conditions
precedent that on the date of such Credit Event the following statements shall
be true (and each of the giving of the applicable Borrowing Request and the
acceptance by International of the proceeds of such Advance or the giving of a
Letter of Credit Request and the issuance of a Letter of Credit, as the case may
be, shall constitute a representation and warranty by the relevant Borrower that
on the date of Credit Event such statements are true):
(a) with respect to each Advance or request for issuance of a
Letter of Credit, the Bank shall have received, a Borrowing Request or a Letter
of Credit Request and Application, as applicable, with respect to such Credit
Event;
(b) with respect to any Advance, immediately after giving
effect to such Advance, the sum of the aggregate outstanding principal amount of
all Advances does not exceed the lesser of (i) the Commitment or (ii) the
Borrowing Base with respect to making Advances;
(c) with respect to the issuance of any Letter of Credit,
immediately after giving effect to such issuance, the sum of the aggregate
outstanding undrawn amount of all Existing Letters of Credit and all Letters of
Credit does not exceed the lesser of (i) the L/C Limit or (ii) the Borrowing
Base with respect to the issuance of Letters of Credit;
(d) the representations and warranties contained in ARTICLE V
and those contained in the other Loan Documents are true and correct in all
material respects as though made on and as of such date (except for those
expressly made as of the date thereof and except for changes in International
and its Subsidiaries arising from transactions contemplated by the terms
hereof);
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(e) no Default or Event of Default has occurred and is
continuing or would result from such Credit Event;
(f) to the extent not previously delivered the Bank shall have
received the L/C Fees and all other fees, if any, theretofore or then due and
payable to it;
(g) since the date of International's last audited financials,
no event shall have occurred and be continuing which has had or is likely to
have a Material Adverse Effect except for any matters disclosed in writing to
the Bank prior to the Effective Date; and
(h) prior to any Advance under Note A, the Bank shall have
received evidence satisfactory to it that the Commitment (as defined in the
Revolving Credit Facility) available to be drawn (taking into account the
then-available Borrowing Base, as defined therein) is fully drawn.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
In order to induce the Bank to enter into this Agreement, to
make the Advances and to issue the Letters of Credit, each Credit Party
represents and warrants to the Bank as to itself, and, to the extent
specifically stated, as to its Subsidiaries and each Joint Venture in which it
has an interest as follows.
Section 5.01. ORGANIZATION. Each Credit Party (a) is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, (b) is duly qualified to do business as a
foreign corporation and is in good standing under the laws of each other
jurisdiction in which such qualification and good standing are necessary in
order for such Credit Party to conduct its business and own its properties as
conducted and owned and except where the failure to be so qualified or in good
standing would not constitute a Material Adverse Effect and (c) has all
requisite power and authority (corporate or otherwise) to conduct its business
as now conducted, to own or lease its property and assets and to execute,
deliver and perform each of the Loan Documents to which it is or may be a party.
Section 5.02. AUTHORITY. The execution, delivery and
performance by each Credit Party of this Agreement and the other Loan Documents
to which it is or may be a party and the consummation of the Advances and the
issuance of the Letters of Credit contemplated hereby, have been duly approved
by the board of directors of such Credit Party and no other corporate
proceedings on the part of such Credit Party are necessary to consummate such
Advances or issue such Letters of Credit. Each of the Loan Documents to which
such Credit Party is a party has been duly executed
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and delivered by such Credit Party and constitutes the legal, valid and binding
obligation of such Credit Party, enforceable against such Credit Party in
accordance with its terms.
Section 5.03. NO CONFLICT. The execution, delivery and
performance by such Credit Party of each of the Loan Documents to which it is or
may be a party, do not and shall not, by the lapse of time, the giving of notice
or otherwise, (a) constitute a violation of any law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award presently in effect
having applicability to such Credit Party or a breach of any provision contained
in such Credit Party's articles or certificate of incorporation or bylaws, or
contained in any material agreement, instrument or document to which it is a
party or by which it is bound, other than violations or breaches which would
not, individually or in the aggregate, result in a Material Adverse Effect or
(b) result in or require the creation or imposition of any Lien whatsoever upon
any of the properties or assets of such Credit Party (other than Liens permitted
by this Agreement and Liens in favor of the Bank arising pursuant to the Loan
Documents).
Section 5.04. CONSENTS. No authorization, consent, approval,
permit, license, or exemption of or filing or registration with, any
governmental agency or any other Person which has not been obtained, was, is or
will be necessary for the valid execution, delivery or performance by any Credit
Party of any of the Loan Documents to which it is or may be a party.
Section 5.05. FINANCIAL CONDITION; NO MATERIAL ADVERSE CHANGE.
(a) Operations delivered to the Bank the consolidated balance sheet of
Operations and its Subsidiaries as of January 31, 1995 and the related
consolidated statements of operations, cash flow and stockholders' equity for
the year then ended, including the related schedules and notes, reported on by
Coopers & Lybrand.
(b) The unaudited consolidated balance sheet and statement of
operations and cash flow of Operations and its Subsidiaries as at October 31,
1995, copies of which has heretofore been furnished to the Bank, are correct in
all material respects, and present fairly the consolidated financial condition
of Operations as at such date (subject to normal year-end audit adjustments).
(c) The financial statements referred to in paragraphs (a) and
(b) above, including the related schedules and notes thereto, have been prepared
in accordance with GAAP applied on a consistent basis throughout the periods
involved.
(d) The Borrowers have disclosed to the Bank in writing any
and all facts which would result in, or which Borrowers believe may result in, a
Material Adverse Effect and since January 31, 1996, there has been no material
adverse change in the business, operations, properties, assets, business
prospects or financial condition of International and its Subsidiaries taken as
a whole except as to those matters previously disclosed to the Bank as of the
date hereof.
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Section 5.06. LITIGATION; MATERIAL ADVERSE EFFECT. (a) Except
as set forth in EXHIBIT 5.06 hereto, there are no actions, suits or proceedings
pending or, to the best of International's knowledge, threatened or probable of
assertion, against or affecting any Credit Party or any of its Subsidiaries or
any property or rights of any Credit Party or any of its Subsidiaries before any
court or any governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which, if determined adversely to the
Borrowers or any such Subsidiary would constitute a Material Adverse Effect.
(b) Except as otherwise disclosed to the Bank in writing,
neither the business, properties nor operations of any Credit Party nor any of
its Subsidiaries is materially and adversely affected by any fire, explosion,
accident, strike, lockout or other labor dispute, embargo, act of God or act of
a public enemy or other event, condition or casualty, provided the determination
of such effect shall include a consideration of available insurance proceeds.
Section 5.07. INDEBTEDNESS. Except as set forth in EXHIBIT
5.07 or as set forth in the financial statements referred to in SECTION 5.05,
and except for the Indebtedness represented by this Agreement, the Notes and the
other Loan Documents and any other Indebtedness owing to the Bank, no Credit
Party, nor any of its Subsidiaries has any secured or unsecured Indebtedness.
Section 5.08. NO MARGIN STOCK. No Credit Party nor any of its
Subsidiaries is engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U), and no
part of the proceeds of any Advance or any Letter of Credit or Existing Letter
of Credit will be used, directly or indirectly, (a) to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock or (b) for the purpose of purchasing, carrying or
trading in any securities under such circumstances as to involve any Credit
Party in a violation of Regulation X.
Section 5.09. ACCURACY AND COMPLETENESS OF INFORMATION. All
written estimates, projections and forecasts furnished by or on behalf of the
Borrowers and the other Credit Parties to the Bank for purposes of or in
connection with this Agreement, or in connection with any Letter of Credit or
Existing Letter of Credit, were and will be prepared on the basis of
assumptions, data, tests or conditions believed to be reasonable, valid or to
represent industry conditions existing at the time such estimates or forecasts
were furnished. Neither this Agreement, the Notes, the other Loan Documents, the
statements and documents referred to in SECTION 5.05 nor any other document
delivered by the Borrowers or any of their respective Subsidiaries to the Bank
contains any material misstatement of fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading as of the respective date thereof. The Borrowers have not
intentionally withheld any fact known to them which has or is reasonably likely
to constitute a Material Adverse Effect which has not been set forth or referred
to in this Agreement, the Notes, the other Loan Documents or such other document
heretofore furnished to the Bank.
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Section 5.10. ERISA. (a) No Reportable Event or withdrawal
from or termination, reorganization or insolvency has occurred and is continuing
with respect to any Plan that would likely constitute a Material Adverse Effect
and (b) neither the PBGC nor a Borrower nor any Commonly Controlled Entity has
instituted any proceedings or taken any other actions with respect to the
withdrawal from, or the termination, reorganization or insolvency of any Plan
that would reasonably be expected to have a Material Adverse Effect.
Section 5.11. GOVERNMENT REGULATION. No Credit Party nor any
of its Subsidiaries is (a) an "investment company" or a company directly or
indirectly controlled by or acting on behalf of any Person which is an
"investment company," as such term is defined in the Investment Company Act of
1940, (b) a "holding company" or a "subsidiary company" of a "holding company"
or an "affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," as such terms are defined in the Public Utility Holding
Company Act of 1935, or (c) a "public utility," as such term is defined in the
Federal Power Act.
Section 5.12. PROPERTY. Each Credit Party and each of its
Subsidiaries, as the case may be, has good record and defensible title in fee
simple to or valid leasehold interests in all its real properties and marketable
title to all its other property and assets except where the failure to so have
such title or interest would not reasonably be expected to have a Material
Adverse Effect.
Section 5.13. PAYMENT OF TAXES. The federal income tax returns
of each Borrower and other tax returns and reports of each Credit Party and its
Subsidiaries required to be filed with the appropriate governmental agencies in
all jurisdictions in which such returns and reports are required to be filed
have been filed and all of the foregoing are true, correct and complete, and
each Borrower paid all taxes and other similar charges, or made adequate
provision therefor, that are due and payable within the time prescribed for
filing and payment or an appropriate extension has been requested and obtained
for such filing or payment except where such failure would not reasonably be
expected to result in a Material Adverse Effect. Neither Borrower nor any of its
Subsidiaries has taken any reporting positions for which it does not have a
reasonable basis and no such Person anticipates any further material tax
liability with respect to the tax years for which returns have been filed.
International has no knowledge of any proposed tax assessment against
International or any of its Subsidiaries that would reasonably be expected to
have a Material Adverse Effect which is not being actively contested in good
faith.
Section 5.14. INSURANCE. Each Credit Party and each of its
Subsidiaries carries and will continue to carry insurance with reputable
insurers in respect of its properties in such amounts and against such risks as
is customarily maintained by other Persons of similar size engaged in similar
business and reasonably acceptable to the Bank.
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Section 5.15. SUBSIDIARIES; JOINT VENTURES. (a) EXHIBIT 5.15
hereto lists each Subsidiary of each Credit Party and each Joint Venture in
which a Credit Party has an interest, the jurisdiction under which each such
Subsidiary and Joint Venture is incorporated or organized and the direct and
indirect ownership interest of such Credit Party therein. Each Subsidiary of a
Credit Party has been duly organized and is validly existing in good standing
under the laws of its jurisdiction of organization.
(b) The Borrowers have heretofore delivered to the Bank a copy
of the Articles or Certificate of Incorporation of each Joint Venture that is a
corporation and each agreement creating or governing the rights of the parties
to each other Joint Venture (collectively, the "JOINT VENTURE AGREEMENTS") in
existence on the date hereof, as amended to the date hereof. Each Joint Venture
Agreement is in full force and effect and as to each Joint Venture Agreement
creating each non-corporate Joint Venture is enforceable against each Credit
Party which is a party thereto in accordance with its terms.
Section 5.16. PATENTS. Each Credit Party and each of its
Subsidiaries owns or holds a valid license to use all material patents,
trademarks, service marks, trade names, copyrights, licenses and other rights,
that are necessary for, and no restriction applicable to any such patent,
trademark, service mark, trade name, copyright, license or other right would
interfere in any material respect with, the operation of its business taken as a
whole as presently conducted and as proposed to be conducted.
Section 5.17. COMPLIANCE WITH STATUTES. (a) Each Credit Party
and each of its Subsidiaries is in compliance with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property, except such non-compliance as is not
likely to, in the aggregate, have a Material Adverse Effect.
(b) Each Credit Party and each of its Subsidiaries is in
compliance with all applicable Environmental Laws governing its business for
which failure to comply is likely to have a Material Adverse Effect, and no
Credit Party nor any of its Subsidiaries is liable for any material penalties,
fines or forfeitures for failure to comply with any of the foregoing in the
manner set forth above. All licenses, permits, registrations or approvals
required for the business of each Credit Party and each of its Subsidiaries, as
conducted as of the Effective Date, under any Environmental Law have been
secured and each Credit Party and each of its Subsidiaries is in substantial
compliance therewith, except such licenses, permits, registrations or approvals
the failure to secure or to comply therewith is not likely to have a Material
Adverse Effect. No Credit Party nor any of its Subsidiaries is in noncompliance
with, breach of or default under any applicable writ, order, judgment,
injunction, or decree to which such Credit Party or such Subsidiary is a party
or which would affect the ability of such Credit Party or such Subsidiary to
operate any of its properties and no event has occurred
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and is continuing which, with the passage of time or the giving of notice or
both, would constitute noncompliance, breach of or default thereunder, except in
each such case, such noncompliances, breaches or defaults as are not likely to,
in the aggregate, have a Material Adverse Effect. There are, as of the Effective
Date, no Environmental Claims pending or, to the best knowledge of any Credit
Party, threatened, which (i) question the validity, term or entitlement of such
Credit Party or any of its Subsidiaries for any permit, license, order or
registration required for the operation of any facility which such Credit Party
or any of its Subsidiaries currently operates and (ii) wherein any unfavorable
decision, ruling or finding would be reasonably likely to have a material
adverse effect on the financial viability of any facility thereof. There are no
facts, circumstances, conditions or occurrences on any real property or, to the
knowledge of the Credit Parties, on any property adjoining or in the vicinity of
any real property that could reasonably be expected (i) to form the basis of an
Environmental Claim against any Credit Party or any of its Subsidiaries or (ii)
to cause such real property to be subject to any restrictions on the ownership,
occupancy, use or transferability of such real property under any Environmental
Law, except in each such case, such Environmental Claims or restrictions that
individually or in the aggregate are not reasonably likely to have a Material
Adverse Effect.
(c) To the best of the Credit Parties' knowledge, Hazardous
Materials have not at any time been (i) generated, used, treated or stored on,
or transported to or from, any real property of any Credit Party or any of its
Subsidiaries or (ii) released on any real property, in each case where such
occurrence or event is reasonably likely to have a Material Adverse Effect.
Section 5.18. LABOR RELATIONS; COLLECTIVE BARGAINING
AGREEMENTS. (a) Set forth on EXHIBIT 5.18 is a list and description (including
dates of termination) of all collective bargaining or similar agreements between
or applicable to any Credit Party or any of its Subsidiaries and any union,
labor organization or other bargaining agent in respect of the employees of any
Credit Party or any of its Subsidiaries on the Effective Date.
(b) No Credit Party nor any of its Subsidiaries is engaged in
any unfair labor practice that could have a Material Adverse Effect. There is
(i) no significant unfair labor practice complaint pending against any Credit
Party or any of its Subsidiaries or, to the best knowledge of any Credit Party,
threatened against any of them before the National Labor Relations Board, and no
significant grievance or significant arbitration proceeding arising out of or
under any collective bargaining agreement is now pending against any Credit
Party or any of its Subsidiaries or, to the best knowledge of such Credit Party,
threatened against any of them, (ii) no significant strike, labor dispute,
slowdown or stoppage is pending against any Credit Party or any of its
Subsidiaries or, to the best knowledge of such Credit Party, threatened against
such Credit Party or any of its Subsidiaries and (iii) no union representation
question exists with respect to the employees of any Credit Party or any of its
Subsidiaries, except such as is not reasonably likely to have a Material Adverse
Effect.
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Section 5.19. LIABILITIES. (a) All contingent liabilities and
direct liabilities of the Credit Parties and their respective Subsidiaries, and
all anticipated losses of the Credit Parties and their respective Subsidiaries,
which in the aggregate are material to the Credit Parties and their respective
Subsidiaries taken as a whole, are set forth in the financial statements
referred to in SECTION 5.05 to the extent required by GAAP and modified by the
footnotes to such statements and (b) all contingent liabilities and direct
liabilities of the Credit Parties and all unrealized or anticipated losses of
the Credit Parties and their respective Subsidiaries, which in the aggregate are
material to the Credit Parties and their respective Subsidiaries taken as a
whole, to the extent required by GAAP will be set forth in the financial
statements next delivered pursuant to SECTION 6.01 hereof after any of such are
incurred or anticipated, as applicable.
Section 5.20. SOLVENCY. The Credit Parties, viewing their
businesses and operations as a single consolidated entity, have capital
sufficient to carry on their businesses and transactions and all businesses and
transactions in which they are about to engage and are now solvent and able to
pay their respective debts as they mature, and the Credit Parties now
collectively own property having a value, both at fair valuation and at present
fair salable value, greater than the amount required to pay all existing debts
of the Credit Parties.
ARTICLE VI
AFFIRMATIVE COVENANTS
So long as any of the Obligations shall remain unpaid or
outstanding or the Bank shall have any Commitment or (subject to Section
2.20(b)(ii)) any Letter of Credit or Existing Letter of Credit is outstanding,
unless the Bank shall otherwise consent in writing, each Credit Party covenants
and agrees as to itself, and, to the extent specifically stated, as to its
Subsidiaries and each Joint Venture in which it has an interest that:
Section 6.01. REPORTING REQUIREMENTS. International shall
deliver or cause to be delivered to the Bank:
(a) ANNUAL REPORTS. Upon the earlier of 120 days after the
close of each fiscal year of International or the day following the date of
filing of International's Annual Report on Securities and Exchange Commission
Form 10-K, either (i) a copy of International's Annual Report on Form 10-K as
filed with respect to such year or (ii) consolidated and consolidating balance
sheets of International and its Subsidiaries, as at the end of such fiscal year
and the related statements of operations, cash flow and stockholders' equity for
such fiscal year, setting forth comparative figures for the preceding fiscal
year, and examined by Coopers & Lybrand (or other independent certified public
accountants of recognized national standing reasonably acceptable to the Bank)
whose opinion shall not be qualified as to the scope of audit and as to the
status of International or any of
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its Subsidiaries as a going concern, together, in each case, with a certificate
of the accounting firm referred to above stating that in the course of its
regular audit of the business of International, which
audit was conducted in accordance with generally accepted auditing standards,
such accounting firm has obtained no knowledge of any Default or Event of
Default that has occurred and is continuing, or, if such firm has obtained
knowledge of any Default or Event of Default that has occurred and is
continuing, a statement as to the nature thereof.
(b) QUARTERLY REPORTS. Upon the earlier of 60 days after the
close of each of the first three quarterly accounting periods in each fiscal
year of International, or the day following each date of filing of
International's Quarterly Report on Form 10-Q either (i) a copy of
International's Quarterly Report on Form 10-Q as filed with respect to such
quarterly period or (ii) consolidated and consolidating balance sheets of
International and its Subsidiaries, as at the end of such quarterly period and
the related statements of operations and cash flows for such quarterly period
and for the elapsed portion of the fiscal year ended with the last day of such
quarterly period, and setting forth comparative figures for the related periods
in the prior fiscal year, in each case, certified by an Authorized Officer,
subject to changes resulting from audit and normal year-end audit adjustments.
(c) MONTHLY REPORTS. As soon as practicable, and in any event
within 30 days (45 days in the case of the last monthly accounting period of
each fiscal quarter), after the end of each monthly accounting period
(commencing with January 1996) of each fiscal year of International and each
Joint Venture, consolidated and consolidating balance sheets of International
and its Subsidiaries, as at the end of such period, and the balance sheet of any
Joint Venture that is accounted for in such month in the statements of
International or its Subsidiaries, and the related statements of operations for
such period setting forth comparative figures for the corresponding period of
the previous year, including listings and agings of all Receivables for
International and each Joint Venture, each of which shall be certified by an
Authorized Officer, subject to changes resulting from audit and normal year-end
audit adjustments.
(d) OFFICER'S CERTIFICATE. Together with each delivery of any
financial statements pursuant to clauses (a), (b) and (c) above, a certificate
of an Authorized Officer demonstrating compliance by International and the other
Credit Parties with the provisions of SECTION 7.03 and stating whether any Event
of Default or Default has occurred and is continuing, and if there is any Event
of Default or Default, describing it and the steps, if any, being taken to cure
it.
(e) SEC FILINGS. Promptly upon transmission thereof, copies of
all such financial statements, proxy statements, notices and reports as
International shall send to its public stockholders and copies of all
registration statements (without exhibits) and reports which it files with the
Securities and Exchange Commission.
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(f) BORROWING BASE CERTIFICATE. Together with each delivery of
the monthly reports pursuant to clause (c) above and on each date on which a new
Borrowing Base Certificate is required to be delivered as provided in SECTION
2.17(B), a Borrowing Base Certificate in the form of EXHIBIT 1.01-A attached
hereto, signed by an Authorized Officer of International, including therein
information as at the end of the period covered by said certificate.
(g) ERISA FILINGS. Promptly upon the filing or making thereof,
copies of each filing and report made by International, under ERISA with the
PBGC or with the U.S. Department of Labor or which International may receive
from such Persons that, in each case, relate to a condition or event that would
likely have a Material Adverse Effect.
(h) REPORTABLE EVENTS. Forthwith upon International receiving
actual notice of the occurrence of a Reportable Event under, the termination,
insolvency or reorganization of, or the institution of steps by the PBGC,
International or any Commonly Controlled Entity with respect to the withdrawal,
termination, insolvency or reorganization of any Plan to which International may
have any liability, written notice thereof describing the same and the steps
being taken by International with respect thereto.
(i) AUDITORS' REPORTS. Promptly upon receipt thereof, a copy
of each other report or "management letter" submitted to International by its
independent accountants in connection with any annual, interim or special audit
made by it of the books of International, provided if said report contains
personnel information of a confidential nature, International may delete said
sections before delivery of same to the Bank.
(j) APPRAISALS. Annually, upon written request by the Bank, an
Appraisal for each of the Mortgaged Properties; provided, that the Bank shall
not request any Appraisal prior to the Termination Date.
(k) ENVIRONMENTAL REPORTS. Upon written request by the Bank,
an Environmental Report for each of the Mortgaged Properties; PROVIDED, HOWEVER,
that the Bank understands and agrees that it may not request or perform any
environmental inspection, audit or assessment of any property owned or leased by
any Credit Party unless (1) all of the obligations of International hereunder
shall have been accelerated in accordance with ARTICLE VIII hereof (and such
acceleration shall not have been rescinded), (2) International receives prior
notice of the inspection, audit or assessment and the proposed scope thereof,
(3) the Bank and the Credit Parties agree that International shall be entitled
to review any report produced from any such inspection, audit or assessment
simultaneously with its delivery to the Bank and (4) any environmental
consultant utilized in connection therewith shall be a party mutually acceptable
to the Bank and International, with the Bank and International hereby
stipulating that E.R.M. - Southwest, Inc. is mutually acceptable.
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(l) OTHER REPORTS. In addition to the reports and statements
described in this Section, International shall provide the Bank: (i) such other
financial reports and information as the Bank may from time to time reasonably
request respecting the business, properties, operations or condition (financial
or otherwise) of International or any Joint Venture; and (ii) notice of any
additional Indirect Indebtedness incurred or Liens granted by any Joint Venture
in excess of $500,000.00 in any single transaction.
Section 6.02. EXISTENCE. Each Credit Party shall preserve and
maintain its and its Subsidiaries' existence, rights, franchises and privileges
in the jurisdictions of their incorporation or other organization and their
qualification and good standing in all jurisdictions in which the failure to
preserve or maintain such existence, rights, franchises, privileges,
qualification and good standing would be likely to constitute a Material Adverse
Effect.
Section 6.03. MAINTENANCE OF PROPERTIES; INSURANCE. (a) Each
Credit Party and each of its Subsidiaries shall maintain with financially sound,
responsible and reputable insurance companies insurance against such risks and
in such amounts as are usually insured against by Persons of established
reputation engaged in the same or similar businesses and similarly situated;
PROVIDED, HOWEVER, notwithstanding the foregoing, each Credit Party and its
Subsidiaries will maintain (i) all insurance required by state statutes to be
maintained by employers for the protection of employees against work related
injuries and (ii) to the extent available at commercially reasonable rates,
comprehensive general liability coverage in such amounts as are appropriate for
the operations of such Credit Party and its Subsidiaries and (iii) all insurance
that such Credit Party and its Subsidiaries are required to maintain by law and
(iv) insurance required to be maintained by any of the Credit Parties pursuant
to the Deeds of Trust. Each policy in effect from time to time pursuant to the
terms of this Section, shall include a provision for thirty (30) days' prior
written notice to the Bank of any cancellation or expiration thereof and shall
show the Bank as an additional insured.
(b) Each Credit Party will maintain and preserve all of its
material properties necessary for the proper conduct of its business in working
order and condition, ordinary wear and tear excepted .
Section 6.04. NOTICE OF LITIGATION. International shall
promptly, upon actual notice or knowledge thereof, deliver or cause to be
delivered to the Bank notice of (a) the institution of or threat of, any action,
suit, proceeding, governmental investigation or arbitration against or affecting
any Credit Party or any of its Subsidiaries not previously disclosed in writing
to the Bank pursuant to SECTION 5.06 which, if determined adversely to such
Credit Party or such Subsidiary, would constitute a Material Adverse Effect or
(b) any material development in any action, suit, proceeding, governmental
investigation or arbitration already disclosed, which is likely to constitute a
Material Adverse Effect.
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Section 6.05. TAXES; CLAIMS. Each Credit Party and each of its
Subsidiaries shall (a) timely file all federal, state and local tax returns and
other reports which such Credit Party and such Subsidiaries are required by law
to file or obtain an appropriate extension for filing thereof, (b) maintain
adequate reserves on its books in accordance with GAAP for the payment of all
material taxes, assessments and governmental charges, and pay prior to
delinquency all such taxes, assessments and governmental charges, and (c) pay
all other material claims (including, without limitation, claims for labor,
services, materials and supplies) that have become due and payable and that by
law have or may become a Lien on International's property or assets, prior to
the time when any penalty or fine may be incurred with respect thereto, other
than any such tax, assessment, charge, levy or claim which is being contested in
good faith, by proper proceedings and with respect to which adequate reserves
have been established.
Section 6.06. NOTICE OF DEFAULT. International shall notify
the Bank in writing within three (3) Business Days after International becomes
aware of the occurrence thereof, (a) of any condition or event that constitutes
either an Event of Default or a Default, (b) of any other default by
International or any of its Subsidiaries under any material note, indenture,
advance agreement, mortgage, lease, deed or other similar agreement to which
International or any of its Subsidiaries is a party or by which International or
any of its Subsidiaries is bound, the existence of which might reasonably be
expected to lead to a Material Adverse Effect, or (c) of any event or condition
that might reasonably be expected to constitute a Material Adverse Effect, such
notice to specify the nature and period of existence of any such condition,
event, default or potential default and what action International has taken, is
taking or proposes to take with respect thereto.
Section 6.07. INSPECTIONS. From time to time during regular
business hours and upon reasonable notice, each Credit Party will permit any
agents or representatives of the Bank to examine and make copies of and
abstracts from the records and books of account and files and visit the
properties of such Credit Party and its Subsidiaries to discuss the affairs,
finances and accounts of such Credit Party and its Subsidiaries with any of its
independent certified public accountants (with an officer or other
representative of such Credit Party present); PROVIDED, HOWEVER, that the Bank
shall keep any information obtained confidential to the extent that the Bank is
not required by law to disclose such information and such information is not
otherwise generally available to the public.
Section 6.08. COMPLIANCE WITH LAWS; NOTICES. (a) GENERAL.
International shall, and shall cause its Subsidiaries to, comply with all
material laws, rules and regulations, including, without limitation, all
Environmental Laws, and all restrictive covenants applicable to International
and its Subsidiaries, the noncompliance with which might, in any respect,
constitute a Material Adverse Effect; PROVIDED, HOWEVER, that neither
International nor any of its Subsidiaries shall be required to comply with any
such law or restrictive covenant if the applicability or validity thereof
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is being contested in good faith, by proper proceedings and for which adequate
reserves have been established.
(b) ENVIRONMENTAL MATTERS. Promptly upon obtaining knowledge
thereof, International shall deliver to the Bank notice of (i) any pending or
threatened Environmental Claim against International or any of its Subsidiaries
or any real property of International or any of its Subsidiaries unless such
Environmental Claim could not, individually or when aggregated with all other
such Environmental Claims, reasonably be expected to have a Material Adverse
Effect; (ii) any condition or occurrence on any real property of International
or any of its Subsidiaries that (A) results in material noncompliance by
International or such Subsidiary with any applicable Environmental Law unless
such noncompliance could not, individually or when aggregated with all other
such non-compliance claims, reasonably be expected to have a Material Adverse
Effect; (iii) any condition or occurrence on any real property of International
that could reasonably be anticipated to cause such real property to be subject
to any restrictions on the ownership, occupancy, use or transferability of such
real property under any Environmental Law unless such restrictions could not,
individually or when aggregated with all other such restrictions, reasonably be
expected to have a Material Adverse Effect; and (iv) the taking of any removal
or remedial action in response to the actual or alleged presence of any
Hazardous Material on any real property of International or any of its
Subsidiaries, unless the presence of such Hazardous Materials and the removal or
remedial action in response thereto could not, individually or when aggregated
with all such other occurrences or events, reasonably be expected to have a
Material Adverse Effect. All such notices shall describe in reasonable detail
the nature, to the extent known, of the claim, investigation, condition,
occurrence or removal or remedial action and the response thereto of
International or of its applicable Subsidiary. In addition, International will
provide the Bank with copies of all material written communications with any
government or governmental agency relating to Environmental Law, all material
communications with any government or governmental agency relating to
Environmental Claims, and such detailed reports of any Environmental Claim, in
each case as they relate to the Mortgaged Properties as may reasonably be
requested in writing from time to time by the Bank.
Section 6.09. BOOKS AND RECORDS; ACCOUNTING SYSTEMS AND
PRINCIPLES. Each Credit Party will keep adequate records and books of account in
which complete entries will be made in accordance with GAAP, reflecting all
financial transactions of such Credit Party and its Subsidiaries.
Section 6.10. OWNERSHIP OF CREDIT PARTIES. International will
at all times maintain and cause to be maintained the legal and beneficial
ownership of the shares of capital stock of the Credit Parties to be as shown on
EXHIBIT 5.15.
Section 6.11. FURTHER ASSURANCES. Each Credit Party shall at
its expense, promptly execute and deliver, or cause to be executed and
delivered, to the Bank upon reasonable request all such other and further
documents, agreements and instruments reasonably required to comply with
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or accomplish the covenants and agreements of such Credit Party in the Loan
Documents to which it is a party.
Section 6.12. PERFORMANCE OF LOAN DOCUMENTS. Each Credit Party
will perform or cause to be performed all of the terms, covenants, agreements
and conditions on its part to be performed under this Agreement and each of the
other Loan Documents.
Section 6.13. ACTIVITIES OF JOINT VENTURE. Except for Liens
and Indebtedness incurred in connection with any project financing as described
in SECTIONS 7.02(D) AND 7.09(G), each of the Credit Parties will use its good
faith efforts, within the bounds of good business judgment and its legal
obligations under or in connection with the Joint Venture Agreements to which it
is a party affecting the Joint Ventures, to limit the Indebtedness that may be
incurred by, and any liens that may be granted by, said Joint Ventures. To the
extent that said Credit Parties are able to do so within the aforesaid bounds,
they will encourage said Joint Ventures to minimize the imposition of any of
said Indebtedness or the granting of any liens.
Section 6.14. DIVIDENDS. To the extent permitted by law,
International agrees to take such actions within its power so that each of the
Credit Parties will pay, to the extent funds are legally available therefor,
dividends of an amount sufficient to allow International to make all required
payments of principal or interest due from International hereunder.
ARTICLE VII
NEGATIVE COVENANTS
So long as any of the Obligations shall remain unpaid or
outstanding or the Bank shall have any Commitment, unless the Bank shall
otherwise consent in writing, each Credit Party covenants and agrees as to
itself, and, to the extent specifically stated, as to its Subsidiaries and each
Joint Venture in which it has an interest that:
Section 7.01. LIENS. Each Credit Party shall not, and shall
not permit any of its Subsidiaries to, create, incur, assume or permit to exist,
whether directly or indirectly, any Lien on or with respect to any of its
properties or assets, whether now held or hereafter acquired, except:
(a) Liens created pursuant to this Agreement or any other Loan
Document or other Liens in favor of the Bank;
(b) Liens existing on the Effective Date and set forth on
EXHIBIT 7.01(B);
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(c) Liens imposed by law, carriers', warehousemen's or
mechanics' liens, and Liens to secure claims for labor, material or supplies
arising in the ordinary course of business, but only to the extent that payment
thereof shall not at the time be due or is being contested in good faith by
appropriate proceedings diligently conducted and with respect to which
appropriate reserves have been set aside in accordance with GAAP, and so long as
the enforcement thereof has been stayed and such Liens do not individually or in
the aggregate have a Material Adverse Effect;
(d) Deposits or pledges to enable the Credit Parties and their
Subsidiaries to exercise any privilege or license, deposits or pledges made in
connection with, or to secure payment of, workmen's compensation, unemployment
insurance, old age pensions or other social security, or to secure the
performance of bids, tenders, contracts (other than those relating to borrowed
money) or leases or to secure statutory obligations or surety or appeal bonds,
or to secure indemnity, performance or other similar bonds in the ordinary
course of business, or in connection with contests, so long as such Liens do not
individually or in the aggregate materially impair the value or materially
interfere with the use of any property subject thereto or the operation of the
usual business of the Credit Party(ies) involved and do not, in the aggregate
exceed $1,000,000.00;
(e) Liens for taxes, assessments, levies or other governmental
charges not yet due or which are being contested in good faith by appropriate
proceedings diligently conducted and with respect to which appropriate reserves
have been set aside in accordance with GAAP, and so long as the enforcement
thereof has been stayed and such Liens do not individually or in the aggregate
have a Material Adverse Effect;
(f) Liens arising out of judgments or awards against a Credit
Party, or any of its Subsidiaries with respect to which such Person shall be in
good faith prosecuting an appeal or a proceeding for review, or Liens incurred
by a Credit Party, or such Subsidiary for the purpose of obtaining a stay or
discharge of any legal proceeding to which such Person is a party, PROVIDED,
HOWEVER, nothing herein is intended to waive any Event of Default that may
result from any such judgment, award or proceeding under SECTION 8.01(K);
(g) Liens consisting of encumbrances, easements or
reservations of, or rights of others for, rights-of-way, sewers, electric lines,
telegraph and telephone lines, pipelines and other similar purposes, zoning
restrictions, restrictions on the use of real property and minor defects and
irregularities in the title thereto, landlord's or lessor's Liens under leases
to which a Credit Party, or any of its Subsidiaries is a party and other similar
encumbrances, none of which has a Material Adverse Effect;
(h) Rights of collecting banks having a right of set off,
revocation, refund or chargeback with respect to money or instruments of a
Credit Party or any of its Subsidiaries on deposit with or in the possession of
such bank;
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(i) [Intentionally Omitted]
(j) Liens to secure Indebtedness incurred in connection with
the purchase of equipment for use in International's day to day office
operations not to exceed, in the aggregate during the term hereof, $250,000.00;
(k) Other Permitted Liens;
(l) Liens on assets of Proler Environmental Services, Inc.
(but not any other Credit Parties) to secure Indebtedness permitted by SECTION
7.02(D) hereof; and
(m) Extensions, renewals or replacements of any Lien referred
to in the foregoing clauses; PROVIDED, HOWEVER, that no Lien arising or existing
as a result of such extension, renewal or replacement shall be extended to cover
any property not theretofore subject to the Lien being extended, renewed or
replaced so as to violate this Agreement; and FURTHER PROVIDED that the
principal amount of Indebtedness secured thereby shall not exceed the principal
amount of Indebtedness so secured at the time of such extension, renewal or
replacement so as to violate this Agreement.
Section 7.02. INDEBTEDNESS. International shall not, and shall
not permit any of its Subsidiaries to, create, incur, assume or permit to exist
any Indebtedness as defined herein exclusive of those items described in
subparagraph (g) of such definition except:
(a) Indebtedness of the Credit Parties hereunder and under the
other Loan Documents or any other Indebtedness owing to the Bank;
(b) Indebtedness set forth in EXHIBIT 5.07 or as set forth in
the financial statements referred to in SECTION 5.05;
(c) Taxes, assessments or other governmental charges which are
not yet delinquent or are being contested in good faith by appropriate action
promptly initiated and diligently conducted, and in respect of which adequate
reserves shall have been made therefor;
(d) Indebtedness, whether in the form of loans, Capital Leases
or other forms of Indebtedness, incurred by Proler Environmental Services, Inc.,
(but not any other Credit Party) in an aggregate original principal amount not
to exceed $20,000,000.00, in connection with project financings, PROVIDED such
Indebtedness shall be without recourse to any Credit Party other than Proler
Environmental Services, Inc.;
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(e) Indebtedness of International, not to exceed
$20,000,000.00, PROVIDED such Indebtedness is subordinate and inferior in all
respects (including subsequent to the filing of any petition for relief under
the U.S. Bankruptcy Code) to the Obligations on such terms and conditions and in
such degree as the Bank shall approve in writing prior to the incurrence
thereof, such approval not to be unreasonably withheld; and
(f) Extensions, renewals and replacements (but not increases)
of any Indebtedness referred to in the foregoing clauses.
Section 7.03. FINANCIAL COVENANTS. (a) International shall not
permit the ratio of (i) Consolidated Current Assets to (ii) Consolidated Current
Liabilities to be less than 1.6 to 1.0 at the end of any fiscal quarter of
International; PROVIDED, notwithstanding the definition of "Joint Ventures," or
anything else herein contained, for purposes of this SECTION 7.03(A) only (but
not any other sections or subsections of 7.03), Consolidated Current Assets and
Consolidated Current Liabilities shall include that portion of the current
assets and current liabilities of the Joint Ventures equal to that portion of
the Credit Parties' ownership interest therein.
(b) International shall not permit Consolidated Net Worth as
of the end of each fiscal quarter, commencing with the fiscal quarter ending
January 31, 1996, to be less than $43,000,000.00 plus 50% of Consolidated Net
Income ( excluding any non-cash asset writedowns or impairment losses not to
exceed $10,000,000 in the aggregate at any such time) earned commencing August
1, 1995 and thereafter.
(c) International shall not permit EBITDA (i) for the fiscal
quarter ending April 30, 1996 to be less than $(2,500,000.00) and (ii) for each
fiscal quarter ending thereafter, to be less than $1,000,000.00, based on the
results of such quarter measured as of the end of such fiscal quarter.
Section 7.04. CONSOLIDATION, MERGERS AND ACQUISITIONS;
FUNDAMENTAL CHANGES. Except as otherwise provided herein, including, without
limitation, as provided in SECTION 7.09(G), International shall not, and shall
not permit any of its Subsidiaries, other than actions by Proler Environmental
Services, Inc., contemplated under SECTIONS 7.02, 7.09 or 7.11 without the prior
written consent of the Bank, to merge or consolidate with or acquire all or any
part of the outstanding capital stock or assets of any other Person (other than
purchases or other acquisitions of inventory and equipment in the ordinary
course of business) or liquidate, wind up or dissolve (or suffer any liquidation
or dissolution), or suffer a change in ownership directly or indirectly, except
that the following shall be permitted:
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(a) any Credit Party (other than International) may merge into
or consolidate with any Credit Party or with any other Subsidiary of any Credit
Party, PROVIDED that a Credit Party is the survivor; and
(b) any Subsidiary of a Credit Party may merge into or
consolidate with any other Subsidiary of any Credit Party, PROVIDED, that, if a
wholly-owned Subsidiary of a Credit Party is a party to such merger or
consolidation, a wholly-owned Subsidiary of a Credit Party is the survivor, and
PROVIDED, FURTHER, that if the outstanding shares of stock of a Subsidiary that
is a party to such a merger or consolidation are pledged to the Bank under the
Pledge Agreement, then the shares of such surviving Subsidiary which are held by
any Credit Party or any Subsidiary of a Credit Party shall be pledged to the
Bank under the Pledge Agreement.
Section 7.05. TRANSACTIONS WITH AFFILIATES. Subject to SECTION
7.16 hereof and the Investments allowed under SECTION 7.09(G), the Credit
Parties shall not, and shall not permit any of their Subsidiaries to, enter
into, or be a party to, any transaction with any Affiliate (including any Joint
Venture) except on terms and conditions as favorable (or more favorable) to such
Credit Party or such Subsidiary than would be obtained in a comparable arm's
length transaction between unrelated parties, PROVIDED, HOWEVER, that the Credit
Parties may deal with any Joint Venture as contemplated by SECTION 7.09(F) or
the Joint Venture Agreements or any other joint venture agreements to which they
are a party in accordance with past practice or within the bounds of good
business judgment.
Section 7.06. USE OF PROCEEDS. No proceeds of any Letter of
Credit shall be used by a Borrower for the purpose, whether immediate,
incidental or ultimate, of purchasing or carrying any "margin stock," within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System.
No Borrower shall engage principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock within the meaning of such Regulation U. No Borrower will request
the issuance of a Letter of Credit or Existing Letter of Credit for any purpose
other than as set forth herein.
Section 7.07. COMPLIANCE WITH ERISA. International shall not,
and shall not permit any of its Subsidiaries to, (a) terminate any Plan so as to
result in any liability to PBGC which could reasonably be expected to have a
Material Adverse Effect, (b) engage in any "prohibited transaction" (as defined
in Section 4975 of the Code) involving any Plan which would result in a
liability for an excise tax or civil penalty in connection therewith which could
reasonably be expected to have a Material Adverse Effect, (c) incur or suffer to
exist any "accumulated funding deficiency" (as defined in Section 302 of ERISA),
whether or not waived involving any Plan which could reasonably be expected to
have a Material Adverse Effect or (d) allow or suffer to exist any event or
condition, which presents a material risk of incurring a liability to PBGC by
reason of termination of any such Plan which could reasonably be expected to
have a Material Adverse Effect.
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Section 7.08. LIMITATION ON NEGATIVE PLEDGE CLAUSES. The
Credit Parties shall not, and shall not permit any of their Subsidiaries to,
enter into any agreement with any Person other than the Bank which prohibits or
limits the ability of the Credit Parties or any of their Subsidiaries to create,
incur, assume or suffer to exist any Lien upon any of their property, assets or
revenues, whether now owned or hereafter acquired, other than any such agreement
entered into by Proler Environmental Services, Inc., but not any other Credit
Party, in connection with the Indebtedness permitted by SECTION 7.02(D) hereof.
Section 7.09. INVESTMENTS. The Credit Parties shall not, and
shall not permit any of their Subsidiaries to, directly or indirectly, make any
Investments except:
(a) Investments existing on the Effective Date and listed on
EXHIBIT 7.09;
(b) Investments on terms customary in the industry involved in
the form of accounts receivable incurred, and Investments made in settlement of
such accounts receivable, all in the ordinary course of business of the Credit
Parties and their Subsidiaries;
(c) Permitted Investments;
(d) stock or securities received in the settlement of debts
(created in the ordinary course of business);
(e) travel advances to officers and employees made in the
ordinary course of business;
(f) Investments in Joint Ventures and Credit Parties;
PROVIDED, that Investments in Proler Environmental Services, Inc. shall be
limited as set forth in subclause (g) below; and
(g) Investments in the stock or assets of other Persons not to
exceed $3,000,000.00 if made in or to Proler Environmental Services, Inc. by any
other Credit Party for the purpose of funding the construction or
pre-construction costs, research, development, marketing, feasibility studies,
demonstration projects or similar items by Proler Environmental Services, Inc.
or a non-Credit Party Affiliate thereof of a gasification plant for which no
recourse exists to any other Credit Party.
Section 7.10. SALE AND LEASEBACK. International shall not, and
shall not permit any of its Subsidiaries to, enter into any arrangement with any
Person providing for the leasing by International or a Subsidiary of
International of real or personal property which has been or is to be sold or
transferred by International or such Subsidiary to such Person or to any other
Person to whom funds have been or are to be advanced by such Person on the
security of such property or
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rental obligations of International or such Subsidiary, other than leases
entered into in connection with any project financed in whole or in part by
Indebtedness permitted by SECTION 7.02(D), which shall be without recourse to
any Credit Party other than Proler Environmental Services, Inc. and which
together with all other Indebtedness incurred in respect of such project, shall
not exceed $20,000,000.00 in the aggregate.
Section 7.11. CAPITAL EXPENDITURES. International shall not
incur Consolidated Capital Expenditures (exclusive of (A) any Consolidated
Capital Expenditures attributable to capital expenditures made by International
or Proler Environmental Services, Inc. in connection with any project financed
in whole or in part by Indebtedness permitted by SECTIONS 7.02(D), 7.02(E),
7.02(F) or 7.10, which expenditures shall be a part of, and may not exceed the
amount permitted by SECTIONS 7.02(D), 7.02(E) or 7.02(F) and (B) exclusive of
Investments permitted by SECTION 7.09) in an aggregate amount in excess of
$1,000,000.00 for any fiscal quarter during the term of this Agreement, which
Consolidated Capital Expenditures shall not exceed $4,000,000.00 in the
aggregate for the fiscal year ending January 31, 1997.
Section 7.12. LIMITATION ON RESTRICTIONS AFFECTING
SUBSIDIARIES. International shall not, and shall not permit any of its
Subsidiaries to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction of any kind, on the ability
of any such Subsidiary to (a) pay dividends or make any distributions on its
capital stock or joint venture or partnership interests, (b) pay any
indebtedness to International or any other Subsidiary of International, (c) make
loans or advances to International or any Subsidiary of International or (d)
transfer any of its property or assets to International or any Subsidiary of
International, other than, in the case of each of the foregoing clauses (a)
through (d), any such encumbrance or restriction created by Proler Environmental
Services, Inc. in connection with any Indebtedness permitted by SECTION 7.02(D).
Section 7.13. RESTRICTED PAYMENTS. Except as contemplated or
permitted by the Rights Agreement dated as of February 28, 1996, as amended or
modified, International shall not directly or indirectly declare, order, pay,
make or set apart any Restricted Payment without the prior written consent of
the Bank.
Section 7.14. OTHER BUSINESS. The Credit Parties will not
engage, and will not permit any of their Subsidiaries to engage, in any lines of
business other than the business in which they are engaged on the Effective Date
and other activities incidental or related to such business, including, without
limitation, lines of business relating to processing, treatment and disposal of
waste streams and the sale, use or marketing of products produced in connection
therewith or the licensing of technology in connection therewith.
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Section 7.15. JOINT VENTURE AGREEMENTS. The Joint Venture
Agreements shall not be modified, amended, terminated or otherwise affected
without the prior written consent of the Bank.
Section 7.16. NO TRANSFERS TO AFFILIATES. Other than as
permitted by SECTIONS 7.05 and 7.09, the Credit Parties shall not transfer to
all of their Affiliates any assets, having a value in excess of $1,000,000 in
the aggregate, during the term hereof, unless said transfer is paid for by said
Affiliate with cash as of the time of the transfer.
ARTICLE VIII
DEFAULT AND REMEDIES
Section 8.01. EVENTS OF DEFAULT. If any of the following
events ("EVENTS OF DEFAULT") shall occur and be continuing, namely:
(a) a Borrower shall fail to pay when due any installment of
principal of or interest owed by it on any Advance or other amount due
hereunder, under the Notes or any Loan Document to which it is a party; or
(b) a Borrower shall fail to pay immediately upon demand by
the Bank the amount paid by the Bank pursuant to a draft presented under an
Existing Letter of Credit or a Letter of Credit issued for the account of such
Borrower; or
(c) any other Credit Party shall fail to pay any amount
payable to the Bank by such Credit Party hereunder or under any other Loan
Document to which it is a party when due thereunder; or
(d) International shall fail to comply with or perform any
covenant, agreement or condition in ARTICLE VII hereof; or
(e) any Credit Party shall fail to perform any other term,
covenant or agreement contained herein or in any other Loan Document to which it
is a party which failure could reasonably be expected to have a Material Adverse
Effect and such failure shall not have been remedied within thirty (30) days
after the earlier of (i) the discovery thereof by the Credit Party or (ii) the
receipt of written notice thereof by International from the Bank; or
(f) any representation or warranty made by any Credit Party in
any Loan Document to which it is a party or in any certificate, agreement,
instrument or statement
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contemplated by or delivered pursuant to, or in connection with, any Loan
Document shall prove to have been incorrect in any material respect when made;
or
(g) any Credit Party shall (i) fail to pay any Indebtedness
owing to the Bank evidenced by a promissory note, credit agreement or letter of
credit application; (ii) fail to pay any other Indebtedness having a principal
amount in excess of $250,000.00 (other than the amounts referred to in
subsections (a) and (b) of this SECTION 8.01) owing by such Person, or any
interest or premium thereon, when due (or, if permitted by the terms of the
relevant document, within any applicable grace period), whether such
Indebtedness shall become due by scheduled maturity, by required prepayment, by
acceleration, by demand or otherwise; or (iii) fail to perform any term,
covenant or condition on its part to be performed under any agreement or
instrument evidencing, securing or relating to any such Indebtedness, when
required to be performed, and such failure shall continue after the applicable
grace period, if any, specified in such agreement or instrument, if the effect
of such failure is to accelerate, or to permit the holder or holders of such
Indebtedness to accelerate, the maturity of such Indebtedness; or
(h) any Loan Document shall (other than with the consent of
the Bank), at any time after its execution and delivery and for any reason,
cease to be in full force and effect or to provide the Liens contemplated
thereby, except for such provisions or Liens that the Bank determines are not
material either individually or in the aggregate, or shall be declared to be
null and void, or the validity or enforceability thereof or of the Liens
contemplated thereby shall be contested by any Credit Party to the Loan
Documents or any such Credit Party shall deny that it has any or further
liability or obligation under any Loan Document; or
(i) any Reportable Event that might constitute grounds for the
termination of any Plan, or for the appointment by an appropriate United States
district court of a trustee to administer any Plan, shall have occurred and be
continuing for at least thirty (30) days, or any Plan shall be terminated, or a
trustee shall be appointed by an appropriate United States district court to
administer any Plan, or the PBGC shall institute proceedings to terminate any
Plan or to appoint a trustee to administer any Plan, and, in any such event, the
then-current value of such Plan's benefits guaranteed under Title IV of ERISA at
the time shall exceed by more than $270,000.00 the then-current value of such
Plan's assets, allocable to such benefits at such time; or
(j) any Credit Party shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, or shall consent to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment
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for the benefit of creditors, or shall fail generally to pay its debts as they
become due, or shall take any corporate action to authorize any of the
foregoing; or
(k) an involuntary case or other proceeding shall be commenced
against any Credit Party seeking liquidation, reorganization or other relief
with respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 90 days; or an order for
relief shall be entered against such Credit Party under the federal bankruptcy
laws as now or hereafter in effect; or
(l) a final judgment or order for the payment of money in
excess of $270,000.00 (net of acknowledged, uncontested insurance coverage)
shall be rendered against any Credit Party and either (i) enforcement
proceedings shall have been commenced by any creditor upon such judgment or
order or (ii) a stay of enforcement of such judgment or order by reason of a
pending appeal or otherwise, shall not be in effect for any period of thirty
(30) consecutive days; or
(m) any single Person shall in a single transaction or a
series of related transactions acquire control of more than 51% of
International's capital stock;
then, (x) upon the occurrence of any Event of Default described in SECTION
8.01(J) or SECTION 8.01(K), (i) the Commitment shall automatically terminate and
the Bank's obligation to issue Letters of Credit shall automatically terminate
and (ii) the unpaid principal amount of and accrued interest on all Advances
together with all other amounts owing by the Credit Parties under this
Agreement, the Notes, the other Loan Documents and any other agreement or
security document contemplated by or delivered in connection with this Agreement
(including all L/C Obligations and Existing L/C Obligations) shall automatically
become immediately due and payable without, in any case, presentment for
payment, further demand, protest, notice of intent to accelerate, notice of
acceleration or further notice of any kind, all of which are hereby expressly
waived by each Borrower, and (y) upon the occurrence of any other Event of
Default, the Bank may, by notice to International, (i) declare the Commitment to
be terminated, whereupon the same shall forthwith terminate and (ii) declare the
entire unpaid principal amount of all Advances, all interest accrued and unpaid
thereon and all other amounts payable by any Credit Party under this Agreement
(including all L/C Obligations and Existing L/C Obligations), the Notes, the
other Loan Documents and any other agreement or security document contemplated
by or delivered in connection with this Agreement, to be forthwith due and
payable, whereupon all such amounts shall become and be forthwith due and
payable, without presentment for payment, further demand, protest, notice of
intent to accelerate, notice of acceleration or further notice of any kind, all
of which are hereby expressly waived by each Borrower. With respect to all
Letters of Credit and Existing Letters of Credit as to which presentment for
honor shall not have occurred at the time of an acceleration
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pursuant to clause (x) or (y) above, the Borrower for the account of which any
of such Letters of Credit or Existing Letters of Credit were issued shall at
such time deposit in a cash collateral account opened by the Bank an amount
equal to the aggregate undrawn face amount of such Letters of Credit and
Existing Letters of Credit issued for its account. Amounts held in such cash
collateral account shall be applied by the Bank to the payment of drafts drawn
under such Letters of Credit and Existing Letters of Credit, and the unused
portion thereof after all such Letters of Credit and Existing Letters of Credit
shall have expired or been fully drawn upon, if any, shall be applied to repay
other obligations of such Borrower hereunder and under the Notes and the other
Loan Documents. After all such Letters of Credit and Existing Letters of Credit
shall have expired or been fully drawn upon, all L/C Obligations and Existing
L/C Obligations shall have been satisfied and all other obligations of each
Borrower hereunder and under the Notes and the other Loan Documents shall have
been paid in full, the balance, if any, in such cash collateral account shall be
returned to each Borrower that deposited such cash collateral to be applied by
the Borrowers as their interests may appear.
Section 8.02. SET-OFF IN EVENT OF DEFAULT. Upon the occurrence
and during the continuance of any Event of Default, the Bank is hereby
authorized, at any time and from time to time, without notice to the Borrowers
or any other Credit Party (any such notice being expressly waived by the Credit
Party) and to the fullest extent permitted by applicable law, to set-off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Bank or
any branch, subsidiary or Affiliate of the Bank to or for the credit or the
account of any Credit Party against any and all of the obligations of such
Credit Party, now or hereafter existing under this Agreement (including all L/C
Obligations and Existing L/C Obligations), the Notes or the other Loan Documents
to which each such Credit Party is a party, irrespective of whether or not the
Bank shall have made any demand for satisfaction of such Obligations and
although such Obligations may be unmatured. The Bank agrees to notify
International promptly after any such set-off and application made by the Bank;
PROVIDED, HOWEVER, that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Bank under this
Section are in addition to other rights and remedies (including other rights of
set-off) which the Bank may have hereunder or under any applicable law.
ARTICLE IX
MISCELLANEOUS
Section 9.01. AMENDMENTS. No modification, amendment or waiver
of any provision of this Agreement (including, without limitation, the
Guaranty), the Notes or any other Loan Document, or consent to any departure by
any Credit Party herefrom or therefrom, shall in any event be effective unless
the same shall be in writing and signed by the Bank and each Credit Party
thereto, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
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Section 9.02. NOTICES. All notices, consents, requests,
approvals, demands and other communications (collectively, "COMMUNICATIONS")
provided for herein and in the other Loan Documents shall be in writing
(including telecopied communications) and mailed, telecopied or delivered as
follows:
if to International or any other Credit Party to, or in care of--
Proler International Corp.
4265 San Felipe, Suite 900
Houston, Texas 77027
Attention: Steven F. Gilliland
Telecopy No.: (713) 627-2737
with a copy to:
Mayor, Day, Caldwell & Keeton, L.L.P.
700 Louisiana, Suite 1900
Houston, Texas 77002
Attention: Gail Merel
Telecopy No.: (713) 225-7047
if to the Bank --
Texas Commerce Bank National Association
712 Main Street
Houston, Texas 77002
Attention: Stephen H. Oglesby or
Curtis D. Karges
Telecopy No.: (713) 236-6004
with a copy to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Attention: Thomas J. Perich
Telecopy No.: (713) 220-4285
or at such other address as the Bank or any Credit Party shall designate in a
Communication to each of the other parties hereto. All Communications shall be
effective, in the case of written or telecopied communications, three days after
being deposited in the mail, or upon the date sent by
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telecopy or (in the case of Communications which are not mailed or telecopied)
when delivered and (if a Communication is sent by telecopy or delivered) receipt
thereof is confirmed, respectively, in each case addressed as aforesaid.
Notwithstanding the foregoing, all Borrowing Requests shall not be effective
until received by the Bank.
Section 9.03. COSTS, EXPENSES AND TAXES. The Borrowers agree
to pay on demand all reasonable costs and expenses of the Bank in connection
with (a) the administration of the Loan Documents, the Letters of Credit and the
preparation, execution, delivery, filing, recording and administration of this
Agreement, the Advances, the Notes, the Letters of Credit, the Existing Letters
of Credit and the other Loan Documents and any other agreements or security
documents delivered in connection with or pursuant to any of the Loan Documents,
including the reasonable fees and out-of-pocket expenses of Andrews & Kurth
L.L.P., counsel for the Bank and any local counsel who may be retained by such
counsel, and the cost of any and all appraisals, surveys, environmental audits
or studies subject to the limitations of SECTION 6.01(L), title insurance
policies and similar items required hereby, (b) all reasonable costs and
expenses, if any, incurred by the Bank in connection with the enforcement of
this Agreement and the other Loan Documents and any other agreements or security
documents executed in connection with or pursuant to any of the Loan Documents,
including the reasonable fees and out-of-pocket expenses of counsel for the Bank
and any local counsel who may be retained by such counsel, and (c) the
reasonable costs and expenses in connection with the custody, preservation, use
or operation of, or the sale of, or collection from, or other realization upon
the collateral covered by any of the Loan Documents. The agreements of the
Borrowers contained in this Section shall survive the termination of the
Commitment and the payment of all amounts owing by any Credit Party hereunder or
under any of the other Loan Documents.
Section 9.04. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This
Agreement shall be binding upon and inure to the benefit of the Credit Parties,
the Bank and their respective successors and assigns, except that no Credit
Party may assign or transfer its respective rights hereunder without the prior
written consent of the Bank.
Section 9.05. INDEPENDENCE OF COVENANTS. All covenants
contained in the Loan Documents shall be given independent effect so that if a
particular action or condition is not permitted by any of such covenants, the
fact that such action or condition would be permitted by an exception to, or
otherwise be within the limitations of, another covenant shall not avoid the
occurrence of a Default or an Event of Default if such action is taken or
condition exists.
Section 9.06. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained in this Agreement and the other Loan
Documents, or made in writing by any Credit Party in connection herewith or
therewith, shall survive the execution and delivery of this Agreement, the
Notes, any Letters of Credit, the Existing Letters of Credit and the other Loan
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Documents. Any investigation by the Bank shall not diminish in any respect
whatsoever its right to rely on such representations and warranties.
Section 9.07. SEPARABILITY. Should any clause, sentence,
paragraph, subsection, Section or Article of this Agreement be judicially
declared to be invalid, unenforceable or void, such decision will not have the
effect of invalidating or voiding the remainder of this Agreement, and the
parties hereto agree that the part or parts of this Agreement so held to be
invalid, unenforceable or void will be deemed to have been stricken herefrom by
the parties hereto, and the remainder will have the same force and effectiveness
as if such stricken part or parts had never been included herein.
Section 9.08. NO WAIVER; REMEDIES. No failure on the part of
the Bank to exercise, and any delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies provided in this Agreement and the Notes are
cumulative and not exclusive of any remedies provided in any of the other Loan
Documents or by law.
Section 9.09. COUNTERPARTS. This Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original,
and all of which taken together shall constitute one and the same agreement.
Section 9.10. GOVERNING LAW. This Agreement, the Notes, the
Letters of Credit, the Existing Letters of Credit and, unless otherwise
specified therein, all other Loan Documents and all other documents executed in
connection herewith or therewith, shall be deemed to be contracts and agreements
executed by Credit Parties and the Bank under the laws of the State of Texas and
of the United States and for all purposes shall be construed in accordance with,
and governed by, the laws of the State of Texas and of the United States.
Without limitation of the foregoing, nothing in this Agreement, the Notes or any
other Loan Documents shall be deemed to constitute a waiver of any rights which
the Bank may have under federal legislation relating to the rate of interest
which the Bank may contract for, take, receive, reserve or charge in respect of
any Advance or any of the Obligations. The Bank and the Borrowers further agree
that insofar as the provisions of Article 1.04, Subtitle 1, Title 79, of the
Revised Civil Statutes of Texas, 1925, as amended, are applicable to the
determination of the Highest Lawful Rate with respect to the Obligations, the
indicated (weekly) rate ceiling computed from time to time pursuant to Section
(a) of such Article shall apply to the other Obligations; PROVIDED, HOWEVER,
that to the extent permitted by such Article, the Bank may from time to time by
notice from the Bank to the Borrowers revise the election of such interest rate
ceiling as such ceiling affects the then current or future balances outstanding
under the Notes. The provisions of Chapter 15 of Subtitle 3 of the said Title 79
do not apply to this Agreement, the Notes or any transactions contemplated by
any Loan Document.
-64-
Section 9.11. LIMITATION ON INTEREST. Each provision in this
Agreement, the Notes, the Letters of Credit, the Existing Letters of Credit and
each other Loan Document is expressly limited so that in no event whatsoever
shall the amount paid, or otherwise agreed to be paid, to the Bank for the use,
forbearance or detention of the money to be advanced under this Agreement, the
Notes or any other Loan Document or otherwise (including any sums paid as
required by any covenant or obligation contained herein or in any other Loan
Document which is for the use, forbearance or detention of such money), exceed
that amount of money which would cause the effective rate of interest to exceed
the Highest Lawful Rate, and all amounts owed under this Agreement and each
other Loan Document shall be held to be subject to reduction to the effect that
such amounts so paid or agreed to be paid which are for the use, forbearance or
detention of money under this Agreement or such Loan Document shall in all
events be less than that amount of money which would cause the effective rate of
interest to exceed the Highest Lawful Rate. Anything in this Agreement, the
Notes, the Letters of Credit, the Existing Letters of Credit or any other Loan
Document to the contrary notwithstanding, no Borrower shall ever be required to
pay unearned interest on the Advances or any of the other Obligations or ever be
required to pay interest on the Advances or any of the other Obligations at a
rate in excess of the Highest Lawful Rate, or if the holder of any of the
Advances or any of the other Obligations shall receive any unearned interest or
shall receive monies that are deemed to constitute interest which would increase
the effective rate of interest payable by either or both Borrowers under this
Agreement, the Notes and the other Loan Documents to a rate in excess of the
Highest Lawful Rate, then (a) the amount of interest which would otherwise be
payable by the Borrowers under this Agreement, the Notes and other Loan
Documents shall be reduced to the amount allowed under applicable law and (b)
any unearned interest paid by a Borrower or any interest paid by a Borrower in
excess of the Highest Lawful Rate shall be in the first instance credited on the
principal of the applicable Note with the excess thereof, if any, refunded to
such Borrower. It is further agreed that, without limitation of the foregoing,
all calculations of the rate of interest contracted for, charged or received by
the Bank under the Notes, this Agreement, the Letters of Credit, the Existing
Letters of Credit or the other Loan Documents, are made for the purpose of
determining whether such rate exceeds the Highest Lawful Rate, and shall be
made, to the extent permitted by usury laws applicable to the Bank (now or
hereafter enacted), by amortizing, prorating, allocating and spreading in equal
parts during the period of the full stated term of the Obligations evidenced by
the Notes all interest at any time contracted for, charged or received by the
Bank in connection therewith. If at any time and from time to time, (x) the
amount of interest payable to the Bank on any date shall be computed at the
Highest Lawful Rate pursuant to this Section and (y) in respect of any
subsequent interest computation period the amount of interest otherwise payable
to the Bank would be less than the amount of interest payable to the Bank
computed at the Highest Lawful Rate, then to the extent permitted by applicable
usury law, the amount of interest payable to the Bank in respect of such
subsequent interest computation period shall continue to be computed at the
Highest Lawful Rate until the total amount of interest payable to the Bank shall
equal the total amount of interest which would have been payable to the Bank if
the total amount of interest had been computed without giving effect to this
Section.
-65-
Section 9.12. INDEMNIFICATION. (a) Each of the Borrowers and
each other Credit Party agrees to indemnify, defend and hold the Bank, as well
as its officers, employees, agents, directors, shareholders, counsels and
Affiliates (collectively, "INDEMNIFIED PERSONS") harmless from and against any
and all loss, liability, damage, judgment, claim, deficiency, penalty, fine,
response and remediation cost, stabilization cost, encapsulation cost,
treatment, storage or disposal cost, groundwater monitoring or environmental
sampling cost or any other reasonable cost or expense (including interest,
penalties, reasonable attorneys', experts' or consultants' fees, and
disbursements in connection with any investigative, administrative or judicial
proceeding and amounts paid in settlement) (collectively, "INDEMNIFIED
LIABILITIES") incurred by or asserted against any Indemnified Person arising out
of, in any way connected with, or as a result of (i) the execution and delivery
of this Agreement and the other Loan Documents, the performance by the parties
hereto and thereto of their respective obligations hereunder and thereunder
(including the making of the Commitment of the Bank) and consummation of the
transactions contemplated hereby and thereby, (ii) the actual or proposed use of
the Letters of Credit or the Existing Letters of Credit or the proceeds of the
Advances, (iii) any past, present or future violation by a Borrower, any of its
respective Subsidiaries, any operator who is not an Indemnified Person of the
Mortgaged Properties, or any other Person (other than any Indemnified Person) of
any requirement of law, including Environmental Laws, with regard to the
ownership, operation, use or occupancy of the Mortgaged Properties occurring at
any time prior to the repayment in full of the Advances and the other
Obligations, (iv) solely insofar as any of the following arises out of any
Mortgaged Property, the past, present or future treatment, storage, disposal,
generation, use, transport, movement, migration, presence, release, spill or
emission of any pollutants, contaminants, Hazardous Materials, or hazardous or
toxic substances or wastes into or onto soil, land, surface water, ground water,
watercourses, publicly-owned treatment works, drains, sewer systems, wetlands or
septic systems occurring at any time prior to the repayment in full of the
Advances and the other Obligations, (v) ownership by the Bank of any real or
personal property following rightful foreclosure under the Security Documents,
to the extent such losses, liabilities, damages, judgments, claims, deficiencies
or expenses arise out of or result from the presence or release of any Hazardous
Materials in, on or under such property during the period owned, leased or
operated by a Borrower or any of its respective Subsidiaries, including, without
limitation, losses, liabilities, damages, judgments, claims, deficiencies or
expenses which are imposed under Environmental Laws upon Persons by virtue of
their ownership, (vi) foreseeable consequential or punitive damages incurred as
a result of any matter or claim described above or (vii) any claim, litigation,
investigation or proceeding relating to any of the foregoing, whether or not any
Indemnified Person is a party thereto.
(b) WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR ANY OF
THE OTHER LOAN DOCUMENTS BUT IN ALL EVENTS SUBJECT TO SUBPARAGRAPH (C) OF THIS
SECTION 9.12, IT IS THE EXPRESS INTENTION OF EACH BORROWER AND THE OTHER CREDIT
PARTIES THAT EACH INDEMNIFIED PERSON SHALL BE INDEMNIFIED AND HELD HARMLESS
AGAINST ANY AND ALL
-66-
LOSSES, LIABILITIES, CLAIMS, DEFICIENCIES, JUDGMENTS OR REASONABLE EXPENSES
ARISING OUT OF OR RESULTING FROM THE ORDINARY NEGLIGENCE (WHETHER SOLE OR
CONTRIBUTORY) OF SUCH INDEMNIFIED PERSON. THE OBLIGATIONS OF EACH BORROWER AND
THE OTHER CREDIT PARTIES UNDER THIS SECTION 9.12 SHALL SURVIVE THE TERMINATION
OF THIS AGREEMENT AND THE COMMITMENT AND THE REPAYMENT OF THE OBLIGATIONS.
(c) Notwithstanding any other provision of this Agreement or
any other Loan Document or any other document or instrument, in no event shall
any Credit Party be liable in any manner with respect to any or all Indemnified
Liabilities to the extent arising from any acts or omissions constituting gross
negligence or willful misconduct on the part of any Indemnified Person.
(d) With respect to all Indemnified Liabilities relating to
any Mortgaged Property or any Hazardous Material or any Environmental Law,
notwithstanding any other provision of this Agreement or any other Loan Document
or any other document or instrument, no Credit Party shall be liable (x) for any
acts of any Indemnified Person or of any Person acting on behalf of or at the
direction of any Indemnified Person, or (y) in the event that any Indemnified
Person, or any Person acting on behalf of or at the direction of any Indemnified
Person, is judicially or administratively determined to be a Person having
management participation or otherwise exercising control within the meaning of
the Environmental Laws in effect on the date of this Agreement, for any omission
of any Indemnified Person or any omission of any Person acting on behalf of, or
at the direction of any Indemnified Person, or (z) for any act or omission of
any Person occurring from and after the date on which none of the Credit Parties
holds title to such Mortgaged Property; PROVIDED, HOWEVER, that this clause (z)
shall not release any Credit Party from any liability which it would otherwise
have under this subparagraph (d) for conditions arising prior to said date as to
which any Indemnified Liability is asserted subsequent to said date.
Section 9.13. NOTICE AND DEFENSE OF CLAIMS. (a) The Credit
Parties shall give prompt notice to the Bank of:
(i) their receipt of any correspondence, demand, notice,
order, complaint, notice of violation, assessment, claim or request for
information issued pursuant to or under color of any Environmental Laws
or which refers to any Hazardous Materials from any federal, state or
local governmental authority or from any private party or organization
with respect to the Mortgaged Properties, any operator of the Mortgaged
Properties or any Credit Party, which, in the reasonable good faith
judgment of the Credit Parties, is likely to result in a Material
Adverse Effect;
(ii) the institution of any claim, suit, action, investigation
or administrative or judicial proceeding or action (formal or informal) of which
the Credit Parties are aware,
-67-
brought with regard to the condition, use, ownership, operation,
occupancy or maintenance of the Mortgaged Properties under the
Environmental Laws or relating to Hazardous Materials which claim,
suit, action, investigation or administrative or judicial proceeding or
action, in the reasonable good faith judgment of the Credit Parties, is
likely to result in a Material Adverse Effect; and
(iii) the discovery or detection, of which the Credit Parties
are aware, by any Person, of Hazardous Materials on the Mortgaged
Properties which, in the reasonable good faith judgment of the Credit
Parties, is likely to result in a Material Adverse Effect.
(b) The Credit Parties shall retain the exclusive right, at
their option, to compromise, settle or defend, at their expense and with their
own counsel, any Indemnified Liabilities; PROVIDED, HOWEVER, that the Credit
Parties shall provide the Bank with all such copies of documents and pleadings
relating to such Indemnified Liabilities as the Bank may reasonably request;
PROVIDED, FURTHER, that in the case of any action in which any Indemnified
Person is a named party thereto, such counsel retained by the Credit Parties
shall be reasonably acceptable to such Indemnified Person. In the case of any
such action in which an Indemnified Person is a named party thereto, the Credit
Parties, at the request of such Indemnified Person, shall keep such Indemnified
Person apprised of all matters relevant to such action and such Indemnified
Person shall have the full right, at its own expense, to participate, through
counsel or otherwise, in all meetings and proceedings with adverse parties or
governmental authorities (other than any confidential meetings unrelated to
claims against such Indemnified Person); PROVIDED, HOWEVER, that if any of the
Credit Parties give notice in writing to such Indemnified Person that the Credit
Parties do not intend, for whatever reason, to defend any such action, then such
Indemnified Person may prosecute its own defense or response with its own
counsel and the reasonable fees of such counsel shall be at the expense of the
Credit Parties for that portion of the action relating to any Indemnified
Liabilities if: (x) such Indemnified Person shall prosecute such defense or
response diligently and in an appropriate manner and (y) such Indemnified
Person, at the request of any of the Credit Parties, shall keep the Credit
Parties apprised of all matters relevant to such action; PROVIDED, FURTHER, that
in the event that such Indemnified Person does not consent to any settlement or
compromise proposed by the parties to such action and acceptable to the Credit
Parties, then the liability of the Credit Parties under SECTIONS 9.12 and 9.13
of this Agreement for any Indemnified Liabilities shall not exceed that
liability which the Credit Parties would have had if such Indemnified Person had
consented to such settlement or compromise.
(c) Upon the occurrence of any of the events contemplated by
subsection (a) above relating to any Mortgaged Property, the Bank shall have
(but need not exercise) the right to retain, at its own expense, consultants and
specialists of the Bank's choice to assess the necessity for and appropriateness
of the investigation, removal, remediation, encapsulation or other treatment of
any Hazardous Materials found on the Mortgaged Properties. If the Bank
reasonably determines that
-68-
any such activities are necessary and appropriate to prevent the occurrence of a
Material Adverse Effect, it shall deliver written notice to the Credit Parties
of the basis of such determination, describing such activities with reasonable
specificity. Upon receipt of such notice, and if such activities are required by
law, the Credit Parties will diligently, and in a reasonable manner, undertake
and complete such activities to the Bank's reasonable satisfaction, at the
Credit Parties' sole expense.
(d) The Indemnified Persons shall give prompt written notice
to the Credit Parties of any claim against the Indemnified Persons which might
give rise to a claim by the Indemnified Persons against the Credit Parties under
SECTION 9.12.
Section 9.14. LIMITATION BY LAW. All rights, remedies and
powers provided in this Agreement and the other Loan Documents may be exercised
only to the extent that the exercise thereof does not violate any applicable
provision of law, and all the provisions of this Agreement and the other Loan
Documents are intended to be subject to all applicable mandatory provisions of
law which may be controlling and to be limited to the extent necessary so that
they will not render this Agreement or any other Loan Document invalid,
unenforceable, in whole or in part, or not entitled to be recorded, registered
or filed under the provisions of any applicable law.
Section 9.15. INTERPRETATION. (a) In this Agreement, unless a
clear contrary intention appears:
(i) the singular number includes the plural number and VICE
VERSA;
(ii) reference to any gender includes each other gender;
(iii) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Agreement as a whole and not to
any particular Article, Section or other subdivision;
(iv) reference to any Person includes such Person's successors
and assigns but, if applicable, only if such successors and assigns are
permitted by this Agreement, and reference to a Person in a particular
capacity excludes such Person in any other capacity or individually,
PROVIDED that nothing in this clause (iv) is intended to authorize any
assignment not otherwise permitted by this Agreement;
(v) reference to any agreement, document or instrument means
such agreement, document or instrument as amended, supplemented or
modified and in effect from time to time in accordance with the terms
thereof and, if applicable, the terms hereof, and reference
-69-
to any Note includes any note issued pursuant hereto in extension or
renewal thereof and in substitution or replacement therefor;
(vi) unless the context indicates otherwise, reference to any
Article, Section, Schedule or Exhibit means such Article or Section
hereof or such Schedule or Exhibit hereto;
(vii) the words "including" (and with correlative meaning
"include") means including, without limiting the generality of any
description preceding such term;
(viii) with respect to the determination of any period of
time, the word "from" means "from and including" and the word "to"
means "to but excluding";
(ix) reference to any law means such as amended, modified,
codified or reenacted, in whole or in part, and in effect from time to
time; and
(x) whenever any accounting computation is required to be
made, for purposes hereof, such computation shall be made in accordance
with GAAP.
(b) The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.
(c) No provision of this Agreement shall be interpreted or
construed against any Person solely because that Person or its legal
representative drafted such provision.
Section 9.16. WAIVER OF TEXAS DECEPTIVE TRADE PRACTICES ACT.
EACH CREDIT PARTY HEREBY WAIVES ALL RIGHTS, REMEDIES, CLAIMS, DEMANDS AND CAUSES
OF ACTION BASED UPON OR RELATED TO THE TEXAS DECEPTIVE TRADE PRACTICES-CONSUMER
PROTECTION ACT AS DESCRIBED IN SECTION 17.41 ET SEQ. OF THE TEXAS BUSINESS &
COMMERCE CODE, AS THE SAME PERTAINS OR MAY PERTAIN TO ANY OF THE LOAN DOCUMENTS
OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, TO THE MAXIMUM EXTENT THAT SUCH
RIGHTS, ETC. MAY LAWFULLY AND EFFECTIVELY BE WAIVED. IN FURTHERANCE OF THIS
WAIVER, EACH UNDERSIGNED OBLIGOR UNDER THE LOAN DOCUMENTS HEREBY REPRESENTS AND
WARRANTS THAT (A) EACH SUCH CREDIT PARTY HAS ASSETS OF $5,000,000.00 OR GREATER
ACCORDING TO ITS MOST RECENT FINANCIAL STATEMENT PREPARED IN ACCORDANCE WITH
GAAP AND HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT
ENABLE IT TO EVALUATE THE MERITS AND RISKS OF A TRANSACTION, (B) EACH SUCH
CREDIT PARTY IS REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH THE NEGOTIATION,
EXECUTION AND DELIVERY OF THE LOAN DOCUMENTS AND (C) NO SUCH CREDIT PARTY
CONSIDERS ITSELF TO BE IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION WITH
RESPECT TO THE LOAN DOCUMENTS.
-70-
Section 9.17. RELEASES. EACH CREDIT PARTY HEREBY RELEASES,
DISCHARGES AND ACQUITS FOREVER THE BANK AND ITS OFFICERS, DIRECTORS, TRUSTEES,
AGENTS, EMPLOYEES AND COUNSEL (IN EACH CASE, PAST, PRESENT OR FUTURE) FROM ANY
AND ALL CLAIMS EXISTING AS OF THE DATE HEREOF (OR THE DATE OF ACTUAL EXECUTION
HEREOF BY THE APPLICABLE PERSON OR ENTITY, IF LATER). AS USED HEREIN, THE TERM
"CLAIM" SHALL MEAN ANY AND ALL LIABILITIES, CLAIMS, DEFENSES, DEMANDS, ACTIONS,
CAUSES OF ACTION, JUDGMENTS, DEFICIENCIES, INTEREST, LIENS, COSTS OR EXPENSES
(INCLUDING COURT COSTS, PENALTIES, ATTORNEYS' FEES AND DISBURSEMENTS AND AMOUNTS
PAID IN SETTLEMENT) OF ANY KIND AND CHARACTER WHATSOEVER, INCLUDING CLAIMS FOR
USURY, BREACH OF CONTRACT, BREACH OF COMMITMENT, NEGLIGENT MISREPRESENTATION OR
FAILURE TO ACT IN GOOD FAITH, IN EACH CASE WHETHER NOW KNOWN OR UNKNOWN,
SUSPECTED OR UNSUSPECTED, ASSERTED OR UNASSERTED OR PRIMARY OR CONTINGENT, AND
WHETHER ARISING OUT OF WRITTEN DOCUMENTS, UNWRITTEN UNDERTAKINGS, COURSE OF
CONDUCT, TORT, VIOLATIONS OF LAWS OR REGULATIONS OR OTHERWISE ARISING OUT OF
THIS TRANSACTION, THE TRANSACTION CONTEMPLATED BY ANY PRIOR AGREEMENTS, AND ALL
RELATED DOCUMENTS, TRANSACTIONS AND EVENTS.
Section 9.18. FINAL AGREEMENT OF THE PARTIES. THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION
26.02(A) OF THE TEXAS BUSINESS & COMMERCE CODE, AND REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
-71-
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first above written.
BORROWERS:
PROLER INTERNATIONAL CORP.
By: /S/ MICHAEL F. LOY
Michael F. Loy
Vice President - Finance
JOINT VENTURE OPERATIONS, INC.
By: /S/ MICHAEL F. LOY
Michael F. Loy
Vice President - Finance
-72-
GUARANTORS:
PROLER INTERNATIONAL CORP.
JOINT VENTURE OPERATIONS, INC.
PROLER POWER MARKETING, INC.
PROLER STEEL, INC.
PROLER INDUSTRIES, INC.
PROLERIDE TRANSPORT SYSTEMS, INC.
PROLER RECYCLING, INC.
PROLER ENVIRONMENTAL
SERVICES, INC.
PROLER PROPERTIES, INC.
By: /S/ MICHAEL F. LOY
Michael F. Loy
Vice President - Finance
-73-
BANK:
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
By: /S/ CURTIS D. KARGES
Curtis D. Karges
Senior Vice President
-74-
EXHIBIT 21
PROLER INTERNATIONAL CORP. (THE "COMPANY") AND SUBSIDIARIES
The following table provides certain information as to (i) each direct
and indirect subsidiary of the Company and (ii) each of the Company's joint
operations:
<TABLE>
<CAPTION>
RELATIONSHIP
TO COMPANY
OR A
NAME OF ENTERPRISE SUBSIDIARY (1)
The Company, Proler International Corp., a Delaware corporation
Subsidiaries of the Company:
<S> <C>
Proler Steel, Inc., a Delaware corporation................................................... 100%
Proler Industries, Inc., a Delaware corporation.............................................. 100%
Joint Venture Operations, Inc., a Delaware corporation
(formerly Proler International Corp.).....................................................100%(2)
Proleride Transport Systems, Inc., a Delaware corporation....................................100%(3)
Prolerized Steel Corporation, a Delaware Corporation.........................................100%(4)
Proler Properties, Inc., a Texas corporation (formerly Buffalo Steel Corp.)..................100%(4)
MRI Corporation, a Delaware corporation......................................................100%(4)
Proler Environmental Services, Inc., a Delaware corporation..................................100%(4)
Proler Recycling, Inc., (formerly Proler Elemental Refining, Inc.)
a Delaware corporation....................................................................100%(4)
Proler Power Marketing, Inc., a Delaware corporation.........................................100%(4)
Gulf Coast Metals, Inc., a Texas corporation ................................................100%(5)
Joint Operations of the Company:
Hugo Neu-Proler Company, a partnership under the laws of California..........................50%(3)(6)
Prolerized New England Company, a partnership under the laws of New York.....................50%(6)(7)
Prolerized Schiabo-Neu Company, a partnership under the laws of New York.....................331/3%(3)(6)
Dover Barge Company, a Delaware corporation..................................................331/3%(3)
Worcester Recycling, Inc., a Massachusetts corporation....................................... 50%(7)
Prolerized New England Foreign Sales Corporation, a Virgin Island corporation................ 50%(8)
Prolerized Schiabo-Neu Foreign Sales Corporation, a Virgin Island corporation................331/3%(9)
Hugo Neu-Proler Foreign Sales Corporation, a Virgin Island corporation.......................50%(10)
Pacific Bulk Loading, Inc., a California corporation......................................... 50%(3)
Bulkloader, Inc., a Massachusetts corporation................................................ 50%(8)
Pacific Industrial Metal Corporation, a California corporation...............................50%(11)
H. Finkelman, Inc., a Maine corporation...................................................... 50%(7)
B. Rovner & Co., Inc. a New Hampshire corporation............................................ 50%(8)
Alameda Street Metal Corp., a California corporation......................................... 50%(3)
</TABLE>
(1) Percentage of voting stock or share in profits owned by the Company except
as otherwise indicated.
(2) Owned by Proler Steel, Inc.
(3) Owned by Joint Venture Operations, Inc.
(4) Owned by Proler Industries, Inc.
(5) Owned by Proler Properties, Inc. (formerly Buffalo Steel Corp.)
(6) Control can be exercised by the Company only by unanimous consent of the
partners.
(7) Owned by Proleride Transport Systems, Inc.
(8) Owned by Prolerized New England Company, a partnership. See footnote (6).
(9) Owned by Prolerized Schiabo-Neu Company, a partnership. See footnote (6).
(10) Owned by Hugo Neu-Proler Company, a partnership. See footnote (6).
(11) Owned by Pacific Bulk Loading, Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Proler International Corp. on Form S-8 (File No. 33-35013) of our
reports dated April 29, 1996, on our audits of the consolidated financial
statements of Proler International Corp. and subsidiaries and the combined
financial statements of Proler International Corp.'s Joint Operations as of
January 31, 1996 and 1995, and for each of the three years in the period ended
January 31, 1996, which reports are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 29, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Proler International Corp. on Form S-8 (File No. 33-35013) of our
reports dated March 18, 1996 and February 26, 1996, respectively, on our audits
of the consolidated financial statements of Prolerized Schiabo-Neu Company as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995, 1994 and 1993 and Dover Barge Company as of January 31, 1996
and 1995, and for each of the three years in the period ended January 31, 1996,
1995 and 1994 (not presented separately therein), which reports are included in
this Annual Report on Form 10-K.
LA GUARDIA & PETRELLA L.L.C.
Fort Lee, New Jersey
April 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF PROLER INTERNATIONAL
CORP. AND SUBSIDIARIES AS OF JANUARY 31,1996 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 1,161
<SECURITIES> 0
<RECEIVABLES> 2,118
<ALLOWANCES> 0
<INVENTORY> 2,776
<CURRENT-ASSETS> 7,234
<PP&E> 32,798
<DEPRECIATION> 16,953
<TOTAL-ASSETS> 66,772
<CURRENT-LIABILITIES> 3,732
<BONDS> 0
0
0
<COMMON> 5,351
<OTHER-SE> 44,113
<TOTAL-LIABILITY-AND-EQUITY> 66,772
<SALES> 13,432
<TOTAL-REVENUES> 13,432
<CGS> 14,084
<TOTAL-COSTS> 14,084
<OTHER-EXPENSES> 1,226
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 638
<INCOME-PRETAX> (8,815)
<INCOME-TAX> 229
<INCOME-CONTINUING> (9,044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,044)
<EPS-PRIMARY> (1.92)
<EPS-DILUTED> (1.92)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF PROLER INTERNATIONAL
CORP. AND SUBSIDIARIES AS OF JANUARY 31, 1995 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1995 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> JAN-31-1995
<CASH> 3,829
<SECURITIES> 0
<RECEIVABLES> 2,183
<ALLOWANCES> 0
<INVENTORY> 1,752
<CURRENT-ASSETS> 9,342
<PP&E> 35,047
<DEPRECIATION> 15,802
<TOTAL-ASSETS> 65,439
<CURRENT-LIABILITIES> 4,317
<BONDS> 0
0
0
<COMMON> 5,351
<OTHER-SE> 53,129
<TOTAL-LIABILITY-AND-EQUITY> 65,439
<SALES> 18,610
<TOTAL-REVENUES> 18,610
<CGS> 17,890
<TOTAL-COSTS> 17,890
<OTHER-EXPENSES> 1,690
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 453
<INCOME-PRETAX> 464
<INCOME-TAX> 161
<INCOME-CONTINUING> 303
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 303
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
