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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from - to -
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Commission file number 1-10470
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
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Delaware 33-0391175
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3600 West Segerstrom Avenue
Santa Ana, California 92704
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 979-7300
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock
par value $.01 New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
---------------
(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K [X]
At March 14, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $2,673,750.
At March 14, 1997, there were 17,649,000 shares of the registrant's common
stock outstanding.
Part III incorporates information by reference from a definitive Proxy Statement
to be filed with the Securities and Exchange Commission within 120 days after
the close of the registrant's fiscal year ended December 31, 1996.
Page 1 of 59
Exhibit Index at Page 53
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PART I
ITEM 1. BUSINESS.
Wahlco Environmental Systems, Inc. ("WES") is a Delaware corporation
with its principal executive offices located at 3600 West Segerstrom Avenue,
Santa Ana, California 92704 (telephone number (714) 979-7300). Unless
otherwise indicated, the term "Company" or "WES" refers to WES and its
consolidated subsidiaries.
The Company designs, manufactures, and sells combined cycle gas
turbine products, metallic bellows, air pollution control equipment, and
related products and services to electric utilities, independent power
producers, cogeneration plants, and industrial manufacturers worldwide. The
Company also provides mechanical plant installation services and rents
associated equipment to users in the U.K. The Company operates through
several subsidiaries which focus on specific geographical regions or
products. These entities, located primarily in the United States and the
U.K., are coordinated through common corporate management.
GENERAL DEVELOPMENT OF BUSINESS
The Company was formed in 1990 by Pacific Diversified Capital
Company ("PDC"), a wholly-owned subsidiary of San Diego Gas & Electric
Company ("SDG&E"), for the purpose of acquiring and operating Wahlco, Inc.
("Wahlco"), at that time a wholly-owned subsidiary of PDC. In May 1990, the
Company issued 3,389,000 shares of common stock in its initial public
offering. Upon the completion of the public offering, PDC's ownership
interest in the Company was approximately 81%.
On June 6, 1995, PDC sold to WES Acquisition Corp., an affiliate of
Wexford Capital Corporation ("WESAC"), its 81% stock interest in the Company.
On March 30, 1990, the Company acquired all of the capital stock of
Bachmann Companies, Inc. ("Bachmann"), which designs, manufactures and sells
gas flow diverters, dampers, and expansion joints used by electric utilities
and other industrial companies.
On August 8, 1991, WES acquired all the outstanding shares of stock
of Teddington Bellows Ltd. ("Teddington"), which manufactures specialized
high performance metallic expansion joints. Teddington's customers include
power generation, petrochemical, automobile, construction, and steel
companies.
On August 17, 1991, the Company acquired substantially all of the
Metro-Flex Group (now called Wahlco Engineered Products Ltd.), headquartered
in Baar, Switzerland, and Pentney Engineering Ltd. ("Pentney"), and Treste
Plant Hire Limited ("Treste") headquartered in Chesterfield, England. Wahlco
Engineered Products, Ltd. ("WEP Ltd."), now located at the Pentney facilities
in Chesterfield, England, designs and markets gas flow diverters and dampers
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for electric utility and industrial power plant exhaust systems. Pentney
manufactures products for WEP Ltd. and also provides hydraulic equipment,
pipework, and general metal fabrication.
In June 1995, the Company formed a division of Wahlco to identify
and develop products designed for the destruction of volatile organic
compounds ("VOCs"). In November 1995, the division signed a license
agreement with LTG Lufttechnische GmbH ("LTG") to sell and manufacture a
line of products for the reduction and control of VOCs in the United States,
Canada and Mexico. LTG is located in Stuttgart, Germany and designs,
manufactures and sells a broad line of catalytic and thermal VOC and odorant
oxidizers.
DESCRIPTION OF THE BUSINESS
The Company's business is operated through its subsidiaries:
Wahlco Engineered Products, Inc. (U. S.) designs, manufactures and
sells gas flow diverters, dampers and fabric and metallic expansion joints
used by electric utilities and other industrial companies.
Wahlco Engineered Products, Ltd. (U.K.) designs and sells gas flow
diverters which control and direct the flow of gases from a gas turbine
exhaust to a waste heat recovery boiler in a gas-turbine combined-cycle
power-generation plant.
Pentney Engineering Ltd. (U.K.) provides mechanical pipework and
plant installation, hydraulic equipment manufacture, and general fabrication
to WEP Ltd., utilities and industrial companies.
Teddington Bellows Ltd. (U.K.) designs, manufactures and sells
specialized high performance metallic expansion joints for industrial and
utility applications.
Wahlco (U.S.) designs, manufactures, sells, leases and services
equipment used by electric utilities and others to reduce and control air
pollution. Wahlco's products and services include flue gas conditioning
systems, Nitrogen Oxide ("NOx") reduction systems, and industrial electric
heaters and thermocouples. In addition, through its license agreement with
LTG, Wahlco manufactures and sells catalytic and thermal oxidizers to
control and reduce VOCs.
Treste Plant Hire, Ltd., rents mechanical equipment to the United
Kingdom construction industry.
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PRODUCTS AND SERVICES
The Company's products are sold in the coal-fired utility
after-boiler market, the gas-turbine power-generation market, the market
for elimination of volatile organic compounds and other industrial markets.
DAMPERS, DIVERTERS, EXPANSION JOINTS, PIPING SYSTEMS, HYDRAULIC EQUIPMENT AND
OTHER SERVICES (80% OF 1996 REVENUES AND 78% OF 1995 REVENUES)
Gas flow diverters divert the flow of exhaust gases from gas
turbines either to the atmosphere via stack or to a boiler for steam
production. The steam produced is principally used for power generation by
steam turbines (combined cycle). In some cases, the steam is used as process
steam in district heating systems, water desalination, or operations such as
liquefying oil to assist in its extraction from the ground (co-generation).
Gas flow diverters are supplied to the power generation industry, industrial
power plant systems, and similar process industries of gas type isolation
equipment. Diverters are sold to customers in Europe, Southeast Asia, the
Far East and the United States.
Dampers control the flow of air and gas by directing, throttling
and/or channeling air and gas through a single path. They are used by power
generating utilities, petrochemical plants, refineries, chemical plants,
cement plants, paper and steel mills, and other industrial companies.
Expansion joints are produced from various fabrics and metals, in a
variety of configurations, and are used with diverters and other ducting
systems. These products are provided to a wide range of industries.
Metallic expansion joints are installed in liquid and gas piping,
pressure systems and exhaust systems in the chemical, petrochemical, utility
power generation, aviation, nuclear, ship building, heating and other general
industries. Expansion joints are used primarily to counteract the negative
effect of the expansion and contraction of pipes and ducts caused by extreme
temperature changes from a production process such as electric power
production and petroleum refining.
In 1995 and 1996, only a small portion of these businesses was
driven by environmental regulation.
WARRANTIES. Warranties for the Company's products generally average
from 12 to 24 months from the date of sale and provide for the repair or
replacement, without charge, of any parts found to be defective in material
or workmanship under normal and proper use (except wear and tear from
abrasion or corrosion). The Company believes that the useful life for this
group of products ranges from 3 to 20 years under normal and proper use.
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FGC SYSTEMS, HEATERS AND THERMOCOUPLES, AND RELATED PRODUCTS AND SERVICES
(20% OF 1996 REVENUES; 22% OF 1995 REVENUES)
FLUE GAS CONDITIONING ("FGC") SYSTEMS. The Company is the leading
provider of FGC systems worldwide. The FGC business is principally driven by
environmental regulations that require electric utilities to meet certain
emissions standards for particulate matter and sulfur oxides.
To comply with these regulations, many utilities previously burning
high sulfur coal have switched to low sulfur coal. While the conversion from
high sulfur to low sulfur coal enables utilities to meet existing sulfur
oxide emissions standards, the conversion generally results in an increase in
particulate emissions. FGC systems increase the collection efficiency of
electrostatic precipitators ("ESPs"), which abate particulate (fly ash)
emissions. The Company's FGC technologies include sulfur trioxide, ammonia
and dual conditioning (both sulfur trioxide and ammonia conditioning). FGC
systems may be installed on existing or new ESP's.
The ability of Wahlco's customers to purchase low sulfur coal
economically is an important factor in the continuing demand for Wahlco's
FGC business. Experts in the field of coal resources expect this trend to
continue. Originally, low sulfur coal was thought to be more difficult to
obtain and transport when planning for the Clean Air Act began in the early
1990's.
RENTAL UNITS. The Company rents FGC test systems to its customers to
demonstrate that the technology will reduce particulate emissions
sufficiently to comply with regulations.
SERVICE AGREEMENTS. The Company has, from time to time, entered into
maintenance agreements of varying terms and conditions under which it
maintains systems purchased by its customers.
NITROGEN OXIDE ("NOx") REDUCTION SYSTEMS. The Company's Staged NOx
Reduction System ("SNRS") relies on two NOx reduction technologies: selective
non-catalytic reduction ("SNCR") and selective catalytic reduction (SCR).
The system uses the customer's existing air heater to further reduce NOx
emissions. The air heater SCR process is covered by U.S. and foreign patents
owned by the Company. In 1995, the Company received contracts for four SNCR
systems in Russia. The contract is important because the global market for
NOx reduction systems on both oil and coal-fired boilers is significant.
HEATERS AND THERMOCOUPLES. Thermocouples are heat-sensing devices
used in conjunction with a temperature controller or indicator to convert an
electrical signal to a temperature readout. The Company's electrical heaters
include: (l) tubular heaters for plastic injection molding and extrusion,
pipe heating and die heating; (2) immersion heaters for heating liquids in
the chemical and process industries; (3) duct heaters for heating large
quantities of air or gas passing through ducts; (4) tubular elements for
specialty heating applications; and (5) silicone rubber heaters for drum and
tank heating used for food processing, medical equipment
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and other applications.
VOLATILE ORGANIC COMPOUND ("VOC") CONTROL SYSTEMS. Under a license
agreement with LTG Lufttechnische GmbH covering the U.S., Canada and Mexico,
the Company manufactures a full line of thermal and catalytic oxidizers to
control and destroy VOCs. VOCs are an inherent by-product of many industrial
processes, but the emission of these hazardous compounds to the atmosphere is
limited under current state and federal regulations stemming from the 1990
Clean Air Act Amendments Titles I, III and V.
WARRANTIES. Warranties for FGC and VOC systems generally provide
for the repair or replacement, without charge, of any parts found to be
defective in material or workmanship under normal and proper use (excepting
wear and tear from abrasion or corrosion) within 18 months from the date of
shipment or 12 months from the date of initial operation, whichever occurs
first. In addition, under certain circumstances, the Company guarantees that
proper operation of its FGC and VOC systems will not exceed certain effluent
opacity or emission levels over an initial acceptance period.
Warranties for heaters and thermocouples generally provide that the
Company will repair or replace, without charge, any parts found to be
defective in material or workmanship under normal and proper use (excepting
wear and tear from abrasion or corrosion) within 12 months from the date of
sale. The Company believes the useful life of each of these products exceeds
five years under normal and proper use.
PATENTS AND TRADEMARKS
The Company holds twenty-four U.S. patents and corresponding foreign
patents and/or applications. Existing patents expire between 1999 and 2015.
Although initially enhanced by its patent rights, the Company believes its
ability to compete effectively in the FGC market depends primarily upon its
engineering, scientific and technological expertise and its reputation for
successful installations. This includes a database of information relating
to coal and ash analysis and precipitator size and operating conditions. In
addition, the Company has competed successfully in the sale of its sulfur
dioxide-based and ammonia conditioning systems, which are not protected by
patents, and in the sale of its sulfur-burning FGC systems in foreign
countries in which it does not have significant patent protection.
During 1996, the Company was awarded four new U.S. patents covering
different approaches to environmentally beneficial "In-duct gas conditioning"
which the Company believes could become an important FGC technology. Foreign
patent applications for this technology are in progress.
In May 1992, the Company acquired from L&C Steinmuller GmbH three
U.S. and a number of corresponding foreign patents which broadly cover the
core component of Wahlco's entry into the market for the control of NOx
emissions.
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The Company holds several U.S. and foreign patents, relating to
dampers, diverters and expansion joints, which expire between 1998 and 2015.
In addition, a number of applications are pending, for some of which patent
grants are imminent. As these patents and applications relate to a diverse
range of products, and because the Company's business is more dependent upon
the engineering quality of the Company's products, the Company does not view
its success as dependent upon any single patent.
Dampers, diverters, expansion joints and related services are
marketed under the trademarks or tradenames "WAHLCO," "METRO-FLEX," and
"TEDDINGTON."
RESEARCH AND PRODUCT DEVELOPMENT
Expenditures for research and product development were approximately
$277 thousand in 1996 and $460 thousand in 1995. The Company's research and
development activities are substantially augmented by the knowledge gained
through custom engineering provided for individual customers.
The Company has an ongoing program to improve its products. As
examples, its research efforts have resulted in the development of FGC
process improvements, development of high efficiency catalysts, improvements
to heat exchange surfaces, NOx reduction systems, a heat transfer testing
facility, and a sophisticated database containing information relating to
coal and ash analysis for sizing and improving the performance of
electrostatic precipitators, and precipitator size and operating conditions.
MARKETING
The Company markets its products, technologies and services to
electric utilities and industrial customers worldwide. The principal export
markets for the Company's products are Asia, Europe and Canada. (See Note 13
to Consolidated Financial Statements.)
The Company has a dedicated sales force for each subsidiary, managed
under common corporate control. Coordination among these groups has aided
the development of relationships and future business prospects for all
products.
Since January 1997, Wahlco's sales organization has been
headquartered in Santa Ana, California. A sales manager oversees
approximately 40 independent sales representative organizations in North
America that sell to utility customers and industrial customers, primarily in
the steel, cement, pulp and paper and related process industries. The
international sales function operates through a network of 42 representatives
in 57 countries in Africa, Asia, the Pacific Rim, the Caribbean, Europe, the
Middle East, and Central and South America. In addition to this sales
organization, Wahlco markets its products through sales and/or service
offices located in California, and Illinois.
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Wahlco's FGC marketing efforts are targeted primarily at coal-fired
power plants operated by electric utilities. Repeat business for FGC systems
is limited because individual customers typically have a small number of
electrostatic precipitators and because FGC systems operate for many years
without the need for replacement.
In recent years, Wahlco has increased its international marketing
efforts for FGC systems. While U.S. environmental regulations, mandating
lower emissions levels for power generating plants, have been in place for
several years, many other countries have not yet adopted or enforced strict
regulations aimed at reducing emissions from coal fired power plants. Wahlco
believes that Asia, Europe, and Africa, may enact stricter regulations to
control power plant emissions. It is impossible to predict with certainty,
however, whether such regulations will be enacted or, if enacted, enforced,
or the effect of such regulations upon the Company's business.
Wahlco has developed a proprietary staged NOx reduction system
("SNRS") that provides gas and coal-fired utilities with a modular, economic
solution to NOX removal. To increase market penetration, the Company is
working with Nalco Fueltech, a significant participant in NOx reduction, to
jointly market the staged reduction technique using the Company's patented
heater basket technology.
Wahlco's marketing activities for the VOC control product line are
similar to those for the FGC product line. A sales manager oversees a
network of independent sales representative organizations in the United
States, Mexico and Canada. VOC and FGC sales representatives do not
generally overlap because the VOC market addresses a different industrial
base. During 1996, the primary VOC control markets in the U.S. were wood
products, semiconductor manufacturing, printing/coating, surface finishing,
metal decorating and chemical processing.
Marketing and sales for Wahlco Engineered Products, Inc. ("WEP,
Inc.") is based in Lewiston, Maine and focuses on customers in the power,
pulp & paper, cement, metals, and petro-chemical industries in North, Central
and South America through a network of approximately 28 independent sales
representative organizations.
WEP, Inc. also markets dampers and expansion joints to customers in
Europe and Asia through a network of 18 independent sales representative
organizations in Europe and Asia. In addition, WEP, Inc. sell diverters to
U.S. based customers for projects in Europe and Asia.
WEP Ltd.'s products are marketed internationally by 28 direct and
independent sales representatives in 34 countries. Sales, engineering and
technical support are performed from the Chesterfield, U.K. facility.
Teddington uses 10 of its own and several of the Company's
international sales and marketing representatives.
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CUSTOMERS
No customer accounted for more than 10% of the Company's revenues in
1996. (See Note 13 to Consolidated Financial Statements).
RAW MATERIALS
The materials used in the production of the Company's product lines
are generally available through a number of sources, and the Company does not
anticipate difficulty in obtaining the materials and components used in its
operations. Most of the materials used by the Company are ordered to a
number of standards, including ASME, ASTM and DIN.
Certain materials and components must withstand extreme operating
conditions and because only relatively few component suppliers consistently
meet necessary specifications, the Company purchases from a limited number of
suppliers. Generally, the Company has not experienced difficulty in
obtaining the necessary materials and components and has several alternative
sources of supply.
Pentney and Teddington have achieved ISO 9000 standards. The
remaining subsidiaries continue to work toward achieving ISO 9000
accreditation or equivalent standards.
COMPETITION
Wahlco, Inc. competes primarily on its engineering, scientific and
technological expertise. Wahlco believes that its past performance record of
approximately 400 installed systems is a benefit in dealing with its
customers. Wahlco bases its belief with respect to the performance record of
its FGC systems on its ongoing communications with customers for which it has
installed such systems.
Since 1990, Wahlco's domestic FGC business has experienced increased
price competition as domestic utilities attempted to reduce the overall costs
of compliance with state and federal regulations. Several smaller domestic
manufacturers including Chemithon, Inc. and Wilhelm Environmental
Technologies, Inc., have been successful in securing some FGC contracts.
As a result of price competition, Wahlco has experienced a decline
in market share and in overall FGC margins. During the period 1993-1996,
Wahlco confronted competitive pricing pressures by reducing certain
engineering and manufacturing costs and by reconfiguring various products to
better meet customer demand. Based upon internal market information, the
Company believes that Wahlco still continues to be the leading provider for
FGC systems in the United States and maintains a strong market position
internationally.
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Since there are several alternatives to FGC systems, Wahlco faces
substantial competition from companies providing devices which reduce
particulate emissions generally without the need for FGC systems. Examples
of such devices are scrubbers, certain ESPs, and baghouses. Numerous factors
may be considered by an electric utility in determining whether to install
FGC systems or an alternative technology to achieve compliance. These include
the amount of initial capital expenditures, issues and policies related to
fuel sources, related on-going operating and maintenance costs, availability
and associated costs of low and/or high sulfur coal, the particular emission
standards applicable to the public utility, and the value of any credits or
allowances which may be available.
One of the largest factors affecting the market and its competitive
nature has been the utilities' strategy to postpone adding FGC and other
compliance equipment by blending coals. Utilities have mixed high and low
sulfur coal or burned low sulfur coal containing enough sulfur content to
reduce sulfur emissions without impairing the effectiveness of the
particulate control devices.
Wahlco faces substantial competition with respect to its
thermocouple and electrical heater products and serves a relatively small
portion of the total market. In addition to a few large companies which
market such products nationally, there are also several regional suppliers
which compete with Wahlco. In establishing a market niche, Wahlco targets
customers requiring specially engineered and customized products.
The Company's line of products to control VOC's compete with
products from numerous competitors. Products are customized for particular
applications, and companies compete based on design and engineering
capabilities as well as installation and on-site reliability.
WEP, Inc. faces significant competition in the sale of its dampers,
diverters, and expansion joints. Although these products are differentiated
by design, sophistication, reliability, and customer service, many purchasing
decisions are made on the basis of price and delivery.
WEP Ltd. continues to win a significant share of the international
market for gas flow diverters. Pentney, Treste and Teddington complete in
the U.K. construction market which has been somewhat depressed during the
last two years. Recent strength of the U.K. pound has adversely affected the
U.K. market.
WEP, Inc. and WEP, Ltd. believe that, as a group, they command a
significant share of the global market for gas flow diverters and dampers.
Significant competitors in this market include Rappold, Braden, Effox, and
Stober & Morlock. Domestically, WEP, Inc. faces competition in the damper
market from Effox, American Warming & Ventilating, ACDC, DDI, and others. In
the expansion joint market, WEP, Inc. competes with Pathways, EJS, Senior
Flexonics, Badger, and others.
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GOVERNMENTAL REGULATION
Although the Company's manufacturing operations are subject to
environmental regulations governing the discharge of pollutants, compliance
by the Company with these environmental regulations has not had, and is not
anticipated to have, a material effect on the capital expenditures, earnings
or competitive position of the Company.
Certain of the Company's business is dependent upon government
regulation of air pollution at the federal, state, local and foreign levels.
In the United States, the Federal Clean Air Act ("CAA") (which was amended in
1990 to impose stricter requirements for emissions), and the associated
federal and state regulations largely determine the size and timing of the
investments the Company's customers make in pollution control equipment.
Clean air legislation in the United States requires compliance with ambient
air quality standards and empowers the Environmental Protection Agency
("EPA") to establish and enforce limits on the emission of various
pollutants. The states have primary responsibility for implementing these
standards and, in some cases, have adopted more stringent standards than
those adopted by the EPA.
Several factors have negatively impacted the air pollution control
equipment marketplace since the passage of the CAA Amendments in 1990. There
was a general increase in competition and an associated decrease in unit
prices. These factors combined to erode gross margins. Weakness in general
business conditions and changes specific to utility industry customers, such
as the availability of emission credit trading, caused many air pollution
control equipment customers to reevaluate or postpone capital equipment
decisions. As an example, the market for FGC equipment plunged almost 70% in
1992. Many of the Company's customers were able to meet January 1, 1995
(Phase I) compliance requirements by blending coal, using environmental
credits, derating plants, and other methods rather than by purchasing FGC
equipment.
EMPLOYEES
At December 31, 1996, the Company employed 354 persons, of whom 250
were engaged in production and operations, 35 were engaged in engineering and
scientific research, 36 were engaged in accounting and administration, 26
were engaged in sales, and 7 were in general management.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS; EXPORT SALES
Information about revenues, results of operations and identifiable
assets by geographic areas and the amount of export sales for the periods
indicated is set forth in Note 13 to Consolidated Financial Statements. The
Company's operations outside the United States are subject to the usual risks
and limitations attendant upon investments in foreign countries, such as
fluctuations in currency values, exchange control regulations, wage and price
controls, employment regulations, effects of foreign investment laws,
governmental instability (including
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expropriation or confiscation of assets) and other potentially detrimental
domestic and foreign governmental policies affecting U.S. companies doing
business abroad.
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ITEM 2. PROPERTIES.
The building which houses the Company's and Wahlco's headquarters
located in Santa Ana, California, is occupied under a lease expiring July 31,
2001 at a rental of $42,000 per month. The building consists of approximately
28,000 square feet of office space and approximately 22,000 square feet of
production space. Wahlco also owns a 5,000 square foot service/installation
office located in Thornton, Illinois.
Wahlco Engineered Products, Inc. is headquartered in Lewiston,
Maine, in a 49,300 square foot facility owned by the Company, consisting of
12,000 square feet of office space, and 37,300 square feet of manufacturing
area.
Wahlco Engineered Products Ltd. operates from leased facilities in
Chesterfield, England aggregating to approximately 115,000 square feet. The
facilities consist of 95,000 square feet of manufacturing space and 20,000
square feet of office space. Approximately 24,000 square feet of
manufacturing space are subleased, which generates approximately $85 thousand
per year. Lease payments required on these facilities total $277 thousand
per year. These lease payments, which are part of the purchase agreement when
the Company purchased Pentney Engineering Ltd., are made to a company which
is 50% owned by an officer of the Company and a previous co-owner of Pentney
Engineering Ltd. Teddington owns and operates a 75,000 square foot facility
in Swansea, Wales. In March 1993, the Company purchased the facility for
approximately $227 thousand.
The Company believes that its facilities are adequate for its
current operations.
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ITEM 3. LEGAL PROCEEDINGS.
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS
The names and ages of the executive officers of the Company and the
positions held by each during the last five years were as follows:
C. Stephen Beal, 49, is the President and Chief Executive Officer of
Wahlco Environmental Systems, Inc. Prior to joining Wahlco, as a result of
the acquisition by the Company of Pentney Engineering, Ltd. in 1991, Mr. Beal
served as Managing Director and joint owner of the Pentney Group since 1974.
From 1991 to 1996, Mr. Beal served as President and CEO of the Company's
Engineered Products Group.
A. Noel DeWinter, 58, has been Vice President and Chief Financial
Officer since October 1996 after serving as Vice President, Controller since
March 1995. Mr. DeWinter served as Vice President, Finance from October
1991 to January 1992, and Chief Financial Officer from January 1990 to
October 1991. From January 1992 to January 1994, he served at the Company's
Lewiston, Maine subsidiary as Vice President, Finance.
James J. Ferrigan, 43, has been Senior Vice President, NOx Reduction
Technologies, Wahlco, Inc., since March 1997. Prior thereto, he was Senior
Vice President of North American Marketing for Wahlco, Inc. for more than
five years.
Barry J. Southam, 60, has served as Senior Vice President, FGC
Technologies, Wahlco, Inc., since March 1997. He served as Senior Vice
President, International Sales and Marketing for the Company since September
1991. Prior thereto, he was Vice President of International Operations for
Wahlco, Inc. for more than five years.
The officers are elected annually by the Board of Directors at the
first meeting following the Annual Meeting of Stockholders. There is no
family relationship between any of the officers, directors or persons
nominated to become a director. There were no arrangements or understandings
between any officer and any other person pursuant to which he was elected as
an officer.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICE FROM JANUARY 1, 1996 TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High Price 1 7/8 1 3/8 5/8 1/2
Low Price 1 1/4 5/8 3/8 9/32
</TABLE>
COMMON STOCK PRICE FROM JANUARY 1, 1995 TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High Price 2 3/8 2 1/4 3 1/4 2 7/8
Low Price 1 1/8 1 1 1/2 1 3/8
</TABLE>
The Company's Common Stock is list ed on the New York Stock Exchange
and trades underthe symbol WAL. At March 14, 1997, there were approximately
279 stockholders of record of the Company's Common Stock. This number does
not include shareholders whose shares are held in the name of a nominee.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollar and share amounts in thousands, except per share data)
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS 1996(1) 1995(1) 1994(1) 1993(1) 1992(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 43,051 $ 60,100 $ 69,897 82,121 81,877
Operating income (loss) (12,945) (12,536) (73,523) (16,353) (16,608)
Net income (loss) (10,809) (11,352) (66,149) (10,896) (12,788)
Net income (loss) per common share (0.61) $ (0.64) $ (3.75) $ (0.62) $ (0.72)
Average shares outstanding 17,649 17,649 17,649 17,649 17,649
Backlog at year end $ 23,899 $ 20,613 $ 32,250 $ 33,500 $ 39,208
Number of employees at year end 354 423 $ 508 $ 814 788
FINANCIAL POSITION AT YEAR END
- ------------------------------------------------------------------------------------------------
Working capital (deficit) $ 5,163 $ 12,713 $ (6,860) $ 5,695 $ 3,215
Property, plant and equipment, net 5,190 5,921 10,232 15,468 24,242
Goodwill, net - - 2,606 53,491 55,685
Total assets 29,820 46,519 58,930 129,780 136,378
Long-term debt 12,145 7,948 1,037 1,265 4,593
Other liabilities 2,435 3,689 4,128 3,300 3,847
Stockholders' equity (deficit) (2,820) 7,367 6,678 72,653 83,932
FINANCIAL PERFORMANCE
- ------------------------------------------------------------------------------------------------
Current ratio 1.3 1.5 0.9 1.1 1.1
Long-term debt as a %
of total capitalization 130.2% 51.9% 13.4% 1.7% 5.2%
</TABLE>
(1) During the years 1990 - 1992, the Company made several business
acquisitions, and from 1993 to 1995 disposed of various businesses, which
may affect the comparability of the information. (See Note 3 to
Consolidated Financial Statements.)
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995.
Revenues in 1996 decreased $17.0 million, or 28%, to $43.1 million
from $60.1 million in 1995. Revenues from businesses discontinued in late
1995, primarily the operations in Australia, represented $2.9 million of the
revenue decrease. The decrease was primarily associated with reduced
revenues for gas flow diverters ($7.2 million), pipe work systems and
hydraulics equipment ($5.6 million), and flue gas conditioning (FGC) systems
($5.6 million). These lower revenues were partially offset by an increase in
shipments of damper products from the Company's facility in Maine. ($3.2
million). International revenues accounted for 67% of total revenues in 1996
compared to 78% of total revenues in 1995.
FGC revenues have decreased in each of the last three years due to
the absence of large contracts from domestic utilities. Commencing in 1994,
the U.S. Electric Utility Industry has undergone major restructuring, as a
result of ongoing federal and state deregulation. Orders for all significant
capital expenditures, including air pollution control equipment, have been
minimal during this period.
The Company's 1996 cost of revenues totaled $39.1 million and
represented 91% of revenues. In 1995, the Company's cost of revenues totaled
$51.5 million and represented 86% of revenues. The increase in cost of
revenues as a percent of revenues in 1996, as compared to 1995, was due to
contract provisions of approximately $2.9 million taken in the second, third
and fourth quarters of 1996, primarily related to jobs subcontracted from
Italy and the U. K. in foreign locations. Cost of revenues for FGC systems
increased to 91% of revenues in 1996 from 74% of revenues in 1995, due to a
large significant profitable FGC contract in 1995 which did not recur in
1996. In addition, fixed manufacturing and engineering cost became more
significant against the lower 1996 revenues.
Selling, general and administrative (SG&A) expense, before
restructuring charges and intangible write-downs, totaled $16.8 million in
1996, down from $19.1 million in 1995 and $21.4 million in 1994. SG&A
expense, as a percent of revenues, before restructuring charges and
intangible write-downs, was 39% in 1996, and 32% in 1995 and 31% in 1994.
SG&A expense in 1996 included one-time charges of approximately $2.8
million, including $2.4 million of reserves for bad debts and $0.7 million
for executive severance and option costs, partially offset by the reversal of
$0.3 million in reserves deemed unnecessary. Approximately $0.8 million of
the bad debt reserve related to reserves required in the Company's Italian
operation. SG&A expense in 1995 contained one-time charges totaling $2.3
million for legal and closing costs related to the purchase by WESAC of an
81% interest in the Company and a decision to close the Puerto Rico
production facility. In 1996, SG&A expense included approximately $0.9
million of expenses related to the marketing and sale of VOC products and the
Company's license agreement with Viking Water Systems, Inc. SG&A expense
related to these businesses was $0.3 million in 1995. The number of employees
in the Company
18
<PAGE>
totaled 354 at December 31, 1996, down from 423 and 508 at the end of 1995
and 1994, respectively.
Prior to the acquisition by WESAC of 81% of the Company's common
stock, the Company's U.S. operations were consolidated into the tax return
of San Diego Gas & Electric Company, its former 81% parent, through a tax
sharing agreement dated April 1990. This agreement terminated on the closing
of the equity sale to WESAC.
With respect to WESAC's acquisition of PDC's shares on June 6, 1995,
the buyer and seller agreed to jointly elect tax treatment for the
transaction as similar to an asset acquisition under section 338(h)(10) of
the Internal Revenue Code. Under this election, the allocation of the
purchase price to the assets deemed purchased resulted in the recording of
deferred tax liabilities totaling $5.0 million, of which approximately $700
thousand was recorded in current liabilities.
Subsequent to the closing of the WESAC transaction on June 6, 1995,
and after the deferred tax liabilities were recorded, the Company provided
tax benefits of $3.0 million in 1995 and $2.0 million in 1996 against losses
from domestic operations. The tax benefit in 1996 also included $0.9 million
from the release of tax reserves deemed unnecessary.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994.
Revenues of $60.1 million in 1995 were $9.8 million, or 14%, below
1994 revenues of $69.9 million. Revenues from businesses discontinued in
1995 and 1994 decreased to $3.5 million in 1995 from $10.3 million in 1994,
accounting for $6.8 million of the total revenue decrease. Revenues from
continuing operations decreased $3.0 million, to $56.6 million in 1995 from
$59.6 million in 1994, primarily due to a $3.1 million decrease in FGC and
De-NOx system revenues. International revenues accounted for 78% of total
revenues in 1995 compared to 60% of revenues in 1994.
The decrease in FGC and De-NOx systems revenues in 1995 resulted
from the absence of large contracts from domestic utilities. Confronted by
increased competition developing from continuous Federal and state
deregulation, the U.S. electric utility industry is in the midst of major
restructuring with the result that order activity for domestic FGC systems
has been declining in this marketplace.
In addition, the air pollution control industry is in a period of
relatively low activity between two compliance deadlines. Demand for
domestic clean air products, including FGC and De-NOx systems, is principally
driven by compliance with emission limits established by the Federal Clean
Air Act Amendments in 1990. The Phase I Compliance deadline was January 1,
1995, and the Phase II Compliance deadline is January 1, 2000. Having met
the Phase I requirements, many North American utilities will likely delay
Phase II compliance actions until later in the decade.
19
<PAGE>
The Company's cost of revenues in 1995 totaled $51.5 million and
represented 86% of revenues, compared to cost of revenues of $64.7 million at
93% of revenues in 1994. Approximately $11.3 million of 1994 cost of revenues
relates to operations which were closed or cut back over the last two years,
including Wahlco Power Products, Inc. ("WPPI"), Field Service Associates,
Inc. ("FSA"), Exergetic Systems, Inc. ("ESI") and Wahlco Engineered Products,
Pty. Ltd. (Australia). When these operations are excluded, the percentage of
cost of revenues to total revenues is 86% and 89% in 1995 and 1994,
respectively.
In 1995, cost of revenues as a percent of revenues decreased
primarily due to lower costs on De-NOx contracts and the absence of high
costs on a large domestic 1994 FGC contract. In addition, closing the Puerto
Rican manufacturing facility and transferring FGC production systems to
California reduced duplicate factory overhead costs and lowered unit
production costs.
During 1995, the Company continued its cost reduction program which
commenced in 1992. As a result, selling, general and administrative ("SG&A")
expense, before restructuring charges and intangible write-downs, declined
from $21.4 million in 1994 to $19.1 million in 1995. SG&A expense, as a
percent of revenues, before restructuring charges and intangible write-downs
was 32%, in 1995, 31% in 1994 and 30% in 1993. As a result of the cost
reduction program, the number of employees declined to 423 at December 31,
1995, down from 508 and 814 at the end of 1994 and 1993, respectively.
During the third quarter of 1995, the Company released restructuring
accruals totaling approximately $590 thousand, primarily related to strategic
actions no longer under consideration by management. The reserves had been
provided for 1993 and 1994 for the closing of facilities used in
international operations and associated severance. After review, management
deemed these reserves unnecessary.
During the fourth quarter of 1995, management evaluated the value of
goodwill remaining on the Company's books at Wahlco, Inc. and Pentney in the
U.K. As a result of this analysis, which involved a forecast for each
business and the discounting of future cash flows, the goodwill at Wahlco,
Inc. and Pentney, which totaled $1.8 million and $634 thousand, respectively
was written off.
Subsequent to the write-off of goodwill, the Company adopted the
provisions of FAS 121, effective December 31, 1995. No additional
write-downs of assets was required under FAS 121 in 1995. (See Note 1 to
Consolidated Financial Statements)
The Company was unable to book a tax benefit against 1995 losses
prior to June 6, 1995, the date WESAC purchased SDG&E's 81 percent stock
interest in the Company, since the tax sharing agreement with SDG&E limited
the Company's reimbursements for tax credits and losses which the Company
would be entitled had it filed separate income tax returns.
20
<PAGE>
Subsequent to the closing of the WESAC transaction on June 6, 1995,
and after the deferred tax liabilities were recorded, the Company provided
tax benefits of $3.0 million against losses from domestic operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a negative cash flow from operating activities in
1996 of $4.1 million compared to a negative cash flow of $10.3 million in
1995. The negative cash flow in 1996 resulted from the net loss of $10.8
million, partially offset by reductions in working capital, principally
accounts receivable and inventories. The negative cash flow in 1995 resulted
primarily from the net loss of $11.4 million reported in that year. In 1996
and 1995, the Company funded its operating cash flow deficit through
borrowings from its 81% stockholder, WESAC, and its primary bank, as
described below.
The Company had a working capital position of $5.2 million at
December 31, 1996 compared to working capital of $12.7 million at December
31, 1995. The decrease in working capital reflects a $5.0 million reduction
in accounts receivable and a $4.6 million decline in inventories, due to the
lower level of production and revenues in 1996 compared to 1995, and contract
adjustments and operating losses in 1996. Working capital improved in 1995
principally due to the contribution to capital of approximately $20 million
of short-term debt owed by the Company to PDC as part of the WESAC
transaction. (See Note 1 to the Consolidated Financial Statements).
As a security for performance and advances on long-term contracts,
the Company is contingently liable in the amount of $1.3 million at December
31, 1996 under standby letters of credit of which $1.1 million are fully
secured by restricted cash and marketable securities.
Capital expenditures in 1996 totaled $402 thousand compared to $648
thousand in 1995. Approximately $155 thousand was spent on additions to the
rental equipment inventory at Treste Plant Hire Ltd. Another $48 thousand
was spent to expand the Treste facility. The balance of the capital
expenditures were for a variety of production equipment and certain building
improvements.
On October 25, 1996, the Company's loan and security agreement with
Silicon Valley Bank was modified, so that (i) the maturity date was extended
to May 1998, and (ii) the interest rate on funds borrowed by the Company was
reduced from about 11% to about 5.5%, since WESAC deposited cash collateral
equivalent to the funds borrowed with Silicon Valley Bank. As part of the
loan and security agreement in October 1995 and the renegotiation in October
1996, the Company issued warrants to SVB to purchase 175,000 shares of the
Company's Common Stock at $2.29 per share, which warrants expire on October
26, 2000.
On August 28, 1996, the Company reached an agreement with WESAC,
pursuant to which WESAC agreed to lend the Company up to $1.6 million. The
loan bears
21
<PAGE>
interest at an annual rate of 13%, and is secured by all of the
assets of the Company. Interest and a commitment fee of $32,000 have been
paid in kind and added to principal. In further consideration for making the
loan, the Company agreed to issue to WESAC or its designee five year warrants
to purchase the Company's common stock as the funds are drawn down. Each
warrant covers the number of shares of common stock equal to the quotient of
(i) the dollar amount of the draw down divided by (ii) $0.47, the approximate
closing price of the common stock on August 16, 1996. The warrants become
exercisable on issuance at $0.47 per share. The Company had drawn $1.5
million against this loan as of December 31, 1996, and issued warrants
covering 3,404,255 shares of common stock to four WESAC partnerships which
provided the funding. The loan matured on January 1, 1997 but was extended
as described below.
On October 18, 1996, the Company announced a capital restructuring
plan that will reduce the Company's debt and provide additional working
capital. The capital restructure plan, subject to final documentation and
stockholder approval, involves converting $5 million of WESAC debt into 12%
preferred stock. The preferred stock will be convertible into 10,958,904
common shares, representing a per share conversion price of $0.45625, the
average closing price of the common stock for the thirty trading days prior
to October 18, 1996. Quarterly dividends on the preferred stock can be paid
in additional preferred stock in lieu of cash, at the option of the Company.
The impact on the Company's capital structure of the conversion of
WESAC debt into preferred stock, as described above, is as follows:
Proforma Impact of Converting Debt into Preferred Stock
Consolidated Balance Sheet at December 31, 1996
<TABLE>
<CAPTION>
PRIOR TO AFTER
CONVERSION CONVERSION
---------- ---------
<S> <C> <C>
Long-term debt $12,145 $7,145
Stockholders' equity $(2,820) $2,180
</TABLE>
As part of the restructuring plan, WESAC extended the maturity of
the August 1996 $1.6 million facility and the existing Silicon Valley Bank
loan. Both facilities mature in May 1998. WESAC also agreed to provide the
Company with a new $2.4 million standby line of credit.
As of March 31, 1997, the Company had not drawn the remaining $100
thousand available under the August 1996 term loan or any funds on the $2.4
million line.
The Company believes that the extension of the existing facilities
with WESAC and Silicon Valley Bank, along with the new line of credit, will
be adequate to fund the Company's operations during 1997; however, there can
be no assurances that this will be the
22
<PAGE>
case. Significant changes in the Company's anticipated level of business and
other events could substantially increase the Company's cash requirements
above those now anticipated, and thereby materially and adversely affect the
Company's results of operations and financial condition.
BACKLOG AND BOOKINGS
Backlog at December 31, 1996 was $23.9 million compared to $20.6
million at December 31, 1995. FGC system backlog increased to $5.2 million
at December 31, 1996 from $3.1 million at the end of 1995. Backlog is
unaudited and is defined as work for which the Company has entered into a
signed agreement or has received a requisition or purchase order.
Approximately $3.9 million of the December 31, 1996 backlog is scheduled for
delivery after December 31, 1997. Historically, substantially all of the
Company's backlog has resulted in completed contracts.
EFFECTS OF INFLATION; OTHER COST INCREASES
Management does not believe that inflation has had a material effect
on operations during the past several years. However, the Company
experienced significant stainless steel price increases on one large contract
in Southeast Asia in 1995 and 1996. Increases in labor, materials and other
operating costs could adversely affect the Company's operations, if the
Company is unable to raise its prices to cover the increases.
FOREIGN CURRENCY TRANSLATION
A substantial portion of the Company's assets are outside of the
United States and are subject to fluctuation in exchange rates. The foreign
currency translation adjustment to the Balance Sheet at December 31, 1996
was $2.0 million (net of tax) compared to $2.5 million as of December 31,
1995.
CAUTIONARY STATEMENT
The foregoing discussion under the heading "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains various "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, and represent the Company's
expectations or beliefs concerning future events, including the following:
Statements regarding increasing competition from other manufacturers of FGC
equipment; statements regarding compliance methods other than FGC systems
such as coal blending, environmental credits, etc.; statements regarding the
timing of demand for clean air products under CAA Phase II deadlines;
statements regarding the adequacy of the Company's cash provided by
internally generated funds and outside borrowings. The Company cautions that
these statements are further qualified by important factors that could cause
actual results to differ
23
<PAGE>
materially from those projected by the Company, including, but not limited
to, the following: change in emphasis regarding compliance of existing clean
air legislation under a new administration; changing governmental regulations
or legislation; development of alternative compliance technologies; and
emergence of new competitors as Phase II of the CAA deadlines draw closer.
Future results actually achieved thus may differ materially from historical
results and/or from Company forecasts.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF WAHLCO ENVIRONMENTAL SYSTEMS,
INC.:
We have audited the accompanying consolidated balance sheets of
Wahlco Environmental Systems, Inc. as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These consolidated
financial statements and the schedule referred to below 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 Wahlco
Environmental Systems, Inc. as of December 31, 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that Wahlco Environmental Systems, Inc. will continue as a
going concern. As more fully described in Note 1, the Company has incurred
recurring operating losses, and has been dependent on advances from its
parent as well as proceeds from the sale of fixed assets to fund its cash
flow requirements. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets, or the
amount and classification of liabilities that may result from the possible
inability of Wahlco Environmental Systems, Inc. to continue as a going
concern.
Our audit was made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The schedule
listed in the index of the consolidated financial statements is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein
in relation to the basic consolidated financial statements taken as a
whole.
Orange County, California
April 7, 1997
Arthur Andersen LLP
25
<PAGE>
Report of Independent Public Accountants
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF WAHLCO ENVIRONMENTAL SYSTEMS, INC.
We have audited the accompanying consolidated statements of
operations, stockholders' equity, and cash flows of Wahlco Environmental
Systems, Inc. for the year ended December 31, 1994. Our audit also included
the financial statement schedule listed in the Index at Item 14(a) for the
year ended December 31, 1994. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Wahlco Environmental Systems, Inc. for the year ended December
31, 1994, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein for the year ended
December 31, 1994.
The accompanying consolidated financial statements have been
prepared assuming that Wahlco Environmental Systems, Inc. will continue as a
going concern. As more fully described in Note 1, the Company has incurred
recurring operating losses, had a working capital deficiency and has been
dependent on advances from its parent as well as proceeds from the sale of
marketable securities and fixed assets to fund its cash flow requirements.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classifications of assets, including goodwill and
intangibles, or the amounts and classification of liabilities that may result
from the possible inability of Wahlco Environmental Systems, Inc. to continue
as a going concern.
Ernst & Young LLP
February 24, 1995
Orange County, California
26
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------
ASSETS 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,853 $ 3,840
Restricted cash and cash equivalents 1,050 1,307
Accounts receivable 12,069 15,935
Cost and estimated earnings in excess of
billings on uncompleted contracts 2,148 6,839
Inventories 4,738 8,711
Other current assets 1,365 1,580
- --------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 23,223 38,212
Property, plant and equipment, net 5,190 5,921
Other assets 1,407 2,386
- --------------------------------------------------------------------------------------------
$ 29,820 $ 46,519
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 373 $ 2,744
Accounts payable 9,622 8,932
Accrued payroll and payroll related liabilities 1,589 1,944
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,356 2,376
Current portion of long-term debt 228 204
Taxes payable 317 391
Other accrued liabilities 4,575 8,908
- --------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 18,060 25,499
Long-term debt 12,145 7,948
Other liabilities 2,435 3,689
Deferred income taxes - 2,016
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value; 10,000,000 shares authorized, - -
None issued or outstanding
Common stock, $.01 par value; 50,000,000 shares authorized,
17,649,000 shares issued and outstanding 176 176
Capital in excess of par value 90,735 90,534
Retained deficit (91,684) (80,875)
Foreign currency translation adjustment (2,047) (2,468)
- --------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (2,820) 7,367
- --------------------------------------------------------------------------------------------
$ 29,820 $ 46,519
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Product sales $ 36,346 $ 49,558 $ 51,750
Rental, service and other 6,705 10,542 18,147
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
43,051 60,100 69,897
- -----------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of revenues:
Product sales 32,685 43,421 49,640
Rental, service and other 6,412 8,099 15,015
Selling, general and administrative 16,769 19,171 21,431
Restructuring and other intangibles write-downs 130 (590) 6,213
Goodwill amortization and write-downs - 2,535 51,121
- -----------------------------------------------------------------------------------------------
55,996 72,636 143,420
- -----------------------------------------------------------------------------------------------
Operating loss (12,945) (12,536) (73,523)
- -----------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest and other income 875 359 1,069
Interest and other expense (1,663) (2,125) (2,394)
- -----------------------------------------------------------------------------------------------
(788) (1,766) (1,325)
- -----------------------------------------------------------------------------------------------
Loss before income taxes (13,733) (14,302) (74,848)
Benefit from income taxes (2,924) (2,950) (8,699)
- -----------------------------------------------------------------------------------------------
Net loss $ (10,809) $ (11,352) $ (66,149)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Net loss per share $ (0.61) $ (0.64) $ (3.75)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Weighted average common shares outstanding 17,649 17,649 17,649
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL RETAINED FOREIGN
IN EXCESS EARNINGS CURRENCY TOTAL
COMMON STOCK OF PAR (ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT VALUE DEFICIT) ADJUSTMENT EQUITY (DEFICIT)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 17,649,000 $ 176 $ 78,188 $ (3,374) $ (2,337) $ 72,653
Net loss - - - (66,149) - (66,149)
Change in foreign currency
translation adjustment
(net of deferred taxes
of $96) - - - - 174 174
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 17,649,000 176 78,188 (69,523) (2,163) 6,678
Net loss - - - (11,352) - (11,352)
Contribution to capital, net
of deferred taxes - - 11,750 - - 11,750
Stock option programs - - 596 - - 596
Change in foreign currency
translation adjustment
(net of deferred taxes
of $164) - - - - (305) (305)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 17,649,000 176 90,534 (80,875) (2,468) 7,367
Net loss - - - (10,809) - (10,809)
Stock option programs - - 201 - - 201
Change in foreign currency
translation adjustment
(net of deferred taxes
of $227) - - - - 421 421
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 17,649,000 $ 176 $ 90,735 $ (91,684) $ (2,047) $ (2,820)
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,809) $ (11,352) $ (66,149)
Adjustments to reconcile net loss to
net cash provided by
(used in) operating activities:
Depreciation and amortization 1,406 1,692 3,008
Non-current asset write-downs - 2,405 54,106
Deferred income taxes (2,924) (3,422) (4,635)
Loss (gain) on sale of fixed assets (83) 625 (406)
Deferred compensation 311 596 -
Changes in current assets and
liabilities net of effects from acquisitions:
Accounts receivable 4,982 1,124 (644)
Refundable income taxes - 883 8,640
Costs and estimated earnings in excess of
billings on uncompleted contracts 5,254 2,016 (695)
Inventories 4,596 (4,168) 4,447
Other current assets 317 17 (459)
Accounts payable 24 (1,799) 2,025
Accrued payroll and payroll related liabilities (425) 615 (554)
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,134) 314 492
Income taxes payable (87) (252) -
Other accrued liabilities (5,520) 368 3,242
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (4,092) (10,338) 2,418
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of marketable securities - - 7,182
Purchase of property, plant and equipment (402) (648) (1,679)
Proceeds from dispositions of property, plant
and equipment 46 2,799 3,645
Change in other assets 774 1,375 (776)
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 418 3,526 8,372
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from WESAC 2,738 3,248 -
Payments to WESAC - (1,000) -
Borrowing on notes payable 11 3,206 -
Payments on notes payable (714) (922) (14,000)
Borrowings on long-term debt 53 65 -
Payments on long-term debt (280) (336) (1,949)
Payments to Pacific Diversified Capital Company - (372) -
Advances from Pacific Diversified Capital Company - 1,267 7,997
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,808 5,156 (7,952)
Effect of exchange rate changes on cash (378) (318) (506)
- -----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,244) (1,974) 2,332
Cash and cash equivalents, beginning of year 5,147 7,121 4,789
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,903 $ 5,147 $ 7,121
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash (paid for) received from income taxes $ (107) $ 1,221 $12,247
- -----------------------------------------------------------------------------------------------
Cash (paid for) interest $ (541) $ (1,088) $ (608)
- -----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(Dollars in thousands, except share and per share data)
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Wahlco Environmental Systems, Inc. ("the Company") was incorporated on
February 6, 1990 as a Delaware corporation and issued ten shares of common
stock to Pacific Diversified Capital Company ("PDC"), a wholly-owned
subsidiary of San Diego Gas & Electric Company ("SDG&E"). On April 25, 1990,
the Company issued an additional 14,259,990 shares of common stock to PDC in
exchange for all of the outstanding stock of Wahlco, Inc. ("Wahlco"), at that
time a wholly-owned subsidiary of PDC. For financial reporting purposes, the
exchange was accounted for as a reorganization of companies under common
control and the historical cost basis of Wahlco carried over to the Company.
Wahlco's predecessor, known as Wahlco, Inc. ("the Predecessor Company"),
was acquired by PDC in October 1987 for a purchase price of $40,000 and
contingent consideration based on certain Wahlco earnings levels. On March 1,
1990, Wahlco, PDC and the shareholders of the Predecessor Company entered
into an Earnout Payment Agreement which fixed the amount of the contingent
consideration provided for in the October 1987 merger agreement at $10,750
plus accrued interest of $171 through the settlement date of May 1990. The
payment of this obligation was accounted for as additional purchase price,
increasing goodwill.
In May 1990, the Company issued 3,389,000 shares of common stock in its
initial public offering. Total proceeds to the Company, net of underwriters'
discount and expenses related to the offering, were approximately $37,881. As
a result of the offering, PDC's ownership interest in the Company was reduced
to approximately 81%.
On May 15, 1995, PDC entered into a purchase agreement with WES
Acquisition Corporation ("WESAC"), an affiliate of Wexford Capital
Corporation, under which WESAC purchased $4,900 of the Company's outstanding
debt to PDC, and PDC contributed to the capital of the Company the remaining
approximately $20,000 the Company owed to PDC. Pursuant to the same
agreement, WESAC agreed to purchase PDC's 81 percent stock interest in the
Company. The share transfer was approved under the Hart-Scott-Rodino
Antitrust Act on June 2, 1995, and the purchase of the stock interest was
completed on June 6, 1995.
OPERATIONS
The Company designs, manufactures, and sells air pollution control and
power
31
<PAGE>
plant efficiency equipment, combined cycle gas turbine products, metallic
bellows, and related services to electric utilities, independent power
producers, cogeneration plants, and industrial manufacturers worldwide. Under
separate licensing agreements, the Company manufactures and installs products
for the control of volatile organic compounds. The Company also provides
mechanical plant installation services and rents mechanical equipment to
users in the U. K. The Company operates through several distinct
subsidiaries, which focus on specific geographical regions or products. These
entities, located throughout the United States and other geographical
locations, are coordinated through common corporate management.
The Company's business is affected by world, national and local economic
conditions and events, legislation, government negotiations, competition,
exchange and interest rates and changing technology.
The Company sells its products primarily to large utility and other
industrial customers worldwide. Credit is extended based on an evaluation of
the customer's financial condition, and collateral generally is not required.
The Company incurred net losses of $10,809 in 1996, and $11,352 in 1995,
and $66,149 in 1994, and a net cash inflow (outflow) from operations of
$(4,092) in 1996, and $(10,338) in 1995, and $2,418 in 1994. The cash flow
deficits in 1996 and 1995 were funded through borrowings from WESAC and
Silicon Valley Bank as described below and more fully in Note 6. The 1994
cash inflow was primarily associated with a decrease in refundable taxes of
$8,640 resulting from the receipt of tax benefits of $12,500 from PDC.
In October 1995, the Company entered into a loan and security agreement
with Silicon Valley Bank ("SVB") under which SVB provided the Company with a
$4,000 working capital loan through September 1996. In May 1996, the Company
revised the terms of the credit line with SVB. Under the renegotiated terms,
SVB agreed to provide a $3,000 line of credit, without covenants, to the
Company through October 25, 1996. WESAC agreed to collateralize its guarantee
of the Company's outstanding loan balance of $1,900 with cash, and to
similarly collateralize any additional principal and interest borrowings up
to the maximum of $3,000.
In October 1996, the Silicon Valley Bank agreement was further modified,
so that (i) the maturity date was extended to May 1998, and (ii) the interest
rate on funds borrowed by the Company was reduced from about 11% to about
5.5%, since WESAC had deposited cash collateral equivalent to the funds
borrowed with Silicon Valley Bank. Borrowings under the loan totaled $1,927
at December 31, 1996, which included $1,700 of cash borrowings and $227 cash
collateral for letters of credit issued under this loan arrangement.
In August 1996, the Company reached an agreement with WESAC, pursuant to
which WESAC agreed to lend the Company up to $1,600. The loan bears interest
at an annual rate of 13%; matures on January 1, 1997; and is secured by all
of the assets of the Company. The Company had drawn $1,500 against this loan
as of December 31, 1996. The
32
<PAGE>
maturity of this loan has been extended as described below.
In October 1996, the Company announced a capital restructuring plan that
will reduce the Company's debt and provide additional working capital. The
capital restructure plan, subject to final documentation and stockholder
approval, involves converting $5,000 of WESAC debt into 12% preferred stock.
The preferred stock will be convertible into 10,958,904 common shares,
representing a per share conversion price of $0.45625, the average closing
price of the common stock for the thirty trading days prior to October 18,
1996. Quarterly dividends on the preferred stock can be paid in additional
preferred stock in lieu of cash, at the option of the Company.
As part of the restructuring plan, WESAC extended the maturity of the
August 1996 $1,600 facility and the Silicon Valley Bank loan. Both facilities
mature in May 1998. WESAC also agreed to provide the Company with a new
$2,400 standby line of credit.
As of March 31, 1997, the Company had not drawn the remaining $100
thousand available under the August 1996 term loan or any funds on the $2.4
million line.
The Company believes that the extension of the existing facilities with
WESAC and Silicon Valley Bank, along with the new line of credit, will be
adequate to fund the Company's operations during 1997. However, significant
changes in the Company's anticipated level of business and other events could
substantially increase the Company's cash requirements above those now
anticipated, and thereby materially and adversely affect the Company's
results of operations and financial condition. Therefore, the Company is
continuing to seek additional sources of financing and to evaluate various
strategies, including seeking new capital to meet its working capital
requirements. There can be no assurance, however, that the Company will be
successful in these efforts.
All of the above conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification
of liabilities that may result from the possible inability of the Company to
continue as a going concern.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
33
<PAGE>
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
REVENUE RECOGNITION
Revenues from most of the Company's large contracts are recognized using
the percentage-of-completion method. Under this method, revenues are
recognized in the same proportion as the percentage of costs incurred during
the period to estimated total costs for each contract. Changes in job
performance, job conditions, estimated profitability and final contract
settlements may result in revisions to revenue recognition and are recognized
in the period in which the revisions are determined. It is reasonably
possible that the revenues and estimated costs on certain contracts may
change in the near term.
Revenues from other products are recognized on a completed contract
basis, where revenues and their associated costs are recognized when the
contract is complete or when the product is shipped.
Revenues from rental and service contracts are recognized over the
respective lease or service period.
Cost of revenues includes all direct materials, labor costs and
indirect costs related to contract performance such as indirect labor,
warranty, supplies, tools, repairs and depreciation.
Selling, general and administrative costs are charged to expense as
incurred.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities, at
the date of purchase, of three months or less to be cash equivalents.
RESTRICTED CASH
At December 31, 1996, $1,050 of cash was pledged to the Company's
various banks as collateral for the letters of credit and other bank
guarantees.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
34
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated over the
following estimated useful lives, predominantly using the straight-line
method:
Buildings and improvements 5 to 35 years
Machinery and equipment 3 to 15 years
GOODWILL AND OTHER INTANGIBLE ASSETS
Management routinely evaluates events or conditions that might indicate
impairment of value or require a reduction in the amortization period of the
Company's goodwill and other intangible assets. As discussed above, the
Company's financial performance has been below expectations during the last
three years. It continues to experience intensifying competition and margin
pressure in its major markets, and has restructured its operations in
response to these factors. As a result, management took substantial
write-downs against goodwill and other intangibles during the quarter ended
June 30, 1994, reduced the amortization period from 40 to 20 years effective
June 1, 1994 and wrote-off the remaining goodwill during the fourth quarter
of 1995. (See note 5).
In March, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("FAS 121") which changed
the method of accounting for long-lived assets, whereby long-lived assets
that are expected to be held and used in operations should be carried at the
lower of cost or the fair value of the asset and long-lived assets to be
disposed of should be reported at the lower of carrying amount or fair value
less cost to sell. In evaluating long-lived assets held for use, an
impairment loss is recognized if the sum of the expected future cash flows
(undiscounted and without interest charge) is less than the carrying amount
of the asset. Once a determination has been made that an impairment loss
should be recognized for long-term assets expected to be held and used,
various assumptions and estimates are used to determine fair value.
Subsequent to the write-off of goodwill in the fourth quarter of 1995, the
Company adopted the provisions of FAS 121, effective December 31, 1995. No
additional write downs of assets were required under FAS 121 in 1996 or 1995.
It is reasonably possible that the estimates used to determine the fair value
of certain long-lived assets will change in the near term.
INCOME TAXES
The Company prepares a consolidated Federal income tax return. The
effective tax rate is different than the Federal statutory rate principally
due to losses from the Company's operations which cannot be utilized and from
certain state taxes. The Company files separate state, Puerto Rican and
foreign income tax returns.
35
<PAGE>
The Company accounts for income taxes under the method prescribed by FAS
No. 109. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Prior to the acquisition by WESAC, the Company's U.S. operations were
consolidated into the tax return of its 81% parent, PDC. A tax sharing
agreement with PDC dated April 2, 1990, enabled the Company to receive tax
benefits from its taxable losses. This tax sharing agreement between the
Company and PDC terminated on the closing of the equity sale to Wexford,
retroactive to January 1, 1995. The Company has not and is not expected to
enter into a similar tax sharing arrangement with WESAC.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
common shares outstanding. Common stock equivalents were antidilutive in each
of the years 1996, 1995, and 1994.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries, which are
principally located in the United Kingdom and Italy, are translated at
year-end rates of exchange, and revenues and expenses are translated at
average monthly rates of exchange. Gains and losses resulting from foreign
currency transactions (transactions denominated in other than the
subsidiary's functional currency) are included in operations and are not
significant. The change in the Foreign Currency Translation Adjustment, which
is included in stockholders' deficit, was primarily due to a strengthening of
the foreign currencies against the U.S. dollar.
PRODUCT WARRANTY COSTS
Provision for estimated warranty expense is recorded at the time of sale
and periodically adjusted to reflect actual experience. The Company reported
warranty expense provisions of $1,794, $1,137 and $981 in 1994, 1995, and
1996, respectively. Costs charged against the warranty reserve at WEP, Inc.
have been reduced significantly over the past three years, from $1,410 in 1994,
to $700 in 1995, and to $335 in 1996. Significant warranty costs have been
incurred since 1992 to re-design and correct toggle type diverters, acquired
at the time of the purchase of Bachmann.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 consolidated financial statements
have been reclassified to conform with the 1996 presentation.
36
<PAGE>
2. BALANCE SHEET COMPONENTS
1996 1995
- -------------------------------------------------------------------------------
Inventories:
Raw materials $ 1,375 $ 1,910
Work in process 3,152 6,579
Finished goods 211 222
- -------------------------------------------------------------------------------
$ 4,738 $ 8,711
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Other accrued liabilities:
Commissions $ 944 $ 1,030
Warranty 1,279 826
Restructuring 249 375
Accrued contract costs 646 5,032
Other 1,457 1,645
- -------------------------------------------------------------------------------
$ 4,575 $ 8,908
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Land $ 270 $ 270
Buildings and improvements 4,290 4,308
Machinery and equipment 11,301 11,629
Construction in progress 0 26
- -------------------------------------------------------------------------------
15,861 16,233
Less accumulated depreciation and amortization (10,671) (10,312)
- -------------------------------------------------------------------------------
$ 5,190 $ 5,921
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3. DISPOSALS OF SUBSIDIARIES
In May 1995, the Company initiated the closure of the
manufacturing plant in Puerto Rico, where it assembled flue gas conditioning
("FGC") systems, and transferred the manufacture of these systems to Santa
Ana, California. On October 20, 1995, Wahlco, Inc. sold the manufacturing
facility in Puerto Rico for $1,550. The facility was operated by a
subsidiary, Wahlco International, Inc.
On January 19, 1994, Wahlco Power Products, Inc. ("WPPI") sold
substantially all of the assets associated with the manufacture of its tube
shield products for $600 and a 6 percent royalty payable quarterly, with a
minimum royalty payment per year of $100 for four years. Subsequent to
receipt of the first $100 payment, the remaining royalty obligation was set
aside for a cash settlement of $240 in May 1995.
37
<PAGE>
The WPPI air preheater line and other equipment used in the
manufacture of heater baskets was sold on October 7, 1994 to ABB Air
Preheater, Inc. ("ABB"), in conjunction with the settlement of a lawsuit. The
amount paid to the Company by ABB to settle the lawsuit and sell the
manufacturing line and associated equipment was $1,500 in cash and a
commitment to provide $1,000 in heater basket product to fill future orders.
The Company sold the WPPI plant and remaining equipment in May 1995 for
$1,270.
The Company sold the machinery, equipment and stock inventory
at Wahlco Engineered Products, Pty. Ltd., its Australian subsidiary, for
approximately $300 in August 1995. In May 1995, the Company closed the
operations of Exergetic Systems, Inc., its performance monitoring subsidiary
located in California, and sold nominal assets to the previous owner.
4. REORGANIZATION
As part of a restructuring plan in 1994, the Company took
charges totaling $2,906 for the closure of several facilities, and reserves
totaling $1,469 for the termination of 169 employees were established.
During 1996 and 1995, $534 and $578, respectively, were paid in benefits
against reserves.
The following data reflect the combined results of the
subsidiaries identified for closure during 1994:
Years ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Revenues:
Product Sales $ 605 $ 3,428 $ 7,040
Service - 30 3,256
- -------------------------------------------------------------------------------
$ 605 $ 3,458 $ 10,296
- -------------------------------------------------------------------------------
Cost of Revenues:
Product Sales $ 669 $ 2,954 $ 7,874
Service - 34 3,472
- -------------------------------------------------------------------------------
$ 669 $ 2,988 $ 11,346
- -------------------------------------------------------------------------------
Operating loss before restructuring charges $ 431 $ 745 $ 5,747
- -------------------------------------------------------------------------------
5. GOODWILL AND OTHER INTANGIBLE WRITE-DOWNS
During 1995 and 1994, the Company evaluated the value of
goodwill and intangibles, given intensifying competition and declining
margins. As a result of this analysis, the Company wrote-off goodwill
totaling $2,406 during the fourth quarter of 1995, which represented the
remaining goodwill at Wahlco, Inc. and Pentney of $1,772 and $634,
respectively.
38
<PAGE>
In 1994, the Company recorded write-downs of $50,403 and $1,826 of goodwill
and other intangibles, respectively, during the quarter ended June 30, 1994.
The write-down of goodwill consisted of $35,999 associated with its FGC and
staged nitrogen oxide removal system businesses and $14,404 associated with
its engineered products business.
The other intangible write-downs in 1994 consisted primarily of
$1,570 in gas flow diverter patents, which were no longer significant since
the product had been redesigned. Other intangible write-downs were $165 and
$91 associated with noncompete agreements with the previous owners of ESI and
FSA, respectively.
As of December 31, 1995, the Company had no goodwill remaining
on the balance sheet.
6. LINES OF CREDIT AND CAPITAL RESTRUCTURING PLAN
On October 25, 1995, the Company entered into a loan and security
agreement with Silicon Valley Bank ("SVB") under which SVB provided the
Company with a $4,000 working capital loan through September 1996. Working
capital draws by the Company under this facility were guaranteed by WESAC, up
to the limit of the line. Borrowings under the loan totaled $1,927 at
December 31, 1996, which included $1,700 of cash borrowings and $227 of cash
collateral for letters of credit issued under this loan arrangement.
On May 9, 1996, the Company revised the terms of the credit line
with SVB. Under the renegotiated terms, SVB agreed to provide a $3,000 line
of credit, without covenants, to the Company through October 25, 1996. WESAC
agreed to collateralize its guarantee of the Company's outstanding loan
balance of $1,900 with cash, and to similarly collateralize any additional
principal and interest borrowings up to the maximum of $3,000. As
consideration for posting the collateral, the Company agreed to pay WESAC a
fee in the form of a note for $150 payable in two years at 15% interest.
On October 25, 1996, the Silicon Valley Bank agreement was further
modified, so that (i) the maturity date was extended to May 1998, and (ii)
the interest rate on funds borrowed by the Company was reduced from about 11%
to about 5.5%, since WESAC deposited cash collateral equivalent to the funds
borrowed with Silicon Valley Bank. As part of the loan and security
agreement in October 1995 and the renegotiation in October 1996, the Company
issued warrants to SVB to purchase 175,000 shares of the Company's Common
Stock at $2.29 per share, which warrants expire on October 26, 2000.
On August 28, 1996, the Company reached an agreement with WESAC,
pursuant to which WESAC agreed to lend the Company up to $1,600. The loan
bears interest at an annual rate of 13%, and is secured by all of the assets
of the Company. Interest and a commitment fee of $32 payable to WESAC are
capitalized. In further consideration for making the loan, the Company
agreed to issue to WESAC or its designee five year warrants
39
<PAGE>
to purchase the Company's common stock as the funds are drawn down. Each
warrant covers the number of shares of common stock equal to the quotient of
(i) the dollar amount of the draw down divided by (ii) $0.47, the approximate
closing price of the common stock on August 16, 1996. The warrants become
exercisable on issuance at $0.47 per share. The Company had drawn $1,500
against this loan as of December 31, 1996, and issued warrants covering
3,404,255 shares of common stock to four WESAC partnerships which provided
the funds. The loan matured on January 1, 1997 but was extended as described
below.
The warrants described above have been determined to have nominal
value and have not been separately recorded in equity.
On October 18, 1996, the Company announced a capital restructuring
plan that will reduce the Company's debt and provide additional working
capital. The capital restructure plan, subject to final documentation and
stockholder approval, involves converting $5,000 of WESAC debt into 12%
preferred stock. The preferred stock will be convertible into 10,958,904
common shares, representing a per share conversion price of $0.45625, the
average closing price of the common stock for the thirty trading days prior
to October 18, 1996. Quarterly dividends on the preferred stock can be paid
in additional preferred stock in lieu of cash, at the option of the Company.
The impact on the Company's capital structure of the conversion of
WESAC debt into preferred stock, as described above, is as follows:
Proforma Impact of Converting Debt into Preferred Stock
Consolidated Balance Sheet at December 31, 1996
PRIOR TO AFTER
CONVERSION CONVERSION
---------- ----------
Long-term debt $12,145 $7,145
Stockholders' equity $(2,820) $2,180
As part of the restructuring plan, WESAC extended the maturity of
the August 1996 $1,600 facility and the Silicon Valley Bank loan. Both
facilities mature in May 1998. WESAC also agreed to provide the Company with
a new $2,400 standby line of credit.
The Company believes that the extension of the existing facilities
with WESAC and Silicon Valley Bank, along with the new line of credit, will
be adequate to fund the Company's operations during 1997. However,
significant changes in the Company's anticipated level of business and other
events could substantially increase the Company's cash requirements above
those now anticipated, and thereby materially and adversely affect the
Company's results of operations and financial condition. Therefore, the
Company is continuing to seek additional sources of financing and to evaluate
various strategies, including seeking new capital to meet its working capital
requirements. There can be no assurance, however, that the Company will be
successful in these efforts.
40
<PAGE>
Selected data, with respect to the SVB facility and the former line of
credit, is shown below:
1996 1995 1994
- ------------------------------------------------------------------------------
Balance at December 31 $ 1,700 $ 1,700 $ -
Interest rate at December 31 5.5% 10.5% -
Maximum amount outstanding $ 1,700 $ 1,700 $ 14,000
Average amount outstanding $ 1,700 $ 312 $ 3,583
Weighted average interest rate 9.54% 8.97% 5.91%
- ------------------------------------------------------------------------------
The average amounts outstanding and weighted average interest
rates during each year are based on daily balances outstanding.
Equipment and facility notes in Italy and the Corporate office
of $305 and $68, respectively, total to the caption, notes payable.
7. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1996 1995
- --------------------------------------------------------------------------------
7.9525% note payable, due in fifty-four monthly
installments of $19 (principal and interest) through
June 2000, secured by related lease payments (Note 11) $ 702 $ 874
Secured term loan from WESAC, bearing interest at
13.0% and due May, 1998. 5,763 5,061
Secured term loan from WESAC, bearing interest at
13.0% and due May, 1998. 2,372 2,087
Secured loan from Silicon Valley Bank, bearing interest at
5.5% and due May 1998. 1,700 -
Secured term loan from WESAC, bearing interest at
13.0% and due May, 1998. 1,585 -
Other credit agreements 251 130
- --------------------------------------------------------------------------------
12,373 8,152
Less current portion (228) (204)
- --------------------------------------------------------------------------------
$ 12,145 $ 7,948
- --------------------------------------------------------------------------------
41
<PAGE>
The fair value of each of the long-term debt instruments discussed
above, as well as the notes payable discussed in Note 6, approximate the
carrying amounts within an insignificant difference based on current market
interest rates for similar instruments.
Under an agreement reached between the Company and WESAC on March
22, 1996, interest due and payable from WESAC is compounded. This agreement
commenced with interest due and payable for the fourth quarter of 1995 and
extends through the maturity date. The above secured loan balances with WESAC
include compounded interest of $1,304 and $248, as of December 31, 1996 and
1995, respectively, under this agreement.
Principal payments due on long-term debt for the years subsequent to
December 31, 1996 are as follows:
1997 $ 228
1998 11,812
1999 237
2000 96
- ----------------------------------------------------------------------
Total $ 12,373
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
8. INCOME TAXES
The benefit from income taxes consists of the following:
Years ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Federal
Current $ - $ - $(4,446)
Deferred (2,266) (2,286) (4,039)
State
Current - - 420
Deferred (658) (664) (653)
Puerto Rico
Current - - 18
Deferred - - 1
Foreign
Current - - -
Deferred - - -
- -------------------------------------------------------------------------------
Benefit from income taxes $(2,924) $(2,950) $(8,699)
- -------------------------------------------------------------------------------
The benefit from income taxes differs from the amount obtained by applying
the statutory tax rate as follows:
42
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal benefit at statutory rate $ (4,669) $ (4,863) $(25,828)
Federal benefit not allowable (pre-acquisition) - 1,326 -
Goodwill amortization - 735 14,812
State taxes, net of Federal impact (498) (703) (232)
Limitation on benefit from current year net operating losses 1,327 - -
Puerto Rican earnings (benefited) taxed at lower rates - 44 (249)
Foreign losses without current benefit 1,816 1,032 5,046
Reduction in Federal and state tax liabilities no longer required (900) (106) (1,443)
Investment loss in foreign affiliates and other - (415) (805)
- --------------------------------------------------------------------------------------------------
Benefit from income taxes $ (2,924) $ (2,950) $ (8,699)
- --------------------------------------------------------------------------------------------------
</TABLE>
The Company had a tax sharing agreement with PDC which
terminated on the closing of the equity sale to WESAC. The Company will not
enter into a similar tax sharing agreement with WESAC. The tax effect of the
WESAC purchase transaction resulted in a net deferred tax liability for the
Company, which was offset against paid in capital.
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
Deferred tax assets 1996 1995
- -------------------------------------------------------------------------------
Accruals $ 1,681 $ 496
Organization and start up costs - -
Net operating loss carry forwards 4,904 2,748
Other - 284
- -------------------------------------------------------------------------------
Total deferred tax assets 6,585 3,528
Valuation allowance (2,423) -
- -------------------------------------------------------------------------------
Net deferred tax assets 4,162 3,528
- -------------------------------------------------------------------------------
Deferred tax liabilities
- -------------------------------------------------------------------------------
Depreciation 1,088 165
Basis adjustments on purchased assets 3,074 5,379
- -------------------------------------------------------------------------------
Total deferred tax liabilities 4,162 5,544
- -------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 0 $ (2,016)
- -------------------------------------------------------------------------------
The Company has provided residual Puerto Rico tollgate tax on
approximately
43
<PAGE>
$11,000 of undistributed earnings as of December 31, 1995 and will be
obligated to pay tollgate taxes estimated at approximately $1,000 over the
next several years, which has been included in other liabilities in the
accompanying balance sheet.
9. RELATED PARTY TRANSACTIONS
Included in other assets at December 31, 1996 and 1995 are $110 and
$432, respectively, of non-interest bearing relocation loans to officers,
employees and certain former employees, which become due in 1998 and are
secured by second trust deeds on each individual's primary residence. The
amount of discount and imputed interest income related to these notes is not
material.
10. LEASING ACTIVITIES
The Company leases buildings, certain office space, vehicles,
equipment and manufacturing facilities under non-cancelable operating leases
which require annual aggregate rental payments as follows:
1997 $ 1,145
1998 1,111
1999 1,124
2000 1,135
2001 774
- ----------------------------------------------------------------------
Total $ 5,289
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Total rental expense for the years ended December 31, 1996, 1995 and
1994 was $1,296, $1,251 and $1,341, respectively.
During 1993, the Company sold a customer equipment lease contract to
its equipment lease lender. The transaction resulted in revenue of
approximately $800, the elimination of the Company's net investment in
equipment leases and a reduction of the related long-term debt of
approximately $3,200. The lease lender has the right to have the Company buy
back the equipment at a definitive amount under certain circumstances, as
defined. As of December 31, 1996, the total amount due, had one of these
events occurred, would have been $2,699, of which $702 is included in
long-term debt (see note 7).
A security interest in service contract payments has been provided
to a lender as collateral for a loan (see note 7).
44
<PAGE>
11. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan established under
Internal Revenue Code Section 401(k) covering substantially all eligible
domestic employees. In addition, as a result of certain acquisitions, the
Company has adopted several foreign defined contribution plans covering
substantially all eligible foreign employees. Employer contributions to the
plans are made to an individual account for each participant based on a
prescribed percentage of the employee's voluntary contribution, in accordance
with the plans. Retirement benefits to the employees are based solely on the
amount available in each participant's account at the time of retirement or
termination of employment. The Company's contributions to the plans for the
years ended December 31, 1996, 1995, and 1994 were $324, $419, and $437,
respectively.
12. STOCK-BASED COMPENSATION PLAN
The Company has one stock option plan, the 1990 Stock Appreciation
Rights Plan, now known as the Second Amended and Restated 1990 Stock
Incentive Plan (the "Amended Plan"). The Company accounts for the Amended
Plan under APB No. 25, under which the Company recognized compensation cost
of $201 and $596 in 1996 and 1995, respectively.
During 1994, the stockholders approved an amendment to the Amended
Plan, which increased the number of Stock Appreciation Rights ("SARs")
available to 1,764,900 from 882,450 and extended the plan to April 23, 1997.
During 1995, the stockholders approved a further amendment to the
Amended Plan which increased the number of shares available for grant to
2,647,350 from 1,764,900, eliminated the minimum purchase price for
non-qualified stock options which had been established at 100% of the fair
market value of the Company's Common Stock on the grant date and increased
the maximum number of shares that may be subject to options granted to any
one person in any one-year period from 50,000 to 1,000,000.
Information with respect to the Amended Plan follows:
<TABLE>
<CAPTION>
Rights and Number of
Options Available Number Rights Stock Option
for Issuance of Rights Prices Options Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1993 178,290 664,160 4.50-13.00 40,000 7.25
Granted - - - -
Canceled (96,650) 4.50-13.00 - 7.25
- ----------------------------------------------------------------------------------------------
Outstanding at December 31, 1994 1,157,390 567,510 4.50-13.00 40,000 7.25
Granted - - 2,069,920 0.49-2.50
Canceled (124,600) - - -
- ----------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1995 94,520 442,910 $4.50-13.00 2,109,920 0.49-7.25
Granted - 345,048
Canceled (145,510) (220,612)
- --------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 115,594 297,400 $4.50-13.00 2,234,356 0.49-7.25
- --------------------------------------------------------------------------------------------
Exercisable 297,400 $4.50-13.00 1,716,417 $0.49-7.25
- --------------------------------------------------------------------------------------------
</TABLE>
Had compensation cost for these plans been determined consistent with
FASB Statement No. 123, the Company's net loss and earnings per share would
have been the following pro forma amounts:
1996 1995 1994
-------- -------- --------
Net Loss: As Reported $(10,809) $(11,352) $(66,149)
Pro Forma (11,554) (12,084) (66,149)
Primary EPS: As Reported $ (0.61) $ (0.64) $ (3.75)
Pro Forma (0.65) (0.68) (3.75)
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
A summary of the status of the Company's option plan at December 31,
1994, 1995 and 1996, and changes during the years then ended is presented in
the table and narrative below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- -----------------
Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg
(000) Ex Price (000) Ex Price (000) Ex Price
--------- -------- --------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of year 2,119,920 $.807 40,000 $7.25 40,000 $7.25
Granted 335,048 - 2,079,920 - 0 0
Exercised 0 0 0 0 0 0
Forfeited (220,612) 0.490 0 0 0 0
Expired 0 0 0 0 0 0
--------- --------- ------
Outstanding at end of year 2,234,356 $.764 2,119,920 $.807 40,000 $7.25
--------- --------- ------
Exercisable at end of year 1,716,417 510,593 40,000
Weighted average fair value
of options granted $0.53 $0.94 -
</TABLE>
46
<PAGE>
The options granted vest through 2000 and expire from 2000 to 2006.
A total of 1,624,356 options outstanding at December 31, 1996 have
an exercise price of $0.49 per share, 580,000 shares have an exercise price
of $.992 per share and 30,000 shares have an exercise price of $1.875 per
share. A total of 2,079,920 options were granted in 1995 which have a
weighted average remaining contractual life of 8.2 years; 335,048 options
were granted in 1996 which have a weighted average remaining contractual life
of 9.6 years.
The fair value of each grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions. Risk-free interest rates ranged from 5.7 to 6.3 percent
for options granted in 1995, and ranged from 5.9 to 6.6 percent for options
granted in 1996. Expected dividend yields of 0 percent were assumed for all
options. Expected option lives of 8.2 and 9.6 years were assumed for the 1995
and 1996 options, respectively, and expected volatility was 62% and 76% for
options granted in 1995 and 1996, respectively.
13. BUSINESS SEGMENT, GEOGRAPHIC AREA AND MAJOR CUSTOMER INFORMATION
The Company operates in several industries: the after-boiler
market, the gas-turbine power-generation market, and the market for
elimination of volatile organic compounds. The Company markets and sells most
of its products through a coordinated worldwide sales force which interacts
with both electric utilities and industrial customers in connection with the
reduction and control of air pollution, gas flow control, energy efficiency,
and the control of volatile organic compounds.
The following table shows financial information by geographic area.
"Other" consists principally of Canada and Australia:
- -----------------------------------------------------------------------------
1996 United States Europe Other Totals
- -----------------------------------------------------------------------------
Revenues $ 20,404 $ 22,042 $ 605 $ 43,051
Operating loss (7,160) (5,555) (230) (12,945)
Loss before income taxes (8,392) (5,495) 154 (13,733)
Identifiable assets 16,049 13,675 96 29,820
- -----------------------------------------------------------------------------
1995
- -----------------------------------------------------------------------------
Revenues $ 21,550 $ 35,122 $ 3,428 $ 60,100
Operating loss (9,826) (2,341) (369) (12,536)
Loss before income taxes (11,267) (2,864) (171) (14,302)
Identifiable assets 22,638 22,999 882 46,519
- -----------------------------------------------------------------------------
1994
- -----------------------------------------------------------------------------
Revenues $ 34,246 $ 31,296 $ 4,355 $ 69,897
Operating loss (57,064) (12,623) (3,836) (73,523)
Loss before income taxes (58,748) (12,290) (3,810) (74,848)
Identifiable assets 37,911 19,202 1,817 58,930
- -----------------------------------------------------------------------------
Export sales were as follows:
- ---------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------
Canada $ 413 $ 685 680
Europe 997 3,228 973
Asia 2,869 3,451 3,479
Africa and Other 1,932 1,331 1,511
- ---------------------------------------------------------------------
$ 6,211 $ $ 8,695 6,643
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
There were no sales to individual customers constituting 10% or
more of total revenues in 1996, 1995 or 1994.
47
<PAGE>
14. COMMITMENTS AND CONTINGENCIES
As security for performance and advances on long-term contracts,
the Company at December 31, 1996 is contingently liable in the amount of
approximately $1,277 under standby letters of credit and bank guarantees.
The Company and certain of its subsidiaries are parties to claims
and litigation proceedings arising in the normal course of business.
Although the legal responsibility and financial impact with respect to such
claims and litigation cannot presently be ascertained, the Company does not
believe that these matters will result in the payment by the Company of
monetary damages that in the aggregate, would be material in relation to the
consolidated financial position of the Company. It is reasonably possible that
the reserves provided for by the Company with respect to such claims and
litigation could change in the near term.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Income
(Loss)
Revenue Gross Margin Net Income (Loss) Per Share
- ---------------------------------------------------------------------
1996
Quarters:
First $ 13,388 $ 2,812 $ (810) $ (0.05)
Second 10,119 11 (4,058) (0.23)
Third 9,123 1,243 (1,417) (0.08)
Fourth 10,421 (112) (4,524) (0.25)
- ---------------------------------------------------------------------
Total $ 43,051 $ 3,954 $(10,809) $ (0.61)
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
1995
Quarters:
First $ 15,908 $ 3,711 $ (517) $ (.03)
Second 14,459 2,587 (2,810) (.16)
Third 14,556 2,927 111 .01
Fourth 15,177 (645) (8,136) (.46)
- ---------------------------------------------------------------------
Total $ 60,100 $ 8,580 $(11,352) $ (.64)
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
During the second and fourth quarters of 1996, and the fourth
quarter of 1995, the Company's gross margin, net loss and net loss per share
were affected by write-downs and restructuring charges (see note 4).
48
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Wahlco Environmental Systems, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged to Costs Charged to Other Balance at
Beginning of Period and Expenses Accounts - Describe Deductions - Describe(1) End of Year
------------------- ---------------- ------------------- ------------------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $1,277 $2,350 $421 $3,206
Inventory valuation reserve 286 120 237 169
Restructuring reserve 375 0 126 249
Warranty reserve 826 981 528 1,279
------------------ --------------- --------------- -----------
Total $2,764 $3,451 $1,312 $4,903
------------------ --------------- --------------- -----------
------------------ --------------- --------------- -----------
Year ended December 31, 1995:
Allowance for doubtful accounts $923 $870 $516 $1,277
Inventory valuation reserve 1,110 141 965 286
Restructuring reserve 1,819 (590) 854 375
Warranty reserve 1,662 1,137 1,973 826
------------------ --------------- --------------- -----------
Total $5,514 $1,558 $4,308 $2,764
------------------ --------------- --------------- -----------
------------------ --------------- --------------- -----------
Year ended December 31, 1994:
Allowance for doubtful accounts $507 $865 $449 $923
Inventory valuation reserve 470 849 209 1,110
Restructuring reserve 1,611 4,386 4,178 1,819
Warranty reserve 1,184 1,794 1,316 1,662
------------------ --------------- --------------- -----------
Total $3,772 $7,894 $6,152 $5,514
------------------ --------------- --------------- -----------
------------------ --------------- --------------- -----------
</TABLE>
(1) Amounts charged off during the year.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item regarding the Company's
directors is included in the Company's Proxy Statement to be filed pursuant
to Schedule 14A in connection with the Company's 1997 Annual Meeting of
Stockholders under the section captioned "Election of Directors" and is
incorporated herein by reference thereto. Information regarding the
Company's executive officers is set forth in Part I hereof, above, under the
caption "Executive Officers" and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Company's
Proxy Statement to be filed pursuant to Schedule 14A in connection with the
Company's 1997 Annual Meeting of Stockholders under the sections captioned
"Directors' Compensation" and "Executive Compensation" and is incorporated
herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Company's
Proxy Statement to be filed pursuant to Schedule 14A in connection with the
Company's 1997 Annual Meeting of Stockholders under the section captioned
"Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Company's
Proxy Statement to be filed pursuant to Schedule 14A in connection with the
Company's 1997 Annual Meeting of Stockholders under the section captioned
"Compensation Committee Interlocks and Insider Participation" and is
incorporated herein by reference thereto.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
(a) 1. Financial Statements, included in Part II of this report:
Reports of Independent Public Accountants 25
Consolidated Balance Sheets at December 31, 1996 and 1995 27
Consolidated Statements of Operations for the Years ended 28
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity (Deficit) for the 29
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years ended 30
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements 31
2. Financial Statement Schedules, included in Part II of this report:
Schedule II Valuation and Qualifying Accountants 49
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
3. Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
(b) Exhibits set forth in the following Exhibit Index are filed as a
part of this report.
</TABLE>
52
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Company. (1)
3.2 Bylaws of the Company. (1)
10.4 Standard Industrial Lease, dated as of September 3, 1991, by and
between Triple R, a California general partnership ("Triple R"), and
Wahlco Inc., a California corporation ("Wahlco CA"). (2)
10.5 First Addendum to Standard Industrial Lease, dated as of September 3,
1991 between Triple R and Wahlco CA. (2)
10.8 Second Amendment to Office Lease, dated as of December 16, 1991, by
and between BCG and WES. (2)
10.26 Grant of Industrial Tax Exemption by the Commonwealth of Puerto Rico
to Wahlco International, Inc., a Delaware corporation ("Wahlco
International"), dated as of March 10, 1982. (1)
10.27 Order of Conversion of Grant of Puerto Rico Industrial Tax Exemption
to Wahlco International, dated as of October 29, 1987, and as amended
on March 8, 1989. (1)
10.32 Redemption and Indemnification Agreement, dated as of October 28,
1987, by and among PDC, Wahlco CA, Robert R. Wahler, as Trustee of
the Wahler Family Trust, Triple R, John H. McDonald, Westfore, a
California limited partnership and Corona Properties, a California
limited partnership. (1)
10.36 Form of Indemnity Agreement between WES and each of its directors
and officers. (1) (8)
10.71 WES 1990 Stock Appreciation Rights Plan. (3) (8)
10.72 Installment Note, dated as of July 20, 1992, by and between Wahlco
CA and Sanwa Business Credit Corporation, a Delaware corporation
("Sanwa"). (4)
10.73 Guaranty Agreement, dated as of July 20, 1992, by and between WES and
Sanwa. (4)
53
<PAGE>
Exhibit
Number Description
- ------- -----------
10.74 Security Agreement, dated as of July 20, 1992, by and between Wahlco
CA, and Sanwa, with accompanying Consent and Acknowledgment of WES,
as Guarantor. (4)
10.78 First Amended and Restated WES 1990 Incentive Award Plan. (4) (8)
10.117 Letter Agreement dated August 31, 1993, by and between WES, Wahlco
CA, Wahlco Power Products, Inc., a Delaware corporation ("Wahlco
Power Products"), Bachmann Companies, Inc., a Delaware corporation
and Sanwa. (7)
10.157 Settlement Agreement, dated as of October 7, 1994, by and between
Wahlco Power Products and ABB Air Preheater, Inc. ("ABB"). (12)
10.159 Mutual General Release, dated as of October 6, 1994, between Wahlco
Power Products and ABB. (12)
10.160 Promissory Note, dated as of December 15, 1994, by and between PDC
and WES. (14)
10.161 Letter, dated as of December 15, 1994, from PDC to WES regarding
the due date of the Promissory Notes. (14)
10.162 Letter, dated as of January 31, 1995, from PDC to WES regarding the
due date of the Promissory Notes. (14)
10.163 Letter, dated as of March 15, 1995, from PDC to WES regarding the
due date of the Promissory Notes. (14)
10.164 Letter, dated as of April 14, 1995, from PDC to WES regarding the due
date of the Promissory Notes. (14)
10.165 Promissory Note, dated as of April 7, 1995, by and between PDC
and WES. (14)
10.166 Assignment of Note, Loan Agreement and Collateral Documents. (14)
10.167 Promissory Note, dated as of May 15, 1995, between WES and WESAC.
(14)
54
<PAGE>
Exhibit
Number Description
- ------- -----------
10.168 Commitment letter, dated as of May 15, 1995, from WESAC to WES for
a secured term loan in the principal amount of $2 million. (14)
10.170 Employment Agreement between WES and C. Stephen Beal dated as of
May 5, 1995. (15)
10.172 Employment Agreement between WES and A. Noel DeWinter dated as of
May 16, 1995. (8)
10.173 Employment Agreement between WES and Barry J. Southam dated June 1,
1995. (8)
10.174 Employment Agreement between WES and James J. Ferrigan dated June 1,
1995. (8)
10.175 Loan and Security Agreement between Wahlco, Inc. and Silicon Valley
Bank. (15)
10.176 Amendment and Forbearance Agreement, dated as of May 9, 1996, by and
between Silicon Valley Bank and Wahlco, Inc. (16)
10.177 Term Loan Agreement and Warrant Agreement and Form of Warrant between
WES, Inc., and WESAC dated August 28, 1996. (17)
10.178 Letter Agreement, dated March 12, 1997, by and between WES and WESAC.
(18)
10.179 Letter Agreement, dated April 12, 1996, by and between WES and WESAC.
(18)
10.180 Promissory Note, dated as of May 9, 1996, by and between WES and
WESAC. (18)
10.181 Promissory Note, dated as of November 15, 1996, by and between WES
and WESAC. (18)
10.182 Warrant Certificate, dated as of November 15, 1996, by and between
WES and Wexford Special Situations 1996, L. P. (18)
55
<PAGE>
Exhibit
Number Description
- ------- -----------
10.183 Warrant Certificate, dated as of November 15, 1996, by and between
WES and Wexford Special Situations 1996 Institutional, L. P. (18)
10.184 Warrant Certificate, dated as of November 15, 1996, by and between
WES and Wexford Special Situations 1996 Limited. (18)
10.185 Warrant Certificate, dated as of November 15, 1996, by and between
WES and Wexford - Euris Special Situations 1996, L. P. (18)
10.186 Term Loan Agreement, dated as of July 28, 1995, between WESAC and
WES for a secured term loan in the principal amount of $2.0
million. (18)
22 Subsidiaries of the Company. (15)
(1) Previously filed with the Securities and Exchange Commission on as an
exhibit to Registration Statement No. 33-33698, as amended, and incorporated
herein by this reference.
(2) Incorporated herein by reference to the Annual Report on Form 10-K of
Registrant for the year ended December 31, 1991.
(3) Incorporated herein by reference to the Quarterly Report on Form 10-Q of
Registrant for Quarter ended June 30, 1991.
(4) Incorporated herein by reference to the Quarterly Report on Form 10-Q of
Registrant for the Quarter ended September 30, 1992.
(5) Incorporated herein by reference to the Annual Report on Form 10-K of
Registrant for Year ended December 31, 1992.
(6) Incorporated herein by reference to the Quarterly Report on Form 10-Q of
Registrant for Quarter ended June 30, 1993.
(7) Incorporated herein by reference to the Quarterly Report on Form 10-Q of
Registrant for Quarter ended September 30, 1993.
(8) Management contract or compensatory plan.
(9) Incorporated herein by reference to the Annual Report on Form 10-K of
Registrant for Year ended December 31, 1993.
(10) Incorporated herein by reference to the Quarterly Report on Form 10-Q
of Registrant for
56
<PAGE>
Quarter ended March 31, 1994.
(11) Incorporated herein by reference to the Quarterly Report on Form 10-Q
of Registrant for the Quarter ended June 30, 1994.
(12) Incorporated herein by reference to the Quarterly Report on Form 10-Q
of Registrant for Quarter ended September 30, 1994.
(13) Incorporated herein by reference to the Current Report on Form 8-K of
Registrant, dated August 30, 1991.
(14) Incorporated herein by reference to the Annual Report on Form 10-K of
Registrant for the year ended December 31, 1994.
(15) Incorporated herein by reference to the Annual Report on Form 10-K of
Registrant for the year ended December 31, 1995.
(16) Incorporated herein by reference to the Quarterly Report on Form 10-Q
of Registrant for Quarter ended June 30, 1996.
(17) Incorporated herein by reference to the Quarterly Report on Form 10-Q of
Registrant for Quarter ended September 30, 1996.
(18) Filed herewith.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DATE: April 12, 1997 WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By: /s/ C. Stephen Beal
-----------------------
C. Stephen Beal
President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints each of C. Stephen Beal, A. Noel DeWinter and
Roger M. Barzun jointly and severally his true and lawful attorneys-in-fact
and agent with full power of substitution for him and in his name, place and
stead in any and all capacities to sign on his behalf, individually and in
each capacity stated below, to file any and all amendments to this Annual
Report on Form 10-K with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents and each of them full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises as fully as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their substitute or substitutes may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the date indicated.
NAME TITLE/CAPACITY DATE
/s/ C. Stephen Beal President & Chief Executive Officer April 14, 1997
- ----------------------- (principal executive officer)
C. Stephen Beal and Director
/s/ A. Noel DeWinter Vice President & Chief Financial Officer April 14, 1997
- ----------------------- (principal financial and accounting
A. Noel DeWinter officer)
/s/ Charles E. Davidson Director April 14, 1997
- -----------------------
58
<PAGE>
/s/ Maarten D. Hemsley Director April 14, 1997
- -----------------------
Maarten D. Hemsley
/s/ Paul H. Hunn Director April 14, 1997
- -----------------------
Paul H. Hunn
/s/ Mark L. Plaumann Director April 14, 1997
- -----------------------
/s/David R. A. Steadman Director April 14, 1997
- -----------------------
59
<PAGE>
WES ACQUISITION CORP.
411 West Putnam Avenue
Greenwich, Connecticut 06830
March 12, 1997
Wahlco Environmental Systems, Inc.
3660 West Segerstrom Avenue
Santa Ana, CA 92704
Gentlemen:
Reference is made to (1) that certain Term Loan Agreement dated as of July
28, 1995, as amended (the "Term Loan Agreement"), between WES Acquisition Corp.
("WESAC") and Wahlco Environmental Systems, Inc. ("Wahlco"), and the notes
issued pursuant thereto (the "Term Loan Notes"), (2) that certain Note, dated
May 15, 1995 (the "Acquisition Debt Note"), in the principal amount of
$4,900,000 from Wahlco to WESAC and (3) that certain amendment dated April
12,1996 of the Term Loan Agreement and the Acquisition Debt Note.
This letter will confirm that, commencing January 1, 1997, and continuing
through the respective maturity dates of the Term Loan Agreement and the
Acquisition Debt Note, on each date when interest shall have become, or would
otherwise become, due and payable in respect of the Acquisition Debt Note and
the Term Loan Notes, such interest shall be capitalized and added to the
outstanding principal balance of the Acquisition Debt Note or the Term Loan
Notes, as the case may be, and the new principal balance of the Acquisition Debt
Note and the Term Loan Notes, as the case may be, shall accrue interest at the
rate provided therein.
This agreement constitutes the entire agreement between Wahlco and WESAC
with respect to the subject matter hereof. Except as set forth herein, the Term
Loan Agreement, the Term Loan Notes and the Acquisition Debt Note remain in full
force and effect.
This agreement may not be amended, modified or waived except by a written
agreement signed by Wahlco and WESAC. This agreement shall be governed by the
laws of the State of New York. This agreement may be executed in counterparts,
all of which, when taken together, shall constitute one agreement.
<PAGE>
Wahlco Environmental Systems, Inc.
March 12, 1997
Page 2
If the foregoing correctly sets forth our agreement with respect to the
subject matter hereof, kindly sign in the space indicated below and return two
executed copies of this letter to WESAC at its address set forth above.
WES ACQUISITION CORP.
By: illegible
------------------------------
Its: Vice President
------------------------------
Agreed to and accepted as of
this 12th day of March, 1997
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By: illegible
------------------------------
Its: VP CFO
------------------------------
<PAGE>
WES ACQUISITION CORP.
411 West Putnam Avenue
Greenwich, Connecticut 06830
April 12, 1996
Wahlco Environmental Systems, Inc.
9660 West Segerstrom Avenue
Santa Ana, CA 92704
Gentlemen:
Reference is made to (l) that certain Term Loan Agreement dated as of July
28, 1995, as amended (the "Term Loan Agreement"), between WESAC Acquisition
Corp. ("WESAC") and Wahlco Environmental Systems, INC, ("Wahlco"), and the notes
issued pursuant thereto (the "Term Loan Notes"), and (2) that certain Note,
dated May 15, 1995 (the "Acquisition Debt Note"), in the principal amount of
$4,900,000 from Wahlco to WESAC.
This letter will confirm that, commencing October 1, 1995, and continuing
through December 31, 1996, on each date when interest shall have become, or
would otherwise become, due and. payable in respect of the Acquisition Debt Note
and the Term Loan Notes, such interest shall be capitalized and added to the
outstanding principal balance of the Acquisition Debt Note or the Term Loan
Notes, as the case may be, and the new principal balance of the Acquisition Debt
Note and the Term Loan Notes, as the case may be, shall accrue interest at the
rate provided therein.
This agreement constitutes the entire agreement between Wahlco and WESAC
with respect to the subject matter hereof, Except as set forth herein, the Term
Loan Agreement, the Term loan Notes and the Acquisition Debt Note remain in full
force and effect.
This agreement may not bc amended, modified or waived except by a written
agreement signed by Wahlco and WESAC. This agreement shall he governed by the
laws of the State of New York. This agreement may be executed in counterparts,
all of which, when taken together, shall constitute one agreement.
<PAGE>
Wahlco Environmental Systems, Inc.
April 12, 1996
Page 2
If the foregoing correctly sets forth our agreement with respect to the
subject matter hereof, kindly sign in the space indicated below and return two
executed copies of this letter to WESAC at its address set forth above.
WES ACQUISITION CORP.
By: /s/ illegible
------------------------------
Its: VP
-----------------------------
Agreed to and accepted as of
this 15th day of February, 1996
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By: /s/ illegible
------------------------------
Its: Chief Financial Officer
-----------------------------
<PAGE>
EXECUTION COPY
FEE NOTE
NOTE
$150,000 Santa Ana, California
May 9, 1996
FOR VALUE RECEIVED, the undersigned, WAHLCO ENVIRONMENTAL SYSTEMS,
INC., a Delaware corporation (hereinafter referred to as "Borrower"), hereby
unconditionally PROMISES TO PAY to the order of WES ACQUISITION CORP., a
Delaware corporation ("Lender"), at 411 West Putnam Avenue, Greenwich,
Connecticut 06830, or at such other place as the holder of this Note may
designate from time to time in writing, in lawful money of the United States of
America and in immediately available funds, the principal amount of ONE HUNDRED
FIFTY THOUSAND HUNDRED DOLLARS ($150,000), or such lesser amount as may be
outstanding from time to time hereunder, together with interest on the unpaid
principal amount of this Note outstanding from time to time at the rate of 15%
per annum.
This Note is issued pursuant to that certain Term Loan Agreement dated
as of July 28, 1995, as amended, between Borrower and Lender (the "Loan
Agreement"), and is entitled to the benefit and security of the Loan Documents
provided for therein, to which reference is hereby made for a statement of all
of the terms and conditions under which the loan evidenced hereby is made. This
Note is subordinate to the Sanwa Obligations to the extent provided in the Loan
Agreement. All capitalized terms, unless otherwise defined herein, shall have
the meanings ascribed to them in the Loan Agreement.
The principal amount of the indebtedness evidenced hereby shall be
payable, if not sooner paid in full, on May 9, 1998. Interest on the unpaid
principal balance of this Note shall be payable at maturity, and shall accrue
from and after April 30, 1996.
If any payment on this Note becomes due and payable on a day other
than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day and, with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension.
Upon and after the occurrence of an Event of Default, this Note may,
as provided in the Loan Agreement, and without demand, notice or legal process
of any kind, be declared, and immediately shall become, due and payable.
Demand, presentment, protest and notice of nonpayment and protest are
hereby waived by Borrower.
<PAGE>
This Note has been executed, delivered and accepted at Santa Ana,
California and shall be interpreted, governed by, and construed in accordance
with, the laws of the State of New York.
WAHLCO ENVIRONMENTAL SERVICES, INC
By: /s/David Steadman
------------------------------
Name: David Steadman
Title: Chairman
-2-
<PAGE>
NEW SERIES A NOTE
EXECUTION COPY
THE SECURITIES REPRESENTED BY THIS NOTE HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
SERIES A SECURED NOTE
$1,500,000 Santa Ana, California
November 15, 1996
FOR VALUE RECEIVED, the undersigned, WAHLCO ENVIRONMENTAL SYSTEMS,
INC., a Delaware corporation (hereinafter referred to as "Borrower"), hereby
unconditionally PROMISES TO PAY to the order of WES ACQUISITION CORP.
("Lender"), at 411 West Putnam Avenue, Greenwich, Connecticut 06830, or at such
other place as the holder of this Note may designate from time to time in
writing, in lawful money of the United States of America and in immediately
available funds, the principal amount of ONE MILLION FIVE HUNDRED THOUSAND
DOLLARS ($1,500,000). Reference is made to that certain agreement dated as of
August 28, 1996 between Borrower and Lender (the "1996 Financing Agreement"), as
amended. This Note is one of the Series A Notes defined in the 1996 Financing
Agreement. Capitalized terms used herein shall have the meanings assigned to
such terms in the 1996 Financing Agreement.
1. REFINANCING OF PRIOR NOTES. This Note refinances three notes
issued pursuant to the 1996 Financing Agreement (1) a note in the principal
amount of $400,000 dated August 28, 1996, (2) a note in the principal amount of
$400,000 dated September 10, 1996, and (3) a note in the principal amount of
$500,000 dated October 15, 1996. No interest on any such note has been paid to
date.
1. INTEREST. This Note shall be deemed to accrue interest on (1) the
principal amount of $400,000 from and after August 28, 1996, (2) the additional
principal amount of $400,000 from and after September 10, 1996, (3) the
additional principal amount of $500,000 from and after October 15, 1996, and (4)
the additional principal amount of $200,000 from and after November 15, 1996
until repaid at the rate of 13% per annum. Interest on each Series A Advance
shall be paid in kind and capitalized and added to the outstanding principal
amount of each Series A Note quarterly on each March 31, June 30, September 30
and December 31. Interest on each Series A Advance shall be computed on the
basis of a 365-day year for the actual number of days elapsed.
2. MATURITY.
(a) This Note shall mature, unless prepaid or accelerated, on
May 15,1998 (the "Maturity Date"). The Maturity Date may be accelerated upon the
occurrence of an Event of Default under the 1996 Financing Letter, the Loan
Agreement, any Collateral Document, or as provided herein.
<PAGE>
(b) Borrower may prepay this Note at any time or from time to
time on one Business Day's notice to Lender. Such prepayment shall not, however,
delay or postpone any subsequent payment under this Note.
(c) If any payment on this Note becomes due and payable on a day
other than a Business Day (as hereinafter defined), the maturity thereof shall
be extended to the next succeeding Business Day and, with respect to payments of
principal, interest thereon shall be payable at the then applicable rate during
such extension.
(d) It is agreed that if this Note is not paid when due or
declared due hereunder, the unpaid principal due thereon shall bear interest at
the rate of seventeen percent (17%) per annum.
3. COLLATERAL. This Note is secured by a perfected lien on all of
the Collateral securing the obligations outstanding under the Loan Agreement.
4. RANKING. The Series 1997 Notes rank senior to Series A Notes. The
Series A Notes rank senior to the New Note and Term Loan Advances made pursuant
to the Loan Agreement. The Series A Notes are subordinated in right of payment
to the Series 1997 Notes and obligations owed by Borrower or Wahlco to Silicon
Valley Bank (the "Silicon Obligations"); PROVIDED, HOWEVER, that such
subordination to the Silicon Obligations shall terminate upon the repayment in
full of the Silicon Obligations; PROVIDED, FURTHER, that if and to the extent
that Lender becomes subrogated to the rights of Silicon in respect of the
Silicon Obligations, the Series A Advances shall rank senior in right of payment
to such subrogation rights.
5. EVENTS OF DEFAULT. Upon and after the occurrence of an Event of
Default, the holder of this Note may, without demand, notice or legal process of
any kind, be accelerated, following which acceleration, (a) all amounts due
hereunder immediately shall become due and payable, and (b) the holder of this
Note may exercise all remedies under the Loan Agreement and the Collateral
Documents.
6. WAIVERS AND MODIFICATIONS. Borrower expressly waives presentment,
protest and demand, notice of protest, demand and dishonor and nonpayment of
this Note and all other notices of any kind, and expressly agrees that this
Note, or any payment thereunder, may be extended from time to time without in
any way affecting the liability of Borrower. To the fullest extent permitted by
law, the defense of the statute of limitations in any action on this Note is
waived by the undersigned. This Note is to be governed by and construed
according to the laws of the State of New York. No single or partial exercise of
any power hereunder, under any agreement now or hereafter securing this Note
shall preclude other or further exercise thereof or the exercise of any other
power. No delay or omission on the part of Lender in exercising any right
hereunder, under the Security Agreement or any other agreement now or hereafter
securing this Note shall operate as a waiver of such right or of any
- 2 -
<PAGE>
other right under this Note. Any waiver or modification of any provision of this
Note must be in writing and signed by the Lender. This Note may from time to
time be extended or renewed, with notice to and acceptance by the undersigned
and any related right may be waived, exchanged, surrendered or otherwise dealt
with, all without affecting the liability of the undersigned hereon.
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By: /s/ Charles Stephen Beal
------------------------------
Name: Charles Stephen Beal
Title: President & CEO
- 3 -
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OR ANY STATE SECURITIES LAWS AND, ACCORDINGLY, THE TRANSFER,
RESALE OR OTHER DISPOSITION OF SUCH SECURITIES MAY ONLY BE MADE PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR A VALID EXEMPTION
THEREFROM AND IN COMPLIANCE WITH ALL APPLICABLE STATE SECURITIES LAWS, AND BY
DELIVERY OF AN OPINION OF COUNSEL SATISFACTORY TO COUNSEL FOR THE COMPANY THAT
THERE IS SUCH AN EXEMPTION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF THAT CERTAIN WARRANT AGREEMENT DATED AS OF AUGUST 28, 1996, BY AND
BETWEEN THE HOLDER AND THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED
UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.
EXERCISABLE ONLY ON OR BEFORE 5:00 P.M. NEW YORK CITY TIME
December 31, 2001
No. W-1 2,277,787 Warrants
WARRANT CERTIFICATE
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
This Warrant Certificate certifies that WEXFORD SPECIAL SITUATIONS
1996, L.P., or registered assigns, is the registered holder (the "Holder") of
TWO MILLION TWO HUNDRED SEVENTY-SEVEN THOUSAND SEVEN HUNDRED EIGHTY-SEVEN
(2,277,787) Warrants (the 'Warrants") expiring December 31, 2001 to purchase
common stock of Wahlco Environmental Systems, Inc., a Delaware corporation (the
"Company"). Each Warrant entitles the Holder to purchase from the Company, on or
after the issuance hereof, and on or before 5:00 p.m. New York City time on
December 31, 2001 one fully paid and nonassessable share of common stock of the
Company, par value S.01 per share ("Common Stock"), at the exercise price (the
"Exercise Price") at the time in effect under the Warrant Agreement (as
hereinafter defined), payable in lawful money of the United States of America,
upon surrender of this Warrant Certificate and payment of such Exercise Price to
the Company in New York, New York, but only subject to the conditions set forth
herein and in the Warrant Agreement; PROVIDED, HOWEVER, that the number or kinds
of shares of Common Stock or other securities (or in certain events other
property) purchasable upon exercise of the Warrants and the Exercise Price
referred to herein may as of the date of this Warrant Certificate have been, or
may after such date be, adjusted as a result of the occurrence of certain
events, as more fully provided in the Warrant Agreement. Payment of the Exercise
Price shall be made by certified or official bank check payable to the order of
the Company.
No Warrant may be exercised after 5:00 p.m. New York City time on
December 31, 2001 (the "Expiration Date").
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to a Warrant Agreement, dated as of
August 28, 1996 (the 'Warrant Agreement"), duly executed and delivered by the
Company, which Warrant Agreement is hereby incorporated by reference in and made
a part of this instrument and is hereby referred to for a description of the
rights, limitation of rights, obligations, duties and immunities thereunder of
the Company and Holder. initially capitalized terms used but not defined herein
shall have the
<PAGE>
available for inspection at the Company, located at 3600 West Segerstrom Avenue,
Santa Ana, California 92704, during regular business hours.
Warrants may be exercised to purchase shares of Common Stock from the
Company at any time, or from time to time on or after the date hereof and on or
before the Expiration Date, at the Exercise Price then in effect. The Holder may
exercise the Warrants represented by this Warrant Certificate by surrendering
the Warrant Certificate with the Form of Exercise set forth hereon properly
completed and executed, together with payment of the Exercise Price at the time
in effect, to the Company; PROVIDED, HOWEVER, that a Holder who is also a
creditor of the Company may exercise Warrants by payment as herein provided,
cancellation of indebtedness or a combination thereof. In the event that an
exercise of Warrants evidenced hereby shall be an exercise of less than the
total number of Warrants evidenced hereby, there shall be issued to Holder or
Holder's assignee a new Warrant Certificate evidencing the number of Warrants
not exercised. No adjustment will be made for any dividends on any shares of
Common Stock issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price may, subject to certain conditions, be adjusted and
under certain circumstances the Warrant may become exercisable for securities or
other assets other than the shares of Common Stock referred to on the face
hereof. If the Exercise Price is adjusted, the Warrant Agreement provides that
the number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be adjusted.
The Company may, but shall not be required to, issue fractions of
shares of Common Stock or any certificates that evidence fractional shares of
Common Stock. In lieu of fractional shares of Common Stock, the Company shall
make a cash payment therefor equal in amount to the product of the applicable
fraction multiplied by the current market price then in effect.
Subject to the terms and conditions contained in the Warrant
Agreement, the Warrants represented by this Warrant Certificate are
transferable, in whole or in part, upon surrender of this Warrant Certificate to
the Company, together with a written assignment of the Warrant on the Form of
Assignment or Partial Assignment, as the case may be, set forth hereon or in
other form satisfactory to the Company, duly executed by Holder or Holder s duly
appointed legal representative, and together with funds to pay any transfer
taxes payable in connection with such transfer. Upon such surrender and payment,
a new Warrant Certificate shall be issued and delivered in the name of the
assignee and in the denomination or denominations specified in such instrument
of assignment. If less than all of the Warrants represented by this Warrant
Certificate are being transferred, a new Warrant Certificate or Certificates
shall be issued for the portion of this Warrant Certificate not being
transferred.
This Warrant Certificate may be divided or combined with other Warrant
Certificates upon surrender hereof to the Company, together with a written
notice specifying the names and denominations in which new Warrant Certificates
are to be issued, signed by Holder or Holder's duly appointed legal
representative, and together with the funds to pay any transfer taxes payable in
connection with such transfer. Upon such surrender and payment, a new Warrant
Certificate or Certificates shall be issued and delivered in accordance with
such notice.
The Company shall make no service or other charge in connection with
any such transfer or exchange of this Warrant Certificate (notwithstanding any
notation of ownership or other
-2-
<PAGE>
writing hereon made by anyone), for the purpose of any exercise hereof, any
distribution to Holder hereof, and for all other purposes.
This Warrant Certificate shall not be valid unless countersigned by
Holder by the manual signature of one of its authorized officers.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
WAHLCO ENVIRONMENTAL SYSTEMS, INC..
By: /s/ illegible
------------------------------
Name:
Title:
Dated: November 15, 1996
Attest:
/s/ Anne L. Anderson
- ------------------------------
[Countersigned:]
- ------------------------------
By: /s/ illegible
---------------------------
Authorized Officer
-3-
<PAGE>
[FORM OF EXERCISE]
[To be executed upon exercise of Warrant]
The undersigned (the "Holder") hereby irrevocably elects to exercise
the right, represented by Wahlco Environmental Systems, Inc. Warrant Certificate
No. W-1, to purchase ___________ shares of Wahlco Environmental Systems, Inc.,
in the amount of $__________ in accordance with the terms hereof. The
undersigned requests that a certificate for such Common Stock be registered in
the name of _______________ (insert social security or other identifying number)
whose address is _______________________________. If said number of
____________ shares of Common Stock is less than all of the shares of Common
Stock purchasable under Wahlco Environmental Systems, Inc. Warrant Certificate
No. W-1, Holder requests that a new Warrant Certificate representing the
remaining balance of the shares of Common Stock be registered in the name of
Holder and that such Warrant Certificate be delivered to _________________ whose
address is ________________________________________________________.
Dated:______________,_________.
WEXFORD SPECIAL SITUATIONS 1996, L.P.
By:
------------------------------
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
- ------------------------------
(insert Social Security or
Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed to transfer the Warrant Certificate)
FOR VALUE RECEIVED, WEXFORD SPECIAL SITUATIONS 1996 LIMITED hereby
sells, assigns and transfers unto______________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(print name and address of transferee) the Warrants represented by Wahlco
Environmental Systems, Inc. Warrant Certificate No. W-1 together with all right,
title and interest evidenced thereby, and does hereby irrevocably constitute and
appoint__________________, attorney, to transfer the said Warrants on the books
of Wahlco Environmental Systems, Inc. with full power of substitution.
Dated:__________,________
WEXFORD SPECIAL SITUATIONS 1996, L.P.
By:
------------------------------
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
- ------------------------------
(Insert Social Security
or Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
[FORM OF PARTIAL ASSIGNMENT]
(To be executed to transfer the Warrant Certificate)
FOR VALUE RECEIVED, WEXFORD SPECIAL SITUATIONS 1996 LIMITED (the
"Holder") hereby sells, assigns and transfers unto__________________________
(print name and address of transferee) _______________ Warrants represented by
Wahlco Environmental Systems, Inc. Warrant Certificate No. W-1, together with
all right, title and interest evidenced thereby, and does hereby irrevocably
constitute and appoint __________________ attorney, to transfer said Warrants on
the books of Wahlco Environmental Systems, Inc., with full power of
substitution. Holder requests that a new Warrant Certificate representing the
remaining balance of Warrants represented by Wahlco Environmental Systems, Inc.
Warrant Certificate No. W-1 be registered in the name of Holder and that such
Warrant Certificate be delivered to __________________________ whose address is
_______________________________________________________________.
Dated:_____________,________.
WEXFORD SPECIAL SITUATIONS 1996, L.P.
By:
------------------------------
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
- ------------------------------
(Insert Social Security
or Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OR ANY STATE SECURITIES LAWS AND, ACCORDINGLY, THE TRANSFER,
RESALE OR OTHER DISPOSITION OF SUCH SECURITIES MAY ONLY BE MADE PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR A VALID EXEMPTION
THEREFROM AND IN COMPLIANCE WITH ALL APPLICABLE STATE SECURITIES LAWS, AND BY
DELIVERY OF AN OPINION OF COUNSEL SATISFACTORY TO COUNSEL FOR THE COMPANY THAT
THERE IS SUCH AN EXEMPTION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF THAT CERTAIN WARRANT AGREEMENT DATED AS OF AUGUST 28, 1996, BY AND
BETWEEN THE HOLDER AND THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED
UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.
EXERCISABLE ONLY ON OR BEFORE 5:00 P.M. NEW YORK CITY TIME
December 31, 2001
No. W-2 423,149 Warrants
WARRANT CERTIFICATE
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
This Warrant Certificate certifies that WEXFORD SPECIAL SITUATIONS
1996 INSTITUTIONAL, L.P., or registered assigns, is the registered holder (the
"Holder") of FOUR HUNDRED TWENTY-THREE THOUSAND ONE HUNDRED FORTY-NINE (423,149)
Warrants (the "Warrants") expiring December 31, 2001 to purchase common stock of
Wahlco Environmental Systems, Inc., a Delaware corporation (the "Company"). Each
Warrant entitles the Holder to purchase from the Company, on or after the
issuance hereof, and on or before 5:00 p.m. New York City time on December 31,
2001 one fully paid and nonassessable share of common stock of the Company, par
value S.01 per share ("Common Stock"), at the exercise price (the "Exercise
Price") at the time in effect under the Warrant Agreement (as hereinafter
defined), payable in lawful money of the United States of America, upon
surrender of this Warrant Certificate and payment of such Exercise Price to the
Company in New York, New York, but only subject to the conditions set forth
herein and in the Warrant Agreement; PROVIDED, HOWEVER, that the number or kinds
of shares of Common Stock or other securities (or in certain events other
property) purchasable upon exercise of the Warrants and the Exercise Price
referred to herein may as of the date of this Warrant Certificate have been, or
may after such date be, adjusted as a result of the occurrence of certain
events, as more fully provided in the Warrant Agreement. Payment of the Exercise
Price shall be made by certified or official bank check payable to the order of
the Company.
No Warrant may be exercised after 5:00 p.m. New York City time on
December 31, 2001 (the "Expiration Date").
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to a Warrant Agreement, dated as of
August 28, 1996 (the "Warrant Agreement"), duly executed and delivered by the
Company, which Warrant Agreement is hereby incorporated by reference in and made
a part of this instrument and is hereby referred to for a description of the
rights, limitation of rights, obligations, duties and immunities thereunder of
the Company and Holder. initially capitalized terms used but not defined herein
shall have the meanings assigned to such terms in the Warrant Agreement. A copy
of the Warrant Agreement is
<PAGE>
available for inspection at the Company, located at 3600 West Segerstrom Avenue,
Santa Ana, California 92704, during regular business hours.
Warrants may be exercised to purchase shares of Common Stock from the
Company at any time, or from time to time on or after the date hereof and on or
before the Expiration Date, at the Exercise Price then in effect. The Holder may
exercise the Warrants represented by this Warrant Certificate by surrendering
the Warrant Certificate with the Form of Exercise set forth hereon properly
completed and executed, together with payment of the Exercise Price at the time
in effect, to the Company; PROVIDED, HOWEVER, that a Holder who is also a
creditor of the Company may exercise Warrants by payment as herein provided,
cancellation of indebtedness or a combination thereof. In the event that an
exercise of Warrants evidenced hereby shall be an exercise of less than the
total number of Warrants evidenced hereby, there shall be issued to Holder or
Holder's assignee a new Warrant Certificate evidencing the number of Warrants
not exercised. No adjustment will be made for any dividends on any shares of
Common Stock issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price may, subject to certain conditions, be adjusted and
under certain circumstances the Warrant may become exercisable for securities or
other assets other than the shares of Common Stock referred to on the face
hereof. If the Exercise Price is adjusted, the Warrant Agreement provides that
the number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be adjusted.
The Company may, but shall not be required to, issue fractions of
shares of Common Stock or any certificates that evidence fractional shares of
Common Stock. In lieu of fractional shares of Common Stock, the Company shall
make a cash payment therefor equal in amount to the product of the applicable
fraction multiplied by the current market price then in effect.
Subject to the terms and conditions contained in the Warrant
Agreement, the Warrants represented by this Warrant Certificate are
transferable, in whole or in part, upon surrender of this Warrant Certificate to
the Company, together with a written assignment of the Warrant on the Form of
Assignment or Partial Assignment, as the case may be, set forth hereon or in
other form satisfactory to the Company, duly executed by Holder or Holder's duly
appointed legal representative, and together with funds to pay any transfer
taxes payable in connection with such transfer. Upon such surrender and payment,
a new Warrant Certificate shall be issued and delivered in the name of the
assignee and in the denomination or denominations specified in such instrument
of assignment. If less than all of the Warrants represented by this Warrant
Certificate are being transferred, a new Warrant Certificate or Certificates
shall be issued for the portion of this Warrant Certificate not being
transferred.
This Warrant Certificate may be divided or combined with other Warrant
Certificates upon surrender hereof to the Company, together with a written
notice specifying the names and denominations in which new Warrant Certificates
are to be issued, signed by Holder or Holder's duly appointed legal
representative, and together with the funds to pay any transfer taxes payable in
connection with such transfer. Upon such surrender and payment, a new Warrant
Certificate or Certificates shall be issued and delivered in accordance with
such notice.
The Company shall make no service or other charge in connection with
any such transfer or exchange of this Warrant Certificate (notwithstanding any
notation of ownership or other
-2-
<PAGE>
writing hereon made by anyone), for the purpose of any exercise hereof, any
distribution to Holder hereof, and for all other purposes.
This Warrant Certificate shall not be valid unless countersigned by
Holder by the manual signature of one of its authorized officers.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
WAHLCO ENVIRONMENTAL SYSTEMS, INC..
By: /s/ illegible
------------------------------
Name:
Title:
Dated: November 15, 1996
Attest:
/s/ Anne L. Anderson
- ------------------------------
[Countersigned:]
- ------------------------------
By: /s/ illegible
---------------------------
Authorized Officer
-3-
<PAGE>
[FORM OF EXERCISE]
[To be executed upon exercise of Warrant]
The undersigned (the "Holder" hereby irrevocably elects to exercise
the right, represented by Wahlco Environmental Systems, Inc. Warrant Certificate
No. W-2, to purchase ___________ shares of Wahlco Environmental Systems, Inc.,
in the amount of $______ in accordance with the terms hereof. The undersigned
requests that a certificate for such Common Stock be registered in the name of
_____ (insert social security or other identifying number) whose address is
_______. If said number of ________ shares of Common Stock is less than all of
the shares of Common Stock purchasable under Wahlco Environmental Systems, Inc.
Warrant Certificate No. W-2, Holder requests that a new Warrant Certificate
representing the remaining balance of the shares of Common Stock be registered
in the name of Holder and that such Warrant Certificate be delivered ______ to
whose address is __________________________________________
Dated: __________,_____.
WEXFORD SPECIAL SITUATIONS 1996
INSTITUTIONAL, L.P.
By:
------------------------------
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
- ------------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed to transfer the Warrant Certificate)
FOR VALUE RECEIVED, WEXFORD SPECIAL SITUATIONS 1996 LIMITED hereby
sells, assigns and transfers unto_____________________________________________
______________________________________________________________________________
______________________________________________________________________________
(print name and address of transferee) the Warrants represented by Wahlco
Environmental Systems, Inc. Warrant Certificate No. W-2 together with all right,
title and interest evidenced thereby, and does hereby irrevocably constitute and
appoint _______________, attorney, to transfer the said Warrants on the books of
Wahlco Environmental Systems, Inc., with full power of substitution.
Dated: ______________,____.
WEXFORD SPECIAL SITUATIONS 1996
INSTITUTIONAL, L.P.
By:
------------------------------
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
- ------------------------------
(Insert Social Security
or Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
[FORM OF PARTIAL ASSIGNMENT]
(To be executed to transfer the Warrant Certificate)
FOR VALUE RECEIVED, WEXFORD SPECIAL SITUATIONS 1996 LIMITED (the
"Holder") hereby sells, assigns and transfers unto ____________________________
(print name and address of transferee) ____________ Warrants represented by
Wahlco Environmental Systems, Inc. Warrant Certificate No. W-2, together with
all right, title and interest evidenced thereby, and does hereby irrevocably
constitute and appoint _________________, attorney, to transfer said Warrants on
the books of Wahlco Environmental Systems, Inc., with full power of
substitution. Holder requests that a new Warrant Certificate representing the
remaining balance of Warrants represented by Wahlco Environmental Systems, Inc.
Warrant Certificate No. W-2 be registered in the name of Holder and that such
Warrant Certificate be delivered to _________________________ whose address is
___________________________________________________.
Dated: __________,___.
WEXFORD SPECIAL SITUATIONS 1996
INSTITUTIONAL, L.P.
By:
------------------------------
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
- ------------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OR ANY STATE SECURITIES LAWS AND, ACCORDINGLY, THE TRANSFER,
RESALE OR OTHER DISPOSITION OF SUCH SECURITIES MAY ONLY BE MADE PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR A VALID EXEMPTION
THEREFROM AND IN COMPLIANCE WITH ALL APPLICABLE STATE SECURITIES LAWS, AND BY
DELIVERY OF AN OPINION OF COUNSEL SATISFACTORY TO COUNSEL FOR THE COMPANY THAT
THERE IS SUCH AN EXEMPTION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF THAT CERTAIN WARRANT AGREEMENT DATED AS OF AUGUST 28, 1996, BY AND
BETWEEN THE HOLDER AND THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED
UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.
EXERCISABLE ONLY ON OR BEFORE 5:00 P.M. NEW YORK CITY TIME
December 31, 2001
No. W-3 115,404 Warrants
WARRANT CERTIFICATE
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
This Warrant Certificate certifies that WEXFORD SPECIAL SITUATIONS
1996 LIMITED, or registered assigns, is the registered holder (the "Holder") of
ONE HUNDRED FIFTEEN THOUSAND FOUR HUNDRED FOUR (115,404) Warrants (the
"Warrants") expiring December 31, 2001 to purchase common stock of Wahlco
Environmental Systems, Inc., a Delaware corporation (the "Company"). Each
Warrant entitles the Holder to purchase from the Company, on or after the
issuance hereof, and on or before 5:00 p.m. New York City time on December 31,
2001 one fully paid and nonassessable share of common stock of the Company, par
value S.01 per share ("Common Stock"), at the exercise price (the "Exercise
Price") at the time in effect under the Warrant Agreement (as hereinafter
defined), payable in lawful money of the United States of America, upon
surrender of this Warrant Certificate and payment of such Exercise Price to the
Company in New York, New York, but only subject to the conditions set forth
herein and in the Warrant Agreement; PROVIDED, HOWEVER, that the number or kinds
of shares of Common Stock or other securities (or in certain events other
property) purchasable upon exercise of the Warrants and the Exercise Price
referred to herein may as of the date of this Warrant Certificate have been, or
may after such date be, adjusted as a result of the occurrence of certain
events, as more fully provided in the Warrant Agreement. Payment of the Exercise
Price shall be made by certified or official bank check payable to the order of
the Company.
No Warrant may be exercised after 5:00 p.m. New York City time on
December 31, 2001 (the "Expiration Date").
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to a Warrant Agreement, dated as of
August 28, 1996 (the "Warrant Agreement"), duly executed and delivered by the
Company, which Warrant Agreement is hereby incorporated by reference in and made
a part of this instrument and is hereby referred to for a description of the
rights, limitation of rights, obligations, duties and immunities thereunder of
the Company and Holder. Initially capitalized terms used but not defined herein
shall have the meanings assigned to such terms in the Warrant Agreement. A copy
of the Warrant Agreement is
<PAGE>
available for inspection at the Company, located at 3600 West Segerstrom Avenue,
Santa Ana, California 92704, during regular business hours.
Warrants may be exercised to purchase shares of Common Stock from the
Company at any time, or from time to time on or after the date hereof and on or
before the Expiration Date, at the Exercise Price then in effect. The Holder may
exercise the Warrants represented by this Warrant Certificate by surrendering
the Warrant Certificate with the Form of Exercise set forth hereon properly
completed and executed, together with payment of the Exercise Price at the time
in effect, to the Company; PROVIDED, HOWEVER, that a Holder who is also a
creditor of the Company may exercise Warrants by payment as herein provided,
cancellation of indebtedness or a combination thereof. In the event that an
exercise of Warrants evidenced hereby shall be an exercise of less than the
total number of Warrants evidenced hereby, there shall be issued to Holder or
Holder's assignee a new Warrant Certificate evidencing the number of Warrants
not exercised. No adjustment will be made for any dividends on any shares of
Common Stock issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price may, subject to certain conditions, be adjusted and
under certain circumstances the Warrant may become exercisable for securities or
other assets other than the shares of Common Stock referred to on the face
hereof. If the Exercise Price is adjusted, the Warrant Agreement provides that
the number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be adjusted.
The Company may, but shall not be required to, issue fractions of
shares of Common Stock or any certificates that evidence fractional shares of
Common Stock. In lieu of fractional shares of Common Stock, the Company shall
make a cash payment therefor equal in amount to the product of the applicable
fraction multiplied by the current market price then in effect.
Subject to the terms and conditions contained in the Warrant
Agreement, the Warrants represented by this Warrant Certificate are
transferable, in whole or in part, upon surrender of this Warrant Certificate to
the Company, together with a written assignment of the Warrant on the Form of
Assignment or Partial Assignment, as the case may be, set forth hereon or in
other form satisfactory to the Company, duly executed by Holder or Holder's duly
appointed legal representative, and together with funds to pay any transfer
taxes payable in connection with such transfer. Upon such surrender and payment,
a new Warrant Certificate shall be issued and delivered in the name of the
assignee and in the denomination or denominations specified in such instrument
of assignment. If less than all of the Warrants represented by this Warrant
Certificate are being transferred, a new Warrant Certificate or Certificates
shall be issued for the portion of this Warrant Certificate not being
transferred.
This Warrant Certificate may be divided or combined with other Warrant
Certificates upon surrender hereof to the Company, together with a written
notice specifying the names and denominations in which new Warrant Certificates
are to be issued, signed by Holder or Holder's duly appointed legal
representative, and together with the funds to pay any transfer taxes payable in
connection with such transfer. Upon such surrender and payment, a new Warrant
Certificate or Certificates shall be issued and delivered in accordance with
such notice.
The Company shall make no service or other charge in connection with
any such transfer or exchange of this Warrant Certificate (notwithstanding any
notation of ownership or other
-2-
<PAGE>
writing hereon made by anyone), for the purpose of any exercise hereof, any
distribution to Holder hereof, and for all other purposes.
This Warrant Certificate shall not be valid unless countersigned by
Holder by the manual signature of one of its authorized officers.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
WAHLCO ENVIRONMENTAL SYSTEMS, INC..
By: /s/ illegible
------------------------------
Name:
Title:
Dated: November 15, 1996
Attest:
/s/ Anne L. Anderson
- ------------------------------
[Countersigned:]
- ------------------------------
By: /s/ illegible
------------------------------
Authorized Officer
-3-
<PAGE>
[FORM OF EXERCISE]
[To be executed upon exercise of Warrant]
The undersigned (the "Holder") hereby irrevocably elects to exercise
the right, represented by Wahlco Environmental Systems, Inc. Warrant Certificate
No. W-3, to purchase ____________ shares of Wahlco Environmental Systems, Inc.,
in the amount of $ _______ in accordance with the terms hereof. The undersigned
requests that a certificate for such Common Stock be registered in the name of
_________________ (insert social security or other identifying number) whose
address is _________________________________. If said number of __________
shares of Common Stock is less than all of the shares of Common Stock
purchasable under Wahlco Environmental Systems, Inc. Warrant Certificate No.
W-3, Holder requests that a new Warrant Certificate representing the remaining
balance of the shares of Common Stock be registered in the name of Holder and
that such Warrant Certificate be delivered to __________________ whose address
is ___________________________________________________.
Dated: _________,___.
WEXFORD SPECIAL SITUATIONS 1996 LIMITED
By:
------------------------------
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
- ------------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed to transfer the Warrant Certificate)
FOR VALUE RECEIVED, WEXFORD SPECIAL SITUATIONS 1996 LIMITED hereby
sells, assigns and transfers unto ____________________________________________
______________________________________________________________________________
______________________________________________________________________________
(print name and address of transferee) the Warrants represented by Wahlco
Environmental Systems, Inc. Warrant Certificate No. W-3 together with all right,
title and interest evidenced thereby, and does hereby irrevocably constitute and
appoint ____________________, attorney, to transfer the said Warrants on the
books of Wahlco Environmental Systems, Inc., with full power of substitution.
Dated: ____________,___.
WEXFORD SPECIAL SITUATIONS 1996 LIMITED
By:
------------------------------
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
- ------------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
[FORM OF PARTIAL ASSIGNMENT]
(To be executed to transfer the Warrant Certificate)
FOR VALUE RECEIVED, WEXFORD SPECIAL SITUATIONS 1996 LIMITED (the
"Holder") hereby sells, assigns and transfers unto ___________________________
(print name and address of transferee) ______________ Warrants represented by
Wahlco Environmental Systems, Inc. Warrant Certificate No. W-3, together with
all right, title and interest evidenced thereby, and does hereby irrevocably
constitute and appoint ________________, attorney, to transfer said Warrants on
the books of Wahlco Environmental Systems, Inc., with full power of
substitution. Holder requests that a new Warrant Certificate representing the
remaining balance of Warrants represented by Wahlco Environmental Systems, Inc.
Warrant Certificate No. W-3 be registered in the name of Holder and that such
Warrant Certificate be delivered to ___________________ whose address is
________________________________________________.
Dated: _____________,______.
WEXFORD SPECIAL SITUATIONS 1996 LIMITED
By:
------------------------------
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
- ------------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OR ANY STATE SECURITIES LAWS AND, ACCORDINGLY, THE TRANSFER,
RESALE OR OTHER DISPOSITION OF SUCH SECURITIES MAY ONLY BE MADE PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR A VALID EXEMPTION
THEREFROM AND IN COMPLIANCE WITH ALL APPLICABLE STATE SECURITIES LAWS, AND BY
DELIVERY OF AN OPINION OF COUNSEL SATISFACTORY TO COUNSEL FOR THE COMPANY THAT
THERE IS SUCH AN EXEMPTION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF THAT CERTAIN WARRANT AGREEMENT DATED AS OF AUGUST 28, 1996, BY AND
BETWEEN THE HOLDER AND THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED
UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.
EXERCISABLE ONLY ON OR BEFORE 5:00 P.M. NEW YORK CITY TIME
December 31, 2001
No. W-4 587,915 Warrants
WARRANT CERTIFICATE
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
This Warrant Certificate certifies that WEXFORD-EURIS SPECIAL
SITUATIONS 1996, L.P., or registered assigns, is the registered holder (the
"Holder") of FIVE HUNDRED EIGHTY-SEVEN THOUSAND NINE HUNDRED FIFTEEN (587,915)
Warrants (the "Warrants") expiring December 31, 2001 to purchase common stock of
Wahlco Environmental Systems, Inc., a Delaware corporation (the "Company"). Each
Warrant entitles the Holder to purchase from the Company, on or after the
issuance hereof, and on or before 5:00 p.m. New York City time on December 31,
2001 one fully paid and nonassessable share of common stock of the Company, par
value S.01 per share ("Common Stock"), at the exercise price (the "Exercise
Price") at the time in effect under the Warrant Agreement (as hereinafter
defined), payable in lawful money of the United States of America, upon
surrender of this Warrant Certificate and payment of such Exercise Price to the
Company in New York, New York, but only subject to the conditions set forth
herein and in the Warrant Agreement; PROVIDED, HOWEVER, that the number or kinds
of shares of Common Stock or other securities (or in certain events other
property) purchasable upon exercise of the Warrants and the Exercise Price
referred to herein may as of the date of this Warrant Certificate have been, or
may after such date be, adjusted as a result of the occurrence of certain
events, as more fully provided in the Warrant Agreement. Payment of the Exercise
Price shall be made by certified or official bank check payable to the order of
the Company.
No Warrant may be exercised after 5:00 p.m. New York City time on
December 31, 2001 (the "Expiration Date").
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to a Warrant Agreement, dated as of
August 28, 1996 (the "Warrant Agreement"), duly executed and delivered by the
Company, which Warrant Agreement is hereby incorporated by reference in and made
a part of this instrument and is hereby referred to for a description of the
rights, limitation of rights, obligations, duties and immunities thereunder of
the Company and Holder. Initially capitalized terms used but not defined herein
shall have the meanings assigned to such terms in the Warrant Agreement. A copy
of the Warrant Agreement is
<PAGE>
available for inspection at the Company, located at 3600 West Segerstrom Avenue,
Santa Ana, California 92704, during regular business hours.
Warrants may be exercised to purchase shares of Common Stock from the
Company at any time, or from time to time on or after the date hereof and on or
before the Expiration Date, at the Exercise Price then in effect. The Holder may
exercise the Warrants represented by this Warrant Certificate by surrendering
the Warrant Certificate with the Form of Exercise set forth hereon properly
completed and executed, together with payment of the Exercise Price at the time
in effect, to the Company; PROVIDED, HOWEVER, that a Holder who is also a
creditor of the Company may exercise Warrants by payment as herein provided,
cancellation of indebtedness or a combination thereof. In the event that an
exercise of Warrants evidenced hereby shall be an exercise of less than the
total number of Warrants evidenced hereby, there shall be issued to Holder or
Holder's assignee a new Warrant Certificate evidencing the number of Warrants
not exercised. No adjustment will be made for any dividends on any shares of
Common Stock issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price may, subject to certain conditions, be adjusted and
under certain circumstances the Warrant may become exercisable for securities or
other assets other than the shares of Common Stock referred to on the face
hereof. If the Exercise Price is adjusted, the Warrant Agreement provides that
the number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be adjusted.
The Company may, but shall not be required to, issue fractions of
shares of Common Stock or any certificates that evidence fractional shares of
Common Stock. In lieu of fractional shares of Common Stock, the Company shall
make a cash payment therefor equal in amount to the product of the applicable
fraction multiplied by the current market price then in effect.
Subject to the terms and conditions contained in the Warrant
Agreement, the Warrants represented by this Warrant Certificate are
transferable, in whole or in part, upon surrender of this Warrant Certificate to
the Company, together with a written assignment of the Warrant on the Form of
Assignment or Partial Assignment, as the case may be, set forth hereon or in
other form satisfactory to the Company, duly executed by Holder or Holder's duly
appointed legal representative, and together with funds to pay any transfer
taxes payable in connection with such transfer. Upon such surrender and payment,
a new Warrant Certificate shall be issued and delivered in the name of the
assignee and in the denomination or denominations specified in such instrument
of assignment. If less than all of the Warrants represented by this Warrant
Certificate are being transferred, a new Warrant Certificate or Certificates
shall be issued for the portion of this Warrant Certificate not being
transferred.
This Warrant Certificate may be divided or combined with other Warrant
Certificates upon surrender hereof to the Company, together with a written
notice specifying the names and denominations in which new Warrant Certificates
are to be issued, signed by Holder or Holder's duly appointed legal
representative, and together with the funds to pay any transfer taxes payable in
connection with such transfer. Upon such surrender and payment, a new Warrant
Certificate or Certificates shall be issued and delivered in accordance with
such notice.
The Company shall make no service or other charge in connection with
any such transfer or exchange of this Warrant Certificate (notwithstanding any
notation of ownership or other
-2-
<PAGE>
writing hereon made by anyone), for the purpose of any exercise hereof, any
distribution to Holder hereof, and for all other purposes.
This Warrant Certificate shall not be valid unless countersigned by
Holder by the manual signature of one of its authorized officers.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
WAHLCO ENVIRONMENTAL SYSTEMS, INC..
By: /s/ illegible
------------------------------
Name:
Title:
Dated: November 15, 1996
Attest:
/s/ Anne L. Anderson
- ------------------------------
[Countersigned:]
- ------------------------------
By: /s/ illegible
---------------------------
Authorized Officer
-3-
<PAGE>
[FORM OF EXERCISE]
[To be executed upon exercise of Warrant]
The undersigned (the "Holder") hereby irrevocably elects to exercise
the right, represented by Wahlco Environmental Systems, Inc. Warrant Certificate
No. W-4, to purchase ____________ shares of Wahlco Environmental Systems, Inc.,
in the amount of $_________ in accordance with the terms hereof. The undersigned
requests that a certificate for such Common Stock be registered in the name of
________________ (insert social security or other identifying number) whose
address is __________________________. If said number of ______________ shares
of Common Stock is less than all of the shares of Common Stock purchasable under
Wahlco Environmental Systems, Inc. Warrant Certificate No. W-4, Holder requests
that a new Warrant Certificate representing the remaining balance of the shares
of Common Stock be registered in the name of Holder and that such Warrant
Certificate be delivered to __________________ whose address is _______________
____________________________________.
Dated: _____________,____.
WEXFORD-EURIS SPECIAL SITUATIONS 1996, L.P.
By:
------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant Certificate.)
- ------------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed to transfer the Warrant Certificate)
FOR VALUE RECEIVED, WEXFORD-EURIS SPECIAL SITUATIONS 1996, L.P. hereby
sells, assigns and transfers unto _____________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(print name and address of transferee) the Warrants represented by Wahlco
Environmental Systems, Inc. Warrant Certificate No. W-4 together with all right,
title and interest evidenced thereby, and does hereby irrevocably constitute and
appoint ________________, attorney, to transfer the said Warrants on the books
of Wahlco Environmental Systems, Inc., with full power of substitution.
Dated: _________________,___.
WEXFORD-EURIS SPECIAL SITUATIONS 1996, L.P.
By:
------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant Certificate.)
- ------------------------------
(Insert Social Security
or Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
[FORM OF PARTIAL ASSIGNMENT]
(To be executed to transfer the Warrant Certificate)
FOR VALUE RECEIVED, WEXFORD-EURIS SPECIAL SITUATIONS 1996, L.P. (the
"Holder") hereby sells, assigns and transfers unto _________________________
(print name and address of transferee) ___________________ Warrants represented
by Wahlco Environmental Systems, Inc. Warrant Certificate No. W-4, together with
all right, title and interest evidenced thereby, and does hereby irrevocably
constitute and appoint ___________________, attorney, to transfer said Warrants
on the books of Wahlco Environmental Systems, Inc., with full power of
substitution. Holder requests that a new Warrant Certificate representing the
remaining balance of Warrants represented by Wahlco Environmental Systems, Inc.
Warrant Certificate No. W-4 be registered in the name of Holder and that such
Warrant Certificate be delivered to ____________________________ whose address
is ___________________________________________________.
Dated: _____________,_____.
WEXFORD-EURIS SPECIAL SITUATIONS 1996, L.P.
By:
------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant Certificate.)
- ------------------------------
(Insert Social Security
or Taxpayer Identification
Number of Holder)
Signature Guaranteed:
- ------------------------------
<PAGE>
EXECUTION COPY
$2,000,000
TERM LOAN AGREEMENT
(Dated as of July 28, 1995
between
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
as Borrower
and
WES ACQUISITION CORP.
as Lender
<PAGE>
TABLE OF CONTEXTS
SECTION Page
------- ----
1. DEFINITIONS ................................................. 1
2. AMOUNT AND TERMS OF CREDIT .................................. 12
2. l. Term Loan Advance ................................. 12
2.2. Mandatory Prepayment .............................. 13
2.3. Optional Prepayment................................ 13
2.4. Use of Proceeds.................................... 13
2.5. Interest on Term Loan.............................. 13
2.6. Commitment Fee .................................... 14
2.7. Receipt of Payments ............................... 14
2.8. Application of Payments.....,...................... 14
2.9. Accounting.......,................................. 15
2.10. Indemnity.......................................... 15
2.11. Access............................................. 15
2.12. Taxes ............................................. 15
3. CONDITIONS PRECEDENT ........................................ 16
3. l. Conditions to Term Loan ........................... 16
4. REPRESENTATIONS AND WARRANTIES ................................ 18
4. l. Corporate Existence; Compliance with Law .......... 18
4.2. Executive Offices.................................. 18
4.3. Subsidiaries ...................................... 18
4.4. Corporate Power; Authorization; Enforceable
Obligations....................................... 19
4.5. Solvency .......................................... 19
4.6. Financial Statements .............................. 19
4.7. Projections ....................................... 20
4.8. Ownership of Property; Liens ...................... 20
4.9. No Default ........................................ 21
4.10. Burdensome Restrictions ........................... 21
4.11. Labor Matters ..................................... 21
4.12. Other Ventures .................................... 22
4. 13. Taxes ............................................. 22
4.14. ERISA.............................................. 22
4.15. No Litigation...................................... 24
4.16. Employment and Labor Agreements ................... 24
4.17. Patents, Trademarks, Copyrights and Licenses....... 24
4.18. Full Disclosure ................................... 24
4.19. Liens.............................................. 24
4.20. No Material Adverse Effect......................... 24
- i -
<PAGE>
SECTION Page
------- ----
4.21. Environmental Protection........................... 24
4.22. Real Estate Mortgages.............................. 25
5. FINANCIAL STATEMENTS AND INFORMATION......................... 25
5.1. Reports and Notices ............................... 25
5.2. Communication with Accountants..................... 27
6. AFFIRMATIVE COVENANTS........................................ 27
6.1. Maintenance of Existence and Conduct of Business... 27
6.2. Payment of Obligations ............................ 27
6.3. Financial Covenants ............................... 28
6.4. Lender's Fees ..................................... 29
6.5. Books and Records ................................. 29
6.6. Litigation......................................... 29
6.7. Insurance.......................................... 29
6.8. Compliance with Law................................ 29
6.9. Agreements......................................... 30
6.10. Supplemental Disclosure ........................... 30
6.11. Employee Plans .................................... 30
6.12. SEC Filings; Certain Other Notices................. 31
6.13. Sale of Certain Assets ............................ 31
6.14. Leases; New Real Estate ........................... 31
6.15. Environmental Matters.............................. 32
6.16. Key Man Life Insurance............................. 33
6.17. Additional Security................................ 33
7. NEGATIVE COVENANTS .......................................... 33
7.1. Mergers, Etc....................................... 33
7.2. Investments; Loans and Advances.................... 33
7.3. Indebtedness ...................................... 34
7.4. Employee Loans..................................... 34
7.5. Maintenance of Business ........................... 34
7.6. Guaranteed Indebtedness ........................... 34
7.7. Liens.............................................. 34
7.8. Capital Expenditures............................... 34
7.9. Sales of Assets.................................... 35
7.10. Cancellation of Indebtedness ...................... 35
7.11. Events of Default ................................. 35
- ii -
<PAGE>
SECTION Page
------- ----
7.12. Hedging Transactions ............................. 35
7.13. Restricted Payments .............................. 35
7.14. Compensation ..................................... 35
7.15. ERISA............................................. 35
8. TERM........................................................ 36
8.1. Termination ...................................... 36
8.2. Survival of Obligations Upon Termination of
Financing Arrangement............................. 36
8.3. Termination Prior To Closing Date................. 36
9. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ..................... 36
9.1. Events of Default................................. 36
9.2. Remedies ......................................... 38
9.3. Waivers by Borrower .............................. 39
9.4. Right of Set-Off.................................. 39
10. MISCELLANEOUS .............................................. 39
10.1. Complete Agreement; Modification of Agreement;
Sale of Interest ................................. 39
10.2. Fees and Expenses ................................ 40
10.3. No Waiver by Lender .............................. 41
10.4. Remedies ......................................... 41
10.5. Waiver of Jury Trial ............................. 42
10.6. Severability...................................... 42
10.7. Parties........................................... 42
10.8. Conflict of Terms................................. 42
10.9. Authorized Signature.............................. 42
10.10. Governing Law .................................... 42
10.11. Notices .......................................... 42
10.12. Survival.......................................... 43
10.13. Section Titles ................................... 44
10.14. Counterparts ..................................... 44
SIGNATURES ...................................................... 44
- iii -
<PAGE>
INDEX OF EXHIBITS AND SCHEDULES
Exhibit A - Guaranty
Exhibit B - Patent Assignment
Exhibit C - Security Agreement
Exhibit D - Stock Pledge Agreement
Exhibit E - Term Note
Exhibit F - Trademark Assignment
- iv -
<PAGE>
TERM LOAN AGREEMENT, dated as of July 28, 1995, between WAHLCO
ENVIRONMENTAL SYSTEMS, INC., a Delaware corporation ("Borrower"), and WES
ACQUISITION CORP., a Delaware corporation ("Lender"),
WITNESSETH:
----------
WHEREAS, Lender has entered into a Stock Purchase Agreement dated as
of May 15, 1995 (the "Stock Purchase Agreement"), with Pacific Diversified
Capital Company, a California corporation ("PDC"), pursuant to which Lender will
acquire all of the outstanding common stock of the Borrower owned by PDC (the
"Acquisition"); and
WHEREAS, in connection with the Acquisition, Lender on May 15, 1995
executed a commitment letter (the "Commitment Letter") with Borrower, pursuant
to which Lender agreed, subject to the terms and conditions specified therein,
to provide Borrower with a $2,000,000 secured term loan for ongoing working
capital purposes; and
WHEREAS, pursuant to the Commitment Letter, Lender has previously
advanced to Borrower sum of (i) $1,000,000 pursuant to a note dated June 26,
1995, (ii) 500,000 pursuant to a note dated July 5, 1995, and (iii) $500,000
pursuant to a note dated July 17, 1995 (collectively, the "Interim Notes"); and
WHEREAS, the Commitment Letter contemplated the negotiation and
execution and delivery of definitive loan documentation; and
WHEREAS, Lender has agreed to refinance the indebtedness evidenced by
the Interim Notes, but only upon the terms, and subject to the conditions,
contained herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto agree as follows:
1. DEFINITIONS
In addition to the defined terms appearing above, capitalized terms
used in this Agreement shall have (unless otherwise provided elsewhere in this
Agreement) the following respective meanings when used herein:
"Account Debtor" shall mean any Person who is or who may become
obligated to Borrower or any of its Subsidiaries under, with respect to, or on
account of, an Account.
"Accounts" shall mean all accounts, accounts receivable, other
receivables, contract rights, chattel paper, instruments, documents, and notes,
whether now owned or hereinafter acquired by Borrower or any of its
Subsidiaries.
"Acquisition" shall have the meaning assigned to it in the first
paragraph of the recitals to this Agreement.
"Affiliate" shall mean, with respect to any Person, (i) each Person
that, directly or indirectly, owns or controls, whether beneficially, or as a
trustee, guardian or other fiduciary, 5% or more of the Stock having ordinary
voting power in the election of directors of such Person, (ii) each
<PAGE>
Person that controls, is controlled by or is under common control with such
Person or any Affiliate of such Person or (iii) each of such Person's
officers, directors, joint venturers and partners. For the purpose of this
definition, "control" of a Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of its management
or policies, whether through the ownership of voting securities, by contract
or otherwise.
"Agreement" shall mean this Term Loan Agreement, including all
amendments, modifications and supplements hereto and any appendices, exhibits
or schedules to any of the foregoing, and shall refer to the Agreement as the
same may be in effect at the time such reference becomes operative.
"Assignee Lender" shall mean any holder of any Term Notes other than
Lender.
"BA" shall mean Bank of America. NT & SA.
"Borrower" shall mean Wahlco Environmental Systems, Inc., a Delaware
corporation having an office at 3600 West Segerstrom Avenue, Santa Ana,
California 92704-6495.
"Business Day" shall mean any day that is not a Saturday, a Sunday
or a day on which banks are required or permitted to be closed in the State
of New York.
"Capital Expenditures" shall mean all payments for any fixed assets
or improvements or for replacements, substitutions or additions thereto, that
have a useful life of more than one year and which are required to be
capitalized under GAAP.
"Capital Lease" shall mean, with respect to any Person, any lease of
any property (whether real, personal or mixed) by such Person as lessee that,
in accordance with GAAP, either would be required to be classified and
accounted for as a capital lease on a balance sheet of such Person or
otherwise be disclosed as such in a note to such balance sheet, other than,
in the case of Borrower or a Subsidiary of Borrower, any such lease under
which Borrower or such Subsidiary is the lessor.
"Capital Lease Obligation" shall mean, with respect to any Capital
Lease, the amount of the obligation of the lessee thereunder that, in
accordance with GAAP, would appear on a balance sheet of such lessee in
respect of such Capital Lease or otherwise be disclosed in a note to such
balance sheet.
"Cash Equivalents" shall have the meaning assigned to it in Section
7.2 hereof.
"Charges" shall mean all federal, state, county, city, municipal,
local, foreign or other governmental (including, without limitation, PBGC)
taxes at the time due and payable, levies, assessments, charges, liens,
claims or encumbrances upon or relating to (i) the Collateral, (ii) the
Obligations, (iii) Borrower's or any of its Subsidiaries' employees, payroll,
income or gross receipts, (iv) Borrower's or any of its Subsidiaries'
ownership or use of any of its assets, or (v) any other aspect of Borrower's
or any of the Subsidiaries' business.
"Closing Date" shall mean the date of the making by Lender of the
Term Loan Advance hereunder.
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"Code" shall mean the Uniform Commercial Code of the jurisdiction
with respect to which such term is used, as in effect from time to time.
"Collateral" shall mean the collateral covered by the Security
Agreement, the Patent Assignments and the Trademark Assignments, and the
Pledged Collateral covered by the Stock Pledge Agreement (as such term is
defined therein).
"Collateral Documents" shall mean the Security Agreement, the Stock
Pledge Agreement, the Guaranty and the Patent and Trademark Assignment.
"Commitment Fee." shall have the meaning assigned to it in Section
2.6 hereof.
"Commitment Letter" shall have the meaning assigned to it in the
second paragraph of the recitals to this Agreement.
"Commitment Termination Date" shall mean the earliest of (i) May 14,
1998, (ii) the date of termination specified in a notice of termination
provided to Borrower by Lender at least 30 days prior thereto, (iii) the date
of termination of the Commitment pursuant to Section 9.2 and (iv) the date of
prepayment in full by Borrower of the Term Loan in accordance with the
provisions of Section 2.2 or 2.3 hereof.
"Compensation" shall mean, with respect to any Person, all payments
and accruals commonly considered to be compensation, including, without
limitation, all wages, salary, deferred payment arrangements, bonus payments
and accruals, profit sharing arrangements, payments in respect of stock
option or phantom stock option or similar arrangements, stock appreciation
rights or similar rights, incentive payments, pension or employment benefit
contributions or similar payments, made by Borrower to or accrued for the
account of such Person or otherwise for the direct or indirect benefit of
such Person.
"Consolidated Available Cash Flow" shall mean, with respect to any
Person for any period, Consolidated Cash Flow PLUS decreases in Working
Capital MINUS payments made in respect of Capital Expenditures permitted
hereunder, cash interest, scheduled principal payments on the Notes,
principal payments permitted hereunder on other Indebtedness, increases in
Working Capital and payment of taxes.
"Consolidated Cash Flow" shall mean, with respect to any Person for
any period, the consolidated operating income (before extraordinary items,
interest, taxes, depreciation, amortization, and expenses and costs directly
related to the consummation of the transactions contemplated by the Loan
Documents) of such Person and its consolidated Subsidiaries determined in
accordance with GAAP and in a manner consistent with the projections referred
to in Section 4.7 hereof.
"Consolidated Cash Flow to Consolidated Fixed Charges Ratio" shall
mean, at any date of calculation thereof, the ratio of (a) Consolidated Cash
Flow of Borrower for the immediately preceding four consecutive fiscal
quarters to (b) Consolidated Fixed Charges of Borrower for such period.
"Consolidated Fixed Charges" shall mean, with respect to any Person
for any period, the sum of (i) cash interest payable on all Indebtedness of
such Person and its consolidated Subsidiaries during such period plus (ii)
rentals payable by such Person and its consolidated
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<PAGE>
Subsidiaries under leases of real or personal, or mixed, property during such
period and (iii) principal amounts of all Indebtedness of such Person and its
consolidated Subsidiaries payable during such period resulting from
borrowings or the granting of credit (other than normal trade credit) plus
(iv) the amount of Capital Expenditures permitted to be paid during such
period pursuant to Section 7.8.
"Consolidated Interest Charges" shall mean, with respect to any
Person for any period, the amount which, in conformity with GAAP, would be
set forth opposite the caption "interest expense" (or any like caption) on a
consolidated income statement of such Person and all other Persons with which
such Person's financial statements are to be consolidated in accordance with
GAAP for the relevant period ended on such date.
"Consolidated Interest Coverage Ratio" shall mean, at any date of
calculation thereof, the ratio of (a) Consolidated Cash Flow of Borrower for
the immediately preceding four consecutive fiscal quarters to (b)
Consolidated Interest Charges of Borrower for such period.
"Consolidated Net Worth" shall mean, with respect to any Person, the
total assets less the total liabilities of such Person and its consolidated
Subsidiaries.
"Consolidated Senior Debt Service" shall mean, with respect to
Borrower for any period, an amount equal to the sum of (i) the Consolidated
Interest Charges on the Senior Debt for such period and (ii) the scheduled
amortization of the Term Loan during such period.
"Consolidated Total Funded Debt" shall mean, with respect to any
Person at any date of determination, the total of all Funded Debt of such
Person and its consolidated Subsidiaries outstanding on such date determined
in accordance with GAAP, after eliminating all intercompany transactions.
"Consolidated Total Funded Debt to Consolidated Cash Flow Ratio"
shall mean, at any date of calculation thereof, the ratio of (a) Consolidated
Total Funded Debt of Borrower to (b) Consolidated Cash Flow of Borrower for
the immediately preceding four consecutive fiscal quarters.
"Default" shall mean any event which, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.
"Due Date" shall mean the date on which payment is due with respect
to an Account, as indicated on the invoice or statement of Account rendered
to the Account Debtor.
"Environmental Laws" shall mean all federal, state and local laws,
statutes, ordinances and regulations, now or hereafter in effect, and in each
case as amended or supplemented from time to time, and any judicial or
administrative interpretation thereof, including, without limitation, any
applicable judicial or administrative order, consent decree or judgment,
relative to the applicable Real Estate, relating to the regulation and
protection of human health, safety, the environment and natural resources
(including, without limitation, ambient air, surface water, groundwater,
wetlands, land surface or subsurface strata, wildlife, aquatic species and
vegetation). Environmental Laws include but are not limited to the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended (42 U.S.C. Section 9601 ET SEQ.) ("CERCLA"); the Hazardous
Material Transportation Act, as amended (49 U.S.C. Section 1801 ET SEQ.); the
Federal
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<PAGE>
Insecticide, Fungicide, and Rodenticide Act, as amended (7 U.S.C. Section 136
ET SEQ.); the Resource Conservation and Recovery Act, as amended (42 U.S.C.
Section 6901 ET SEQ.) ("RCRA"); the Toxic Substance Control Act, as amended
(15 U.S.C. Section 2601 ET SEQ.); the Clean Air Act, as amended (42 U.S.C.
Section 740 ET SEQ.); the Federal Water Pollution Control Act, as amended (33
U.S.C. Section 1251 ET SEQ.); the Occupational Safety and Health Act, as
amended (29 U.S.C. Section 651 ET SEQ.) ("OSHA"); and the Safe Drinking Water
Act, as amended (42 U.S.C. Section 300f ET SEQ.), and any and all regulations
promulgated thereunder, and all analogous state and local counterparts or
equivalents and any transfer of ownership notification or approval statutes
such as the New Jersey Environmental Cleanup Responsibility Act (N.J. Stat.
Ann. Section 13:1K-6 ET SEQ.) ("ECRA").
"Environmental Liabilities and Costs" shall mean all liabilities,
obligations, responsibilities, remedial actions, losses, damages, punitive
damages, consequential damages, treble damages, costs and expenses
(including, without limitation, all fees, disbursements and expenses of
counsel, experts and consultants and costs of investigation and feasibility
studies), fines, penalties, sanctions and interest incurred as a result of
any claim, suit, action or demand by any person or entity, whether based in
contract, tort, implied or express warranty, strict liability, criminal or
civil statute or common law (including, without limitation, any thereof
arising under any Environmental Law, permit, order or agreement with any
Governmental Authority) and which relate to any health or safety condition
regulated under any Environmental Law or in connection with any other
environmental matter or Spill or the presence of a hazardous substance or
threatened Spill or hazardous substance.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974 (or any successor legislation thereto), as amended from time to time and
any regulations promulgated thereunder.
"ERISA Affiliate" shall mean, with respect to Borrower, any trade or
business (whether or not incorporated) under common control with Borrower and
which, together with Borrower, are treated as a single employer within the
meaning of Section 414(b), (c), (m) or (o) of the IRC.
"ERISA Event" shall mean, with respect to Borrower or any ERISA
Affiliate, (i) a Reportable Event with respect to a Title IV Plan or a
Multiemployer Plan; (ii) the withdrawal of Borrower, any of its Subsidiaries
or any ERISA Affiliate from a Title IV Plan subject to Section 4063 of ERISA
during a plan year in which it was a substantial employer, as defined in
Section 4001(a)(2) of ERISA; (iii) the complete or partial withdrawal of
Borrower, any of its Subsidiaries or any ERISA Affiliate from any
Multiemployer Plan; (iv) the filing of a notice of intent to terminate a
Title IV Plan or the treatment of a plan amendment as a termination under
Section 4041 of ERISA; (v) the institution of proceedings to terminate a
Title IV Plan or Multiemployer Plan by the PBGC; (vi) the failure to make
required contributions to a Qualified Plan; or (vii) any other event or
condition which might reasonably be expected to constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a trustee
to administer, any Title IV Plan or Multiemployer Plan or the imposition of
any liability under Title IV of ERISA, other than PBGC premiums due but not
delinquent under Section 4007 of ERISA.
"Event of Default" shall have the meaning assigned to it in Section
9.1 hereof.
"Financials" shall mean the financial statements referred to in
Section 4.6(a) hereof.
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<PAGE>
"Fiscal Year" shall mean the calendar year. Subsequent changes of
the fiscal year of Borrower shall not change the term "Fiscal Year," unless
the Required Lenders shall consent in writing to such changes.
"Funded Debt" shall mean, with respect to any Person, all
Indebtedness of such Person which by the terms of the agreement governing or
instrument evidencing such Indebtedness matures more than one year from, or
is directly or indirectly renewable or extendible at the option of the debtor
under a revolving credit or similar agreement obligating the lender or
lenders to extend credit over a period of more than one year from, the date
of creation thereof, including current maturities of long-term debt,
revolving credit, and short-term debt extendible beyond one year at the
option of the debtor and, in respect of Borrower, including the Term Loan
Advance.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time.
"Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Guaranteed Indebtedness" shall mean, as to any Person, any
obligation of such Person guaranteeing any indebtedness, lease, dividend, or
other obligation ("primary obligations") of any other Person (the "primary
obligor") in any manner including, without limitation, any obligation or
arrangement of such Person (a) to purchase or repurchase any such primary
obligation, (b) to advance or supply funds (i) for the purchase or payment of
any such primary obligation or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet condition of the primary obligor, (c) to
purchase property, securities or services primarily for the purpose of
assuring the owner of any such primary obligation of the ability of the
primary obligor to make payment of such primary obligation, or (d) to
indemnify the owner of such primary obligation against loss in respect
thereof.
"Guarantor" shall mean each Subsidiary of Borrower, each of which is
executing and delivering to Lender the Guaranty.
"Guaranty" shall mean the agreement made in favor of Lender by each
Guarantor, substantially in the form attached hereto as Exhibit A, including
all amendments, modifications and supplements thereto, and shall refer to the
Guaranty as the same may be in effect at the time such reference becomes
operative.
"Indebtedness" of any Person shall mean (i) all indebtedness of such
Person for borrowed money or for the deferred purchase price of property or
services (including, without limitation, reimbursement and all other
obligations with respect to surety bonds, letters of credit and bankers'
acceptances, whether or not matured, but not including obligations to trade
creditors incurred in the ordinary course of business), (ii) all obligations
evidenced by notes, bonds, debentures or similar instruments, (iii) all
indebtedness created or arising under any conditional sale or other title
retention agreements with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement
in the event of default are limited to repossession or sale of such
property), (iv) all Capital Lease Obligations, (v) all Guaranteed
Indebtedness, (vi) all Indebtedness referred to in clause (i), (ii), (iii),
(iv) or (v) above secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be
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<PAGE>
secured by) any Lien upon or in property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person
has not assumed or become liable for the payment of such Indebtedness, (vii)
the Obligations, and (viii) all liabilities under Title IV of ERISA.
"Interest Payment Date" shall have the meaning assigned to such term
in Section 2.5(a) hereof.
"Inventory" shall mean any and all now owned or hereafter acquired
inventory, goods, merchandise, and other tangible personal property intended
for sale or lease, in the custody or possession, actual or constructive, of
Borrower or any of its Subsidiaries, or in transit to Borrower or any of its
Subsidiaries, including such inventory as is on consignment to third parties,
leased to customers of Borrower or any of its Subsidiaries, or otherwise
temporarily out of the custody or possession of Borrower or any of its
Subsidiaries.
"IRC" shall mean the Internal Revenue Code of 1986, as amended, and
any successor thereto.
"IRS" shall mean the Internal Revenue Service, or any successor
thereto.
"Leases" shall mean all of those leasehold estates in real property
now owned or hereafter acquired by Borrower or any Subsidiary of Borrower, as
lessee.
"Lender" shall mean WES Acquisition Corp. and, if at any time WES
Acquisition Corp. shall cease to be a holder of Term Note, such replacement
lender as shall be designated as such by the Required Lenders.
"Letter of Credit Obligations" shall mean all outstanding
obligations incurred by BA at the request of Borrower or any Subsidiary,
whether direct or indirect, contingent or otherwise, due or not due, in
connection with the issuance or guarantee by BA of letters of credit, bank
acceptances in respect of letters of credit, or the like. The amount of such
Letter of Credit Obligations shall equal the maximum amount which may be
payable by BA thereupon or pursuant thereto.
"Letters of Credit" shall mean commercial or standby letters of
credit issued at the request and for the account of Borrower, and bankers'
acceptances issued by Borrower, for which BA has incurred Letter of Credit
Obligations pursuant thereto.
"Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any lease or title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement
perfecting a security interest under the Code or comparable law of any
jurisdiction).
"Loan Documents" shall mean this Agreement, the Term Note, the
Collateral Documents, the Guaranty, those other Ancillary Agreements as to
which Lender is a party or a beneficiary on the Closing Date, and all other
agreements, instruments, documents and certificates, including, without
limitation, pledges, powers of attorney, consents, assignments, contracts,
notices, and all other written matter whether heretofore, now or hereafter
executed by or on behalf of
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<PAGE>
Borrower or any of its Affiliates, or any employee of Borrower or any of its
Affiliates, and delivered to Lender in connection with this Agreement or the
transactions contemplated hereby, and all amendments or supplements to any of
the foregoing.
"Loan Party" shall mean Borrower and each Subsidiary of Borrower.
"Material Adverse Effect" shall mean material adverse effect on (i)
the business, assets, operations, prospects or financial or other condition
of Borrower and its Subsidiaries taken as a whole, (ii) Borrower's and its
Subsidiaries' collective ability to pay the Obligations in accordance with
the terms thereof, or (iii) the Collateral or Lender's Liens on the
Collateral or the priority of any such Lien.
"Maximum Lawful Rate" shall have the meaning assigned to it in
Section 2.5(c) hereof.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA, and to which Borrower, any of its Subsidiaries
or any ERISA Affiliate is making, is obligated to make, has made or been
obligated to make, contributions on behalf of participants who are or were
employed by any of them.
"Net Cash Proceeds" shall have the meaning assigned to it in Section
2.2(a) hereof.
"Obligations" shall mean all loans, advances, debts, liabilities,
and obligations, for monetary amounts (whether or not such amounts are
liquidated or determinable) owing by Borrower or any of its Subsidiaries or
all of them to Lender or any Subsidiary of Lender, and all covenants and
duties regarding such amounts, of any kind or nature, present or future,
whether or not evidenced by any note, agreement or other instrument, arising
under any of the Loan Documents. This term includes, without limitation, all
interest, Commitment Fees, charges, expenses, attorneys' fees and any other
sum chargeable to Borrower or any or all of its Subsidiaries under any of the
Loan Documents.
"Patent Assignment" shall mean the Patent Assignments made in favor
of Lender by Borrower and its Subsidiaries, substantially in the form
attached hereto as Exhibit B.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor thereto.
"Pension Plan" shall mean an employee pension benefit plan, as
defined in Section (3)(2) of ERISA (other than a Multiemployer Plan), which
is not an individual account plan, as defined in Section 3(34) of ERISA, and
which Borrower, any of its Subsidiaries or, if a Title IV Plan, any ERISA
Affiliate maintains, contributes to or has an obligation to contribute to on
behalf of participants who are or were employed by any of them.
Permitted Dispositions" shall have the meaning assigned to it in
Section 6.13 hereof.
"Permitted Encumbrances" shall mean the following encumbrances: (i)
Liens for taxes or assessments or other governmental charges or levies,
either not yet due and payable or to the extent that nonpayment thereof is
permitted by the terms of this Agreement; (ii) pledges or deposits securing
obligations under workmen's compensation, unemployment insurance, social
security or
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public liability laws or similar legislation; (iii) pledges or deposits
securing bids, tenders, contracts (other than contracts for the payment of
money) or leases to which Borrower or any of its Subsidiaries is a party as
lessee made in the ordinary course of business; (iv) deposits securing public
or statutory obligations of Borrower or any of its Subsidiaries; (v)
workers', mechanics', suppliers', carriers', warehousemen's or other similar
liens arising in the ordinary course of business and securing indebtedness
aggregating not in excess of $100,000 at any time outstanding, not yet due
and payable; (vi) deposits securing or in lieu of surety, appeal or customs
bonds in proceedings to which Borrower or any of its Subsidiaries is a party;
(vii) any attachment or judgment lien, unless the judgment it secures shall
not, within 60 days after the entry thereof, have been discharged or
execution thereof stayed pending appeal, or shall not have been discharged
within 60 days after the expiration of any such stay; (viii) zoning
restrictions, easements, licenses, or other restrictions on the use of real
property or other minor irregularities in title (including leasehold title)
thereto, so long as the same do not materially impair the use, value, or
marketability of such real property, leases or leasehold estates; (ix) Liens
on cash and Cash Equivalents to secure Letter of Credit Obligations; (x)
Liens on the specific items of equipment that are the subject of the SBCC
Lease to secure the Sanwa Obligations.
"Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, institution, public benefit corporation, entity or government
(whether federal, state, county, city, municipal or otherwise, including,
without limitation, any instrumentality, division, agency, body or department
thereof).
"Plan" shall mean, with respect to Borrower or any ERISA Affiliate,
at any time, an employee benefit plan, as defined in Section 3(3) of ERISA,
which Borrower or any of its Subsidiaries maintains, contributes to or has an
obligation to contribute to on behalf of participants who are or were
employed by any of them.
"Projections" shall mean the projections referred to in Section 4.7
hereof.
"Qualified Plan" shall mean an employee pension benefit plan, as
defined in Section 3(2) of ERISA, which is intended to be tax-qualified under
Section 401(a) of the IRC, and which Borrower, any of its Subsidiaries or any
ERISA Affiliate maintains, contributes to or has an obligation to contribute
to on behalf of participants who are or were employed by any of them.
"Real Estate" shall mean all of those plots, pieces or parcels of
land now owned or leased or hereafter acquired or leased by Borrower or any
Subsidiary (the "Land"), including, without limitation, those listed on
Schedule 4.8 hereto and more particularly described in the Mortgages,
together with the right, title and interest of Borrower or any Subsidiary, if
any, in and to the streets, the land lying in the bed of any streets, roads
or avenues, opened or proposed, in front of, adjoining, or abutting the Land
to the center line thereof, the air space and development rights pertaining
to the Land and right to use such air space and development rights, all
rights of way, privileges, liberties, tenements, hereditaments, and
appurtenances belonging or in any way appertaining thereto, all fixtures, all
easements now or hereafter benefiting the Land and all royalties and rights
appertaining to the use and enjoyment of the Land, including, without
limitation, all alley, vault, drainage, mineral, water, oil, and gas rights,
together with all of the buildings and other improvements now or hereafter
erected on the Land, and all fixtures and articles of personal property
appertaining thereto and all additions thereto and substitution and
replacement thereof.
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"Reportable Event" shall mean any of the events described in Section
4043(b)(1), (2), (3), (5), (6), (8) or (9) or ERISA.
"Required Lenders" shall mean, as of any date, the holders of Notes
evidencing at least a majority of the aggregate unpaid principal amount of the
Term Loan; PROVIDED, HOWEVER, that any amendment to, modification of or
supplement to this Agreement or waiver of a Default or an Event of Default
hereunder that would have the effect of reinstating the obligations to make Term
Loans from and after the date such obligations have been terminated or changing
the terms of, amount of or obligation to make Term Loans shall require the
affirmative consent thereto of WES Acquisition Corp.
"Reserves" shall mean such reserves for doubtful accounts, returns,
allowances and the like as may be established by Borrower or any Subsidiary or
as may otherwise be required in accordance with GAAP.
"Restricted Lease" shall mean, as at any date, any lease of property
(whether real, personal or mixed) other than Capital Leases.
"Restricted Payment" shall mean (i) the declaration of any dividend or the
incurrence of any liability to make any other payment of distribution of cash or
other property or assets in respect of Borrower's Stock or (ii) any payment on
account of the purchase, redemption or other retirement of Borrower's Stock or
any other payment or distribution made in respect thereof, either directly or
indirectly.
"Retiree Welfare Plan" shall refer to any Welfare Plan providing for
continuing coverage or benefits for any participant or any beneficiary of a
participant after such participant's termination of employment, other than
continuation coverage provided pursuant to Section 4980B of the IRC and at the
sole expense of the participant or the beneficiary of the participant.
"Sanwa Obligations" means all amounts payable by Borrower to SBCC pursuant
to (i) that certain letter agreement dated August 31, 1993 (the "SBCC Letter
Agreement") among SBCC, Borrower, Bachmann Companies, Inc., Wahlco, Inc., and
Wahlco Power Products, Inc., (ii) that certain Lease Agreement Number 0339795
dated August 15, 1991 (the "SBCC Lease") among Wahlco, Inc., Pennsylvania
Electric Company and New York State Electric and Gas Corporation, which has been
assigned to SBCC pursuant to the SBCC Letter Agreement, and (iii) that certain
letter agreement dated May 11, 1995 (the "May 11 Letter Agreement") among SBCC,
Borrower, Bachman Companies, Inc., Wahlco, Inc., Wahlco Power Products, Inc.,
and Wexford Capital Corporation.
"SBCC" means Sanwa Business Credit Corporation.
"Security Agreement" shall mean the agreement entered into between Lender
and Borrower and its Subsidiaries, substantially in the form attached hereto as
Exhibit C, including all amendments, modifications and supplements thereto, and
shall refer to the Security Agreement as the same may be in effect at the time
such reference becomes operative.
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"Senior Debt to Consolidated Cash Flow Ratio" shall mean, at any
date of calculation thereof, the ratio of (a) Senior Debt of Borrower
outstanding on such date to (b) Consolidated Cash Flow of Borrower for the
immediately preceding four consecutive fiscal quarters.
"Solvent" shall mean, when used with respect to any Person, that:
(a) the present fair salable value of such Person's assets is in
excess of the total amount of such Person's liabilities;
(b) such Person is able to pay its debts as they become due; and
(c) such Person does not have unreasonably small capital to carry
on such Person's business as theretofore operated and all businesses in
which such Person is about to engage.
"Spill" shall have the meaning assigned to it in Section 4.21.
"Stated Rate" shall have the meaning assigned to it in Section
2.5(a) hereof.
"Stock" shall mean all shares, options, warrants, general or limited
partnership interests, participations or other equivalents (regardless of how
designated) of or in a corporation, partnership or equivalent entity whether
voting or nonvoting, including, without limitation, common stock, preferred
stock, or any other "equity security" (as such term is defined in Rule 3a11-1
of the General Rules and Regulations promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended).
"Stock Pledge Agreement" shall mean the agreement entered into
between Lender and each of Borrower and those Subsidiaries owning Stock of
other Subsidiaries of Borrower, substantially in the form attached hereto as
Exhibit D, including all amendments, modifications and supplements thereto,
and shall refer to the Stock Pledge Agreement as the same may be in effect at
the time such reference becomes operative.
"Stock Purchase Agreement" shall have the meaning assigned to it in
the first paragraph of the recitals to this Agreement.
"Subsidiary" shall mean, with respect to any Person, (a) any
corporation of which an aggregate of more than 50% of the outstanding Stock
having ordinary voting power to elect a majority of the board of directors of
such corporation (irrespective of whether, at the time, Stock of any other
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time, directly or
indirectly, owned legally or beneficially by such Person and/or one or more
Subsidiaries of such Person, and (b) any partnership in which such Person
and/or one or more Subsidiaries of such Person shall have an interest
(whether in the form of voting or participation in profits or capital
contribution) of more than 50%.
"Taxes" shall have the meaning assigned to it in Section 2.12 hereof.
"Term Loan Advance" shall have the meaning assigned to it in Section
2.1(a) hereof.
"Term Note" shall have the meaning assigned to it in Section 2.1
hereof.
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"Termination Date" shall mean the date on which all Senior Debt and
any other Obligations hereunder have been completely discharged and Borrower
shall have no further right to borrow any monies hereunder.
"Title IV Plan" shall mean a Pension Plan, other than a
Multiemployer Plan, which is covered by Title IV of ERISA.
"Trademark Assignment" shall mean the Trademarks and Service Marks
Assignment in the form attached hereto as Exhibit F.
"Welfare Plans" shall mean any welfare plan, as defined in Section
3(1) of ERISA, which is maintained or contributed to by Borrower, any of its
Subsidiaries or any ERISA Affiliate.
WES Acquisition Corp. shall mean WES Acquisition Corp., a Delaware
corporation having an address at 411 West Putnam Avenue, Greenwich,
Connecticut 06830.
"Withdrawal Liability" means, at any time, the aggregate amount of
the liabilities, if any, pursuant to Section 4201 of ERISA, and any increase
in contributions pursuant to Section 4243 of ERISA with respect to all
Multiemployer Plans.
Any accounting term used in this Agreement shall have, unless
otherwise specifically provided herein, the meaning customarily given such
term in accordance with GAAP, and all financial computations hereunder shall
be computed, unless otherwise specifically provided herein, in accordance
with GAAP consistently applied. That certain terms or computations are
explicitly modified by the phrase "in accordance with GAAP" shall in no way
be construed to limit the foregoing. All other undefined terms contained in
this Agreement shall, unless the context indicates otherwise, have the
meanings provided for by the Code as in effect in the State of New York to
the extent the same are used or defined therein. The words "herein," "hereof"
and "hereunder" and other words of similar import refer to this Agreement as
a whole, including the Exhibits and Schedules hereto, as the same may from
time to time be amended, modified or supplemented, and not to any particular
section, subsection or clause contained in this Agreement.
Wherever from the context it appears appropriate, each term stated
in either the singular or plural shall include the singular and the plural,
and pronouns stated in the masculine, feminine or neuter gender shall include
the masculine, the feminine and the neuter.
2. AMOUNT AND TERMS OF CREDIT
2.1. TERM LOAN ADVANCE. (a) Upon and subject to the terms and
conditions hereof, Lender agrees to refinance the Interim Notes, and to make
available until the Commitment Termination Date, for Borrower's use one
advance (the "Term Loan Advance") in an aggregate amount of $2,000,000.
(b) The Term Loan Advance made by Lender shall be evidenced by a
promissory note to be executed and delivered by Borrower at the time of the
Term Loan Advance, the form of which is attached hereto and made a part
hereof as Exhibit E (the "Term Note"). The Term Loan Note shall be payable to
the order of Lender and shall represent the obligation of Borrower to pay the
amount of the Term Loan Advance, with interest thereon as prescribed in
Section 2.5(a). The date and amount of the Term Loan Advance and each payment
of principal with respect thereto shall be
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recorded on the books and records of Lender, which books and records shall
constitute PRIMA FACIE evidence of the accuracy of the information therein
recorded. The entire unpaid balance of the Term Loan Advance shall be due and
payable on the Commitment Termination Date.
(c) The Term Loan Advance and all Obligations of Borrower hereunder
shall be subordinate to the payment of any amounts due to SBCC under the SBCC
Letter Agreement and the May ll Letter Agreement which are not paid as and
when due.
2.2. MANDATORY PREPAYMENT. (a) The net cash proceeds realized from
any Permitted Dispositions, after deducting all expenses related thereto (the
"Net Cash Proceeds"), shall, immediately upon receipt thereof, be used by
Borrower to prepay the Term Loan Advances.
(b) Borrower shall prepay the Term Loan Advance in an amount equal
to the lesser of (i) the Obligations or (ii) 100% of the Net Cash Proceeds
received by Borrower from any public offering of its equity securities.
(c) No prepayment fee shall be payable in respect of any mandatory
prepayment under this Section 2.2.
2.3. OPTIONAL PREPAYMENT. Borrower shall have the right at any time,
on 10 days' prior written notice to Lender, to voluntarily prepay the Term
Loan Advance in a minimum amount of $50,000 and integral multiples thereof,
without premium or penalty. If Borrower prepays the Term Loan Advance in
full, Borrower shall have no right to receive additional Term Loan Advances
hereunder. Each prepayment shall be accompanied by the payment of accrued and
unpaid interest on the amount being prepaid, through the date of prepayment.
2.4. USE OF PROCEEDS. Borrower shall apply the proceeds of the Term
Loan Advance as set forth in the recitals of this Agreement.
2.5. INTEREST ON TERM LOAN. (a) Borrower shall pay interest to
Lender quarterly in arrears on the last day of each calendar quarter,
commencing on September 30, 1995 (each, an "Interest Payment Date"), at an
annual rate equal to 13% (the "Stated Rate"), based on a year of 365 days for
the actual number of days elapsed, and based on the amounts outstanding from
time to time under the Term Loan, and as set forth in the following sentence,
the Interim Notes. The Term Note issued pursuant to this Agreement refinances
the outstanding principal amounts of, and accrued but unpaid interest on, the
Interim Notes; accordingly, interest on the Term Note shall accrue (a) on
$1,000,000 principal amount of the indebtedness evidenced hereby from July 1,
1995, (b) on $500,000 principal amount of the indebtedness evidenced hereby
from July 5, 1995, and (c) on $500,000 principal amount of the indebtedness
evidenced hereby from July 17, 1995.
(b) So long as any Event of Default shall be continuing, the
interest rate applicable to the Term Loan Advances shall be increased by two
percentage points per annum above the rate otherwise applicable.
(c) Notwithstanding anything to the contrary set forth in this
Section 2.5, if at any time until payment in full of all of the Obligations
in respect of the Term Loan Advances, the Stated Rate exceeds the highest
rate of interest permissible under any law which a court of competent
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jurisdiction shall, in a final determination, deem applicable hereto (the
"Maximum Lawful Rate"), then in such event and so long as the Maximum Lawful
Rate would be so exceeded, the rate of interest payable hereunder shall be
equal to the Maximum Lawful Rate; PROVIDED, HOWEVER, that if at any time
thereafter the Stated Rate is less than the Maximum Lawful Rate, Borrower
shall continue to pay interest hereunder at the Maximum Lawful Rate until
such time as the total interest received by Lender from the making of
advances hereunder is equal to the total interest which Lender would have
received had the Stated Rate been (but for the operation of this paragraph)
the interest rate payable since the Closing Date. Thereafter, the interest
rate payable hereunder shall be the Stated Rate, unless and until the Stated
Rate again exceeds the Maximum Lawful Rate, in which event this paragraph
shall again apply. In no event shall the total interest received by Lender
pursuant to the terms hereof exceed the amount which Lender could lawfully
have received had the interest due hereunder been calculated for the full
term hereof at the Maximum Lawful Rate. In the event the Maximum Lawful Rate
is calculated pursuant to this paragraph, such interest shall be calculated
at a daily rate equal to the Maximum Lawful Rate divided by the number of
days in the year in which such calculation is made. In the event that a court
of competent jurisdiction, notwithstanding the provisions of this Section
2.5(c), shall make a final determination that Lender has received interest
hereunder or under any of the Loan Documents in excess of the Maximum Lawful
Rate, Lender shall, to the extent permitted by applicable law, promptly apply
such excess first to any interest due and not yet paid under the Term Loan,
then to the outstanding principal installments of the Term Note in inverse
order of maturity (without premium or penalty), then to other unpaid
Obligations and thereafter shall refund any excess to Borrower or as a court
of competent jurisdiction may otherwise order.
2.6. COMMITMENT FEE. Borrower shall pay to Lender a fee (the
"Commitment Fee") equal to $30,000, payable on the Closing Date. At Lender's
option, Lender may deduct the amount of the Commitment Fee from the initial
Term Loan Advance.
2.7. RECEIPT OF PAYMENTS. Borrower shall make each payment under
this Agreement not later than 3:00 P.M. (New York City time) on the day when
due in lawful money of the United States of America in immediately available
funds to Lender's depositary bank as designated by Lender from time to time
for deposit in Lender's depositary account. For purposes only of computing
interest hereunder, ail payments shall be applied by Lender on the day
payment has been credited by Lender's depository bank to Lender's account in
immediately available funds.
2.8. APPLICATION OF PAYMENTS. Borrower irrevocably waives the right
to direct the application of any and all payments at any time or times
hereafter received by Lender from or on behalf of Borrower, and Borrower
irrevocably agrees that Lender shall have the continuing exclusive right to
apply any and all such payments against the then due and payable Obligations
of Borrower and in repayment of the Term Loan Advances as Lender may deem
advisable. In the absence of a specific determination by Lender with respect
thereto, the same shall be applied in the following order: (i) then due and
payable fees and expenses; (ii) then due and payable interest payments on the
Term Loan Advances; and (iii) then due and payable principal payments on the
Term Loan Advances. Lender is authorized to, and at its option may, make
advances on behalf of Borrower for payment of all fees, expenses, charges,
costs, principal and interest incurred by Borrower hereunder when and as
Borrower fails to promptly pay any such amounts. At Lender's option and to
the extent permitted by law, any advances so made may be deemed Term Loan
Advances constituting Obligations hereunder.
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<PAGE>
2.9. ACCOUNTING. Lender will provide a monthly accounting of
transactions hereunder to Borrower. Each and every such accounting shall
(absent manifest error) be deemed final, binding and conclusive upon Borrower
in all respects as to all matters reflected therein, unless Borrower, within
30 days after the date any such accounting is rendered, shall notify Lender
in writing of any objection which Borrower may have to any such accounting,
describing the basis for such objection with specificity. In that event, only
those items expressly objected to in such notice shall be deemed to be
disputed by Borrower. Lender's determination, based upon the facts available,
of any item objected to by Borrower in such notice shall (absent manifest
error) be final, binding and conclusive on Borrower, unless Borrower shall
commence a judicial proceeding to resolve such objection within 30 days
following Lender's notifying Borrower of such determination.
2.10. INDEMNITY. Borrower shall indemnify and hold Lender harmless
from and against any and all suits, actions, proceedings, claims, damages,
losses, liabilities and expenses (including, without limitation, reasonable
attorneys' fees and disbursements, including those incurred upon any appeal)
which may be instituted or asserted against or incurred by Lender as the
result of its having entered into any of the Loan Documents or extended
credit hereunder; PROVIDED, HOWEVER, that Borrower shall not be liable for
such indemnification to such indemnified Person to the extent that any such
suit, action, proceeding, claim, damage, loss, liability or expense results
from such indemnified Person's gross negligence or willful misconduct.
2.11. ACCESS. Lender and each Assignee Lender and any of their
officers, employees and/or agents shall have the right, exercisable as
frequently as Lender or any Assignee Lender determines to be appropriate,
during normal business hours (or at such other times as may reasonably be
requested by Lender or any Assignee Lender), to inspect the properties and
facilities of Borrower and its Subsidiaries and to inspect, audit and make
extracts from all of Borrower's and its Subsidiaries' records, files and
books of account. Borrower shall deliver any document or instrument
reasonably necessary for Lender or any Assignee Lender, as any of them may
request, to obtain records from any service bureau maintaining records for
Borrower or its Subsidiaries, and shall maintain duplicate records or
supporting documentation on media, including, without limitation, computer
tapes and discs owned by Borrower and its Subsidiaries. Borrower shall
instruct its and its Subsidiaries' banking and other financial institutions
to make available to Lender such information and records as Lender and each
Assignee Lender may reasonably request.
2.12. TAXES. (a) Any and all payments by Borrower hereunder or under
the Term Notes shall be made, in accordance with this Section 2.12, free and
clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities
with respect thereto, excluding taxes imposed on or measured by the net
income of Lender by the jurisdiction under the laws of which Lender is
organized or any political subdivision thereof (all such non-excluded taxes,
levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If Borrower shall be required by law to
deduct any Taxes from or in respect of any sum payable hereunder or under any
Term Note to Lender, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.12) Lender
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) Borrower shall make such deductions, and (iii)
Borrower shall pay the full amount deducted to the relevant taxing or other
authority in accordance with applicable law.
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<PAGE>
(b) In addition, Borrower agrees to pay any present or future stamp or
documentary taxes or any other sales, transfer, excise, mortgage recording or
property taxes, charges or similar levies that arise from any payment made
hereunder or under the Term Notes or from the execution, sale, transfer,
delivery or registration of, or otherwise with respect to, this Agreement or the
Notes, the Loan Documents and any other agreements and instruments contemplated
thereby (hereinafter referred to as "Other Taxes").
(c) Borrower shall indemnify Lender for the full amount of Taxes or
Other Taxes (including without limitation, any Taxes or Other Taxes imposed by
any jurisdiction on amounts payable under this Section 2.12) paid by Lender and
any liability (including penalties, interest and expenses) arising therefrom or
with respect thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted. This indemnification shall be made within 30 days from the
date such Lender makes written demand therefor.
(d) Within 30 days after the date of any payment of Taxes, Borrower
shall furnish to Lender, at its address referred to in Section 10.11, the
original or a certified copy of a receipt evidencing payment thereof.
(e) Without prejudice to the survival of any other agreement of
Borrower hereunder, the agreements and obligations of Borrower contained in this
Section 2.12 shall survive the payment in full of principal and interest
hereunder and under the Notes and the Termination of this Agreement.
3. CONDITIONS PRECEDENT
3.1. CONDITIONS TO TERM LOAN. Notwithstanding any other provision of
this Agreement and without affecting in any manner the rights of Lender
hereunder, Borrower shall have no rights under this Agreement (but shall have
all applicable obligations hereunder), and Lender shall not be obligated to make
the Term Loan hereunder, unless and until all conditions precedent to the
obligations of Borrower in the Stock Purchase Agreement shall have been
fulfilled or (with the consent of Lender) waived, and Borrower shall have
delivered to Lender, in form and substance satisfactory to Lender and (unless
otherwise indicated) each dated the Closing Date:
(a) The Term Note payable to the order of Lender, duly executed by
Borrower.
(b) A favorable opinion of Roger M. Barzun, Esq., counsel to the Loan
Parties.
(c) Resolutions of the boards of directors of each Loan Party,
certified by the Secretary or Assistant Secretary of such Loan Party, as of the
Closing Date, to be duly adopted and in full force and effect on such date,
authorizing (i) the consummation of each of the transactions contemplated by the
Loan Documents and (ii) specific officers to execute and deliver this Agreement
and the other Loan Documents.
(d) Governmental certificates, dated the most recent practicable date
prior to the Closing Date, showing that each Loan Party is organized and in good
standing in the jurisdiction of its organization and is qualified as a foreign
corporation and in good standing in all other jurisdictions in which it is
qualified to transact business.
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<PAGE>
(e) A copy of the organizational charter and all amendments thereto of
each Loan Party, certified as of a recent date by the Secretary of State of the
jurisdiction of its organization, and copies of each Loan Party's by-laws,
certified by the Secretary or Assistant Secretary of such Loan Party as true and
correct as of the Closing Date.
(f) The Security Agreement, duly executed and delivered by Borrower;
the Stock Pledge Agreement, duly executed and delivered by Borrower and each
Subsidiary owning Stock of other Subsidiaries of Borrower; the Patent and
Trademark Assignments duly executed by Borrower and its Subsidiaries; and the
Guaranty, duly executed and delivered by each Guarantor; together with:
(i) acknowledgment copies of proper Financing Statements (Form
UCC-1) duly filed under the Uniform Commercial Code of each
jurisdiction as may be necessary or, in the opinion of Lender,
desirable to perfect the security interests created by the Security
Agreement,
(ii) certified copies of Requests for Information or Copies
(Form UCC-11), or equivalent reports, listing the Financing
Statements referred to in paragraph (i) above and all other effective
financing statements which name Borrower or any of its Subsidiaries
(under its present name and any previous name) as debtor and which are
filed in the jurisdictions referred to in said paragraph (i), together
with copies of such other financing statements (none of which shall
cover the Collateral purported to be covered by the Security
Agreement),
(iii) evidence of the completion of all recordings and filings of
the Security Agreement and Patent and Trademark Assignments as may be
necessary or, in the opinion of Lender, desirable to perfect the
security interests and liens created by the Security Agreement and
Patent and Trademark Assignments,
(iv) certificates representing the Pledged Shares referred to in
the Stock Pledge Agreement and undated stock powers for such
certificates executed in blank, and
(v) evidence that all other actions necessary or, in the opinion
of Lender, desirable to perfect and protect the security interests
created by the Security Agreement and Patent and Trademark Assignments
have been taken.
(g) The consolidated financial statements and the Projections
referred to in Sections 4.6 and 4.7, each certified by the chief financial
officer of Borrower, and the letter from Borrower to its accountants referred to
in Section 5.2.
(h) A certificate of the chief executive officer and chief financial
officer of Borrower, satisfactory in form and substance to Lender, stating that
all of the representations and warranties of the Loan Parties contained herein
or in any of the Loan Documents are correct on and as of the Closing Date as
though made on and as of such date, and no event has occurred and is continuing,
or would result from a Term Loan Advance, which constitutes or would constitute
a Default or an Event of Default.
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(i) Evidence that the insurance policies provided for in Section 6.7
are in full force and effect, certified by the insurer thereof, together with
appropriate evidence showing a loss payable clause in favor of Lender.
(j) Certificates of the Secretary or an Assistant Secretary of each
Loan Party, dated the Closing Date, as to the incumbency and signatures of the
officers of such Loan Party executing this Agreement, the Term Note, any of the
Loan Documents and any other certificate or other document to be delivered
pursuant hereto or thereto, together with evidence of the incumbency of such
Secretary or Assistant Secretary.
(k) Such additional information and materials as Lender may reasonably
request, including, without limitation, copies of any debt agreements, security
agreements and other material contracts.
4. REPRESENTATIONS AND WARRANTIES
To induce Lender to make the Term Loan Advances, as herein provided
for, Borrower makes the following representations and warranties to Lender, each
and all of which shall be true and correct as of the date of execution and
delivery of this Agreement, and shall survive the execution and delivery of this
Agreement:
4.1. CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Borrower and each
Subsidiary of Borrower (i) is a corporation duly organized, validly existing and
in good standing under the laws of the state of its incorporation; (ii) is duly
qualified as a foreign corporation and in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification (except for jurisdictions in which such
failure to so qualify or to be in good standing would not have a Material
Adverse Effect); (iii) has the requisite corporate power and authority and the
legal right to own, pledge, mortgage or otherwise encumber and operate its
properties, to lease the property it operates under lease, and to conduct its
business as now, heretofore and proposed to be conducted; (iv) has all material
licenses, permits, consents or approvals from or by, and has made all material
filings with, and has given all material notices to, all Governmental
Authorities having jurisdiction, to the extent required for such ownership,
operation and conduct; (v) is in compliance with its certificate or articles of
incorporation and by-laws; and (vi) is in compliance with all applicable
provisions of law where the failure to comply would have a Material Adverse
Effect.
4.2. EXECUTIVE OFFICES. The current location of Borrower's and each of
its Subsidiary's executive offices and principal place of business is set forth
in Schedule 4.2 hereto.
4.3. SUBSIDIARIES. There currently exist, and upon consummation of the
Acquisition there shall exist, no Subsidiaries of Borrower other than as set
forth on Schedule 4.3 hereto, which sets forth such Subsidiaries, together with
their respective jurisdictions of organization, and the authorized and
outstanding capital Stock of each such Subsidiary, by class and number and
percentage of each class legally owned by Borrower or a Subsidiary of Borrower
or any other Person, or to be owned by the Closing Date. There are no options,
warrants, rights to purchase or similar rights covering capital Stock for any
such Subsidiary.
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4.4. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by Borrower and its Subsidiaries of the Loan
Documents, Ancillary Documents and all instruments and documents to be delivered
by Borrower and its Subsidiaries, to the extent they are parties thereto,
hereunder and thereunder and the creation of all Liens provided for herein and
therein: (i) are within Borrower's and its Subsidiaries' corporate power; (ii)
have been, or by the Closing Date will be, duly authorized by all necessary or
proper corporate action; (iii) are not in contravention of any provision of
Borrower's or its Subsidiaries' respective certificates or articles of
incorporation or by-laws; (iv) will not violate any law or regulation, or any
order or decree of any court or governmental instrumentality; (v) will not
conflict with or result in the breach or termination of, constitute a default
under or accelerate any performance required by, any indenture, mortgage, deed
of trust, lease, agreement or other instrument to which Borrower or any of its
Subsidiaries is a party or by which Borrower or any of its Subsidiaries or any
of their property is bound; (vi) will not result in the creation or imposition
of any Lien upon any of the property of Borrower or any of its Subsidiaries
other than those in favor of Lender, all pursuant to the Loan Documents; and
(vii) do not require the consent or approval of any Governmental Authority or
any other Person, except for compliance with the filing and waiting period
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
rules and regulations promulgated thereunder, which will have been duly
obtained, made or complied with prior to the Closing Date. At or prior to the
Closing Date, each of the Loan Documents shall have been duly executed and
delivered for the benefit of or on behalf of Borrower or its Subsidiaries, as
the case may be, and each shall then constitute a legal, valid and binding
obligation of Borrower or its Subsidiaries, to the extent they are parties
thereto, enforceable against them in accordance with its terms.
4.5. SOLVENCY. After giving effect to the initial Term Loan Advance,
if made on the Closing Date, Borrower and each of its Subsidiaries will be
Solvent as of and on the Closing Date.
4.6. FINANCIAL STATEMENTS.
(a) All of the following balance sheets and statements of income,
retained earnings and cash flows of Borrower, copies of which have been
furnished to Lender prior to the date of this Agreement, have been, except as
noted therein, prepared in conformity with GAAP consistently applied throughout
the periods involved and present fairly the consolidated financial position of
Borrower in each case as at the dates thereof, and the results of operations and
cash flows for the periods then ended (as to the unaudited interim financial
statements, subject to normal year-end audit adjustments):
(i) the unaudited consolidated balance sheet of Borrower as
at March 31, 1995, and the related consolidated statements of
income, retained earnings and cash flows for the three months
ending on such date; and
(ii) the audited consolidated balance sheet of Borrower as
at December 31, 1994, and the related consolidated statements of
income, retained earnings and cash flows for the year then ended,
with the opinion thereon of Ernst & Young, LLP.
(b) Except for the Sanwa Obligations, Borrower, as of March 31, 1995,
had no obligations, contingent liabilities or liabilities for Charges, long-term
leases or unusual forward or long-term commitments which are not reflected in
the consolidated balance sheet of Borrower and its Subsidiaries and which would
have a Material Adverse Effect.
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(c) There has been no material adverse change in the business, assets,
operations, prospects or financial or other condition of Borrower and its
Subsidiaries taken as a whole since March 31, 1995 (it being understood that,
subsequent to the Closing Date, this representation and warranty shall be
subject to the fact that Borrower shall have incurred the Obligations
hereunder). No dividends or other distributions have been declared, paid or made
upon any shares of capital Stock of Borrower or any of the Subsidiaries, nor
have any shares of capital Stock of Borrower or any of the Subsidiaries been
redeemed, retired, purchased or otherwise acquired for value by Borrower or
Subsidiaries since March 31, 1995.
4.7. PROJECTIONS. The Projections of Borrower's annual operating
budgets on a consolidated basis, balance sheets and cash flow statements for the
fiscal years ending on December 31, 1995, 1996, 1997 and 1998, copies of which
have been delivered to Lender, disclose all material assumptions made with
respect to general economic, financial and market conditions in formulating such
Projections. No facts are known to Borrower which would result in any material
change in any of such Projections. The Projections are based upon reasonable
estimates and assumptions, all of which are fair in light of current conditions,
have been prepared on the basis of the assumptions stated therein, and reflect
the reasonable estimate of Borrower, to the best of its ability, of the results
of operations and other information projected therein.
4.8. OWNERSHIP OF PROPERTY; LIENS. (a) Borrower or its Subsidiaries
owns good and marketable fee simple title to all of the Real Estate described
on Schedule 4.8(a) hereto and good, valid and marketable leasehold interests
in the Leases described in Schedule 4.8(b) hereto, and good and marketable
title to, or valid leasehold interests in, all of its other properties and
assets and none of the properties and assets of Borrower or its Subsidiaries,
including, without limitation, the Real Estate and Leases is subject to any
Liens, except (i) Permitted Encumbrances and (ii) from and after the Closing
Date, the Lien in favor of Lender pursuant to the Collateral Documents; and
Borrower and its Subsidiaries have received all deeds, assignments, waivers,
consents, non-disturbance and recognition or similar agreements, bills of
sale and other documents, and duly effected all recordings, filings and other
actions necessary to establish, protect and perfect Borrower's and its
Subsidiaries' right, title and interest in and to all such property except
where the failure to have received such documents or effected such actions
will not, in the aggregate, have a Material Adverse Effect.
(b) All real property owned or leased by Borrower and its Subsidiaries
is set forth on Schedule 4.8(a) and 4.8(b), respectively. Neither Borrower nor
any of its Subsidiaries owns any other real property or is lessee or lessor
under any leases other than as set forth therein. Schedules 4.8(a) and 4.8(b)
are true and correct in all material respects. Part One of Schedule 4.8(b)
hereto sets forth all leases of real property held by Borrower or any Subsidiary
as lessee and Part Two of Schedule 4.8(b) sets forth all leases of real property
held by Borrower or any Subsidiary as lessor together with information regarding
the commencement date, termination date, renewal options (if any) and annual
base rents for the years 1995, 1996, 1997 and 1998. Each of such leases is valid
and enforceable in accordance with its terms and is in full force and effect.
Borrower has delivered to Lender true and complete copies of each of such leases
set forth on Part One and Part Two of Schedule 4.8(b) and all documents
affecting the rights or obligations of Borrower or any Subsidiary which is a
party thereto, including, without limitation, any non-disturbance and
recognition agreements, subordination agreements, attornment agreements and
agreements regarding the term or rental of any of the leases. Neither Borrower
nor the applicable Subsidiary nor any other party to any such lease is in
default of its obligations thereunder or has delivered or received any notice of
default under any such lease, nor has any event occurred which, with the giving
of notice, the passage of
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time or both, would constitute a default under any such lease, except for any
default which would not have a Material Adverse Effect.
(c) Neither Borrower nor any of its Subsidiaries owns or holds, or
is obligated under or a party to, any option, right of first refusal or any
other contractual right to purchase, acquire, sell, assign or dispose of any
real property owned or leased by Borrower or any of its Subsidiaries.
(d) All permits required to have been issued or appropriate to
enable the real property owned or leased by Borrower or its Subsidiaries to
be lawfully occupied and used for all of the purposes for which they are
currently occupied and used, have been lawfully issued and are, as of the
date hereof, in full force and effect.
(e) Neither Borrower nor any of its Subsidiaries has received any
notice, nor has any knowledge, of any pending, threatened or contemplated
condemnation proceeding affecting any real property owned or leased by
Borrower or any of its Subsidiaries or any part thereof, or of any sale or
other disposition of any real property owned or leased by Borrower or any of
its Subsidiaries or any part thereof in lieu of condemnation.
(f) No portion of any real property owned or leased by Borrower or
any of its Subsidiaries has suffered any material damage by fire or other
casualty loss which has not heretofore been completely repaired and restored
to its original condition. No portion of any real property owned or leased by
Borrower or any of its Subsidiaries is located in a special flood hazard area
as designated by any federal, Governmental Authority.
4.9. NO DEFAULT. Neither Borrower nor any of its Subsidiaries is in
default, nor to Borrower's knowledge is any third party in default, under or
with respect to any contract, agreement, lease or other instrument to which
it is a party, except for any default which (either individually or
collectively with other defaults arising out of the same event or events)
would not have a Material Adverse Effect. No Default or Event of Default has
occurred and is continuing.
4.10. BURDENSOME RESTRICTIONS. No contract, lease, agreement or
other instrument to which Borrower or any of its Subsidiaries is a party or
is bound and no provision of applicable law or governmental regulation has a
Material Adverse Effect, or insofar as Borrower can reasonably foresee may
have a Material Adverse Effect.
4.11. LABOR MATTERS. There are no strikes or other labor disputes
against Borrower or any of its Subsidiaries pending or, to Borrower's
knowledge, threatened which would have a Material Adverse Effect. Hours
worked by and payment made to employees of Borrower and its Subsidiaries have
not been in violation of the Fair Labor Standards Act or any other applicable
law dealing with such matters which would have a Material Adverse Effect. All
payments due from Borrower or any of its Subsidiaries on account of employee
health and welfare insurance which would have a Material Adverse Effect if
not paid have been paid or accrued as a liability on the books of Borrower or
such Subsidiary. Neither Borrower nor any of its Subsidiaries has any
obligation under any collective bargaining agreement or any employment
agreement. There is no organizing activity involving Borrower or any of its
Subsidiaries pending or threatened by any labor union or group of employees.
There are no representation proceedings pending or threatened with the
National Labor Relations Board, and no labor organization or group of
employees of Borrower or any of its Subsidiaries has made a pending demand
for recognition. There are no complaints or charges against
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Borrower or any of its Subsidiaries pending or threatened to be filed with
any federal, state, local or foreign court, governmental agency or arbitrator
based on, arising out of, in connection with, or otherwise relating to the
employment or termination of employment by Borrower or any Subsidiary of any
individual. Neither Borrower nor any of its Subsidiaries is a contractor,
subcontractor or has a legal obligation to engage in affirmative action other
than as required by the rules, regulations, orders, policies, decisions and
procedures of the FCC.
4.12. OTHER VENTURES. Except as set forth in Schedule 4.12, neither
Borrower nor any Subsidiary is engaged in any joint venture or partnership
with any other Person.
4.13. TAXES. All federal, state, local and foreign tax returns,
reports and statements required to be filed by Borrower and its Subsidiaries
have been filed with the appropriate Governmental Authority and all Charges
and other impositions shown thereon to be due and payable have been paid
prior to the date on which any fine, penalty, interest or late charge may be
added thereto for nonpayment thereof, or any such fine, penalty, interest,
late charge or loss has been paid. Each of Borrower and its Subsidiaries has
paid when due and payable all Charges required to be paid by it. Proper and
accurate amounts have been withheld by Borrower and its Subsidiaries from
their respective employees for all periods in full and complete compliance
with the tax, social security and unemployment withholding provisions of
applicable federal, state, local and foreign law and such withholdings have
been timely paid to the respective governmental agencies. Schedule 4.13 sets
forth, for each of Borrower and its Subsidiaries, those taxable years for
which its tax returns are currently being audited by the IRS or any other
applicable Governmental Authority. Neither Borrower nor any of its
Subsidiaries has executed or filed with the IRS or any other Governmental
Authority any agreement or other document extending, or having the effect of
extending, the period for assessment or collection of any Charges. Neither
Borrower nor any of its Subsidiaries has filed a consent pursuant to IRC
Section 341(f) or agreed to have IRC Section 341(f)(2) apply to any
dispositions of subsection (f) assets (as such term is defined in IRC Section
341(f)(4)). None of the property owned by Borrower or any of its Subsidiaries
is property which such company is required to treat as being owned by any
other Person pursuant to the provisions of IRC Section 168(f)(8) of the
Internal Revenue Code of 1954, as amended, and in effect immediately prior to
the enactment of the Tax Reform Act of 1986 or is "tax-exempt use property"
within the meaning of IRC Section 168(h). Neither Borrower nor any of its
Subsidiaries has agreed or has been requested to make any adjustment under
IRC Section 481(a) by reason of a change in accounting method or otherwise.
Neither Borrower nor any of its Subsidiaries has any obligation under any
written tax sharing agreement.
4.14. ERISA. (a) Schedule 4.14 lists all Plans maintained or
contributed to by Borrower and its Subsidiaries and all Qualified Plans
maintained or contributed to by any ERISA Affiliate, and separately
identifies the Title IV Plans, Multiemployer Plans, any multiple employer
plans subject to Section 4064 of ERISA, unfunded Pension Plans and Retiree
Welfare Plans.
(b) Each Qualified Plan has been determined by the IRS to qualify
under Section 401 of the IRC, and the trusts created thereunder have been
determined to be exempt from tax under the provisions of Section 501 of the
IRC, and to the best knowledge of Borrower nothing has occurred which would
cause the loss of such qualification or tax-exempt status.
(c) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA and the IRC, including the filing of reports
required under the IRC or ERISA which are
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true and correct in all material respects as of the date filed, and with respect
to each Plan, other than a Qualified Plan, all required contributions and
benefits have been paid in accordance with the provisions of each such Plan.
(d) None of Borrower, its Subsidiaries or any ERISA Affiliate, with
respect to any Qualified Plan, has failed to make any contribution or pay any
amount due as required by Section 412 of the IRC or Section 302 of ERISA or the
terms of any such plan.
(e) With respect to all Retiree Welfare Plans, the present value of
future anticipated expenses pursuant to the latest actuarial projections of
liabilities does not exceed $100,000, and copies of such latest projections have
been provided to Lender.
(f) There are no pending, or to the knowledge of Borrower or any of
its Subsidiaries, threatened claims, actions or lawsuits (other than claims for
benefits in the normal course), asserted or instituted against (i) any Plan or
its assets, (ii) any fiduciary with respect to any Plan or (iii) Borrower, any
of its Subsidiaries or any ERISA Affiliate with respect to any Plan.
(g) Except as set forth on Schedule 4.14, none of Borrower, any of its
Subsidiaries or any ERISA Affiliate has incurred or reasonably expects to incur
any Withdrawal Liability (and no event has occurred which, with the giving of
notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 of ERISA as a result of a complete or partial withdrawal from a
Multiemployer Plan.
(h) Except as set forth in Schedule 4.14, within the last five years
none of Borrower, any of its Subsidiaries or any ERISA Affiliate has engaged in
a transaction which resulted in a Title IV Plan with Unfunded Liabilities being
transferred outside of the "controlled group" (within the meaning of Section
4001(a)(14) of ERISA) of any such entity.
(i) Except as set forth on Schedule 4.14, no plan which is a Retiree
Welfare Plan provides for continuing benefits or coverage for any participant or
any beneficiary of a participant after such participant's termination of
employment (except as may be required by Section 4980B of the IRC and at the
sole expense of the participant or the beneficiary of the participant) which
would result in a liability in an amount which would have a Material Adverse
Effect. Borrower, its Subsidiaries and each ERISA Affiliate have complied with
the notice and continuation coverage requirements of Section 4980B of the IRC
and the regulations thereunder except where the failure to comply would not
result in any Material Adverse Effect.
(j) Neither Borrower nor any of its Subsidiaries has engaged in a
prohibited transaction, as defined in Section 4975 of the IRC or Section 406 of
ERISA, in connection with any Plan, which would subject Borrower or any of its
Subsidiaries (after giving effect to any exemption) to a material tax on
prohibited transactions imposed by Section 4975 of the IRC or any other material
liability.
(k) Except as set forth on Schedule 4.14, no liability under any Plan
has been funded, nor has such obligation been satisfied with, the purchase of a
contract from an insurance company that is not rated AAA by Standard & Poor's
Corporation and the equivalent by each other nationally recognized rating
agency.
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4.15. NO LITIGATION. Except as set forth on Schedule 4.15 hereto, no
action, claim or proceeding is now pending or, to the knowledge of Borrower,
threatened against Borrower or any of its Subsidiaries, at law, in equity or
otherwise, before any court, board, commission, agency or instrumentality of any
federal, state, or local government or of any agency or subdivision thereof, or
before any arbitrator or panel of arbitrators, which, if determined adversely,
could have a Material Adverse Effect, nor to the knowledge of Borrower does a
state of facts exist which is reasonably likely to give rise to such
proceedings. None of the matters set forth therein questions the validity of any
of the Loan Documents or any action taken or to be taken pursuant thereto, or
would have either individually or in the aggregate a Material Adverse Effect.
4.16. EMPLOYMENT AND LABOR AGREEMENTS. Except as set forth on Schedule
4.16, there are no employment, consulting or management agreements covering
management of Borrower or any of its Subsidiaries and there are no collective
bargaining agreements or other labor agreements covering any employees of
Borrower or any of its Subsidiaries. A true and complete copy of each such
agreement has been furnished to Lender.
4.17. PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES. Borrower and its
Subsidiaries own all material licenses, patents, patent applications,
copyrights, service marks, trademarks, trademark applications, and trade names
necessary to continue to conduct their business as heretofore conducted by them,
now conducted by them and proposed to be conducted by them, each of which is
listed, together with Patent and Trademark Office application or registration
numbers, where applicable, on Schedule 4.17 hereto. Borrower and its
Subsidiaries conduct their respective businesses without infringement or claim
of infringement of any license, patent, copyright, service mark, trademark,
trade name, trade secret or other intellectual property right of others, except
where such infringement or claim of infringement would not have a Material
Adverse Effect. To Borrower's knowledge, there is no infringement or claim of
infringement by others of any material license, patent, copyright, service mark,
trademark, trade name, trade secret or other intellectual property right of
Borrower or any of its Subsidiaries.
4.18. FULL DISCLOSURE. No information contained in this Agreement, the
other Loan Documents, the Financial Statements or any written statement
furnished by or on behalf of Borrower or its Subsidiaries pursuant to the terms
of this Agreement contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained herein or
therein not misleading in light of the circumstances under which made.
4.19. LIENS. Except for Permitted Encumbrances, the Liens granted to
Lender pursuant to the Collateral Documents will at the Closing Date be fully
perfected first priority Liens in and to the Collateral described therein. The
Liens granted to Lender pursuant to the Mortgages and Leasehold Mortgages will
be fully perfected first priority Liens in and to the Collateral therein
described upon their recording.
4.20. NO MATERIAL ADVERSE EFFECT. No event has occurred since March
31, 1995 and is continuing which has had or could have a Material Adverse
Effect.
4.21. ENVIRONMENTAL PROTECTION. Except as set forth on Schedule 4.21
attached hereto, to Borrower's knowledge without independent investigation, all
Real Estate owned and all real property leased pursuant to the Leases by
Borrower or any of Borrower's Subsidiaries is free of contamination from any
substance or material currently identified to be toxic or hazardous pursuant to
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Environmental Laws, including, without limitation, any asbestos, pcb,
radioactive substance, methane, volatile hydrocarbons, industrial solvents, or
any other material or substance which has in the past or could at any time in
the future cause or constitute a health, safety, or environmental hazard to any
Person or property. Neither Borrower nor any of Borrower's Subsidiaries has
caused or suffered to occur any discharge, spillage, uncontrolled loss, seepage,
or filtration of oil or petroleum or chemical liquids or solids, liquid or
gaseous products, or hazardous waste, or hazardous substance in violation of the
Environmental Laws (a "Spill") at, under, or within any real property owned or
leased by any such Person. Neither Borrower nor any of Borrower's Subsidiaries
is involved in operations which could lead to the imposition of any liability or
Lien on any such Person or any owner of any premises occupied by such Person
under the Environmental Laws and neither Borrower nor any of Borrower's
Subsidiaries permitted any tenant or occupant of such premises to engage in any
such activity.
4.22. REAL ESTATE MORTGAGES. Schedule 4.8 hereto sets forth with
respect to any Real Estate (i) the amount of existing Indebtedness secured by a
Lien on each property (each such property being a "Mortgaged Property"), (ii)
the current monthly payment of interest and principal in respect of such
Indebtedness, (iii) the current interest payable in respect of such
Indebtedness, and (iv) the estimated fair market values thereof as set forth in
certain appraisals prepared by third party appraisers, copies of which have
heretofore been furnished to Lender. Borrower has no reason to believe that the
amounts specified in the preceding sentence are not accurate. Borrower is not in
default of its obligations under any such Indebtedness nor has any event
occurred which, with the giving of notice, the passage of time or both, would
constitute a default under any such Indebtedness.
5. FINANCIAL STATEMENTS AND INFORMATION
5.1. REPORTS AND NOTICES. Borrower covenants and agrees that from and
after the Closing Date and until the Termination Date, it shall deliver to
Lender:
(a) Within 30 days after the end of each fiscal month, (i) a copy of
the unaudited consolidated and consolidating balance sheets of Borrower and its
Subsidiaries as of the end of such month and the related consolidated and
consolidating statements of income and cash flows for that portion of the Fiscal
Year ending as of the end of such month, and (ii) a copy of the unaudited
consolidated and consolidating statements of income of Borrower and its
Subsidiaries for such month, all prepared in accordance with GAAP (subject to
normal year-end adjustments), setting forth in comparative form in each case the
projected consolidated and consolidating figures for such period and accompanied
by (A) a statement in reasonable detail showing the calculations used in
determining the financial covenants under Sections 6.3 and 7.8 hereof, and (B)
the certification of the chief executive officer and chief financial officer of
Borrower that all such financial statements are complete and correct and present
fairly in accordance with GAAP (subject to normal year-end adjustments), the
consolidated and consolidating financial position, the consolidated and
consolidating results of operations and the consolidated and consolidating
statements of cash flows of Borrower and its Subsidiaries as at the end of such
month and for the period then ended, and that there was no Default or Event of
Default in existence as of such time.
(b) Within 45 days after the end of each fiscal quarter, (i) a copy of
the unaudited consolidated and consolidating balance sheets of Borrower and its
Subsidiaries as of the close of such quarter and the related consolidated and
consolidating statements of income and cash flows for that portion of the Fiscal
Year ending as of the close of such quarter, and (ii) a copy of the unaudited
consolidated and consolidating statements of income of Borrower and its
Subsidiaries for such quarter,
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all prepared in accordance with GAAP (subject to normal year-end adjustments)
and accompanied by (A) a statement in reasonable detail showing the calculations
used in determining the financial covenants under Sections 6.3 and 7.8 hereof,
and (B) the certification of the chief executive officer, chief financial
officer and chief accounting officer of Borrower that all such financial
statements are complete and correct and present fairly in accordance with GAAP
(subject to normal year-end adjustments), the consolidated and consolidating
financial position, the consolidated and consolidating results of operations and
the consolidated and consolidating statements of cash flows of Borrower and its
Subsidiaries as at the end of such quarter and for the period then ended, and
that there was no Default or Event of Default in existence as of such time.
(c) Within 90 days after the close of each Fiscal Year, a copy of the
annual audited consolidated and unaudited consolidating financial statements of
Borrower and its Subsidiaries, consisting of consolidated and consolidating
balance sheets and consolidated and consolidating statements of income and
retained earnings and cash flows, setting forth in comparative form in each case
the consolidated and consolidating figures for the previous fiscal year, which
financial statements shall be prepared in accordance with GAAP, certified (only
with respect to the consolidated financial statements) without qualification by
the independent certified public accountants regularly retained by Borrower, or
any other firm of independent certified public accountants of recognized
national standing selected by Borrower and acceptable to Lender, and accompanied
by (i) a schedule in reasonable detail showing the calculations used in
determining the financial covenants under Section 6.3 and 7.8 hereof, occurred
and (ii) a certification of the chief executive officer, chief financial officer
and chief accounting officer of Borrower that all such financial statements are
complete and correct and present fairly in accordance with GAAP the consolidated
and consolidating financial position, the consolidated and consolidating results
of operations and the consolidated and consolidating statements of cash flows of
Borrower and its Subsidiaries as at the end of such year and for the period then
ended and that there was no Default or Event of Default in existence as of such
time.
(d) As soon as practicable, but in any event within one (1) Business
Day after Borrower becomes aware of the existence of any Default or Event of
Default, or any development or other information which would have a Material
Adverse Effect, telephonic or telegraphic notice specifying the nature of such
Default or Event of Default or development or information, including the
anticipated effect thereof, which notice shall be promptly confirmed in writing
within three (3) days.
(e) Within 90 days prior to the beginning of each Fiscal Year:
(i) projected consolidated balance sheet of Borrower and its
Subsidiaries and projected consolidating balance sheet of Borrower and its
Subsidiaries for such Fiscal Year, on a monthly basis;
(ii) projected consolidated and consolidating cash flow statements
of Borrower and its Subsidiaries, including summary details of cash
disbursements (including for Capital Expenditures), for such Fiscal Year,
on a monthly basis; and
(iii) projected consolidated and consolidating income statements of
Borrower and its Subsidiaries for such Fiscal Year, on a monthly basis;
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<PAGE>
together with appropriate supporting details as requested by Lender.
(f) If requested by Lender, copies of all federal, state, local and
foreign tax returns and reports in respect of income, franchise or other taxes
on or measured by income (excluding sales, use or like taxes) filed by Borrower
or any of its Subsidiaries.
(g) Such other information respecting Borrower's or any of its
Subsidiaries' business, financial condition or prospects as Lender or any
Assignee Lender may, from time to time, reasonably request.
5.2. COMMUNICATION WITH ACCOUNTANTS. Borrower authorizes Lender and
each Assignee Lender to communicate directly with its independent certified
public accountants and tax advisors and authorizes those accountants to disclose
to Lender and each Assignee Lender any and all financial statements and other
supporting financial documents and schedules including copies of any management
letter with respect to the business, financial condition and other affairs of
Borrower and any of its Subsidiaries. At or before the Closing Date, Borrower
shall deliver a letter addressed to such accountants and tax advisors
instructing them to comply with the provisions of this Section 5.2.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, unless the Required Lenders shall
otherwise consent in writing, from and after the date hereof and until the
Termination Date:
6.1. MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS. Borrower shall,
and shall cause each of its Subsidiaries to: (a) do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, and its rights and franchises; (b) continue to conduct its business
substantially as now conducted or as otherwise permitted hereunder; (c) at all
times maintain, preserve and protect all of its material trademarks and trade
names, and preserve all the remainder of its property, in use or useful in the
conduct of its business and keep the same in good repair, working order and
condition (taking into consideration ordinary wear and tear) and from time to
time make, or cause to be made, all needful and proper repairs, renewals and
replacements, betterments and improvements thereto consistent with applicable
industry practices, so that the business carried on in connection therewith may
be properly and advantageously conducted at all times; and (d) transact business
only in such names set forth on Schedule 6.1, or such other names as Borrower or
any Subsidiary of Borrower shall specify to Lender in writing not less than
thirty (30) days prior to the first date such name is used by Borrower or any
Subsidiary of Borrower.
6.2. PAYMENT OF OBLIGATIONS. (a) Borrower shall, and shall cause each
of its Subsidiaries to: (i) pay and discharge or cause to be paid and discharged
all its Indebtedness, including, without limitation, all the Obligations, as and
when due and payable, and (ii) pay and discharge or cause to be paid and
discharged promptly all (A) Charges imposed upon it, its income and profits, or
any of its property (real, personal or mixed), and (B) lawful claims for labor,
materials, supplies and services or otherwise before any thereof shall become in
default.
(b) Borrower and its Subsidiaries may in good faith contest, by proper
legal actions or proceedings, the validity or amount of any Charges or claims
arising under Section 6.2(a)(ii), provided that at the time of commencement of
any such action or proceeding, and during the pendency thereof (i) no Default or
Event of Default shall have occurred; (ii) adequate Reserves with
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respect thereto are maintained on the books of Borrower or such Subsidiary,
in accordance with GAAP; (iii) such contest operates to suspend collection of
the contested Charges or claims and is maintained and prosecuted continuously
with diligence; (iv) none of the Collateral would be subject to forfeiture or
loss or any Lien by reason of the institution or prosecution of such contest;
(v) no Lien shall exist for such Charges or claims during such action or
proceeding; (vi) Borrower or such Subsidiary shall promptly pay or discharge
such contested Charges and all additional charges, interest, penalties and
expenses, if any, and shall deliver to Lender evidence acceptable to Lender
of such compliance, payment or discharge, if such contest is terminated or
discontinued adversely to Borrower or such Subsidiary; and (vii) Lender has
not advised Borrower in writing that Lender reasonably believes that
nonpayment or nondischarge thereof would have a Material Adverse Effect.
(c) Notwithstanding anything to the contrary contained in Section
6.2(b) above, Borrower and each of its Subsidiaries shall have the right to
pay the charges or claims arising under Section 6.2(a)(ii) and in good faith
contest, by proper legal actions or proceedings, the validity or amount of
such Charges or claims.
6.3. FINANCIAL COVENANTS. Borrower and its Subsidiaries shall, on
a consolidated basis:
(a) maintain at all times, such maintenance to be evidenced as at
the end of any fiscal quarter of Borrower, a Consolidated Total Funded Debt
to Consolidated Cash Flow Ratio equal to or less than:
6.0:1.0 for the Fiscal Year ended
December 31, 1995
3.0:1.0 for the Fiscal Year ending
December 31, 1996; and
2.0:1.0 thereafter;
(b) maintain at all times, such maintenance to be evidenced as at
the end of any fiscal quarter of Borrower, a Senior Debt to Consolidated Cash
Flow Ratio equal to or less than:
5.0:1.0 for the Fiscal Year ending
December 31, 1995;
2.5:1.0 for the Fiscal Year ending
December 31, 1996; and
1.5:1.0 thereafter;
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(c) maintain at all times, such maintenance to be evidenced as at the
end of any fiscal quarter of Borrower, a Consolidated Interest Coverage Ratio
equal to or greater than:
1.0:1.0 for the Fiscal Year ending
December 31, 1995;
2.5:1.0 for the six months ending
June 30, 1996;
3.0:1.0 for the six months ending
December 31, 1996; and
5.0:1.0 thereafter;
(d) have a Consolidated Cash Flow equal to or greater than:
$1,500,000 for the three months ending
September 30, 1995;
$3,000,000 for the Fiscal Year ending
December 31, 1996;
$4,000,000 for each Fiscal Year thereafter.
6.4. LENDER'S FEES. Borrower shall pay to Lender, on demand, any and
all fees, costs or expenses that Lender shall pay to a bank or other similar
institution arising out of or in connection with the forwarding to Borrower or
any other Person on behalf of Borrower by Lender of proceeds of the Term Loan
Advances.
6.5. BOOKS AND RECORDS. Borrower shall, and shall cause each of its
Subsidiaries to, keep adequate records and books of account with respect to
its business activities, in which proper entries, reflecting all of their
financial transactions, are made in accordance with GAAP and on a basis
consistent with the Financials referred to in Section 4.6(b) hereof.
6.6. LITIGATION. Borrower shall notify Lender in writing, promptly
upon learning thereof, of any litigation commenced against Borrower and/or
any of the Subsidiaries, and of the institution against any of them of any
suit or administrative proceeding that may have a Material Adverse Effect.
6.7. INSURANCE. Borrower shall and shall cause each Subsidiary of
Borrower to maintain insurance covering, without limitation, fire, theft,
burglary, public liability, property damage, product liability, workers'
compensation, and insurance on all property and assets, all in amounts customary
for its industry and under policies issued by insurers and pursuant to policies
satisfactory to Lender and in any event in compliance with any insurance
requirements under any Loan Documents and with a lender's loss payable clause
for the benefit of Lender. Borrower shall, and shall cause each of its
Subsidiaries to, pay all insurance premiums payable by them.
6.8. COMPLIANCE WITH LAW. Borrower shall and shall cause each of its
Subsidiaries to comply with all federal, state and local laws and regulations
applicable to it, including, without
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limitation. ERISA, those regarding the collection, payment and deposit of
employees' income, unemployment and social security taxes and those relating to
environmental matters where the failure to comply may have a Material Adverse
Effect.
6.9. AGREEMENTS. Borrower shall and shall cause each of its
Subsidiaries to perform, within all required time periods (after giving effect
to any applicable grace periods), all of its obligations and enforce all of its
rights under each agreement to which it is a party, including, without
limitation, any leases to which any such company is a party, where the failure
to so perform and enforce would have a Material Adverse Effect. Borrower shall
not and shall cause each of its Subsidiaries not to terminate or modify in any
manner adverse to any such company any provision of any agreement to which it is
a party which termination or modification could have a Material Adverse Effect.
6.10. SUPPLEMENTAL DISCLOSURE. From time to time as may be necessary
(in the event that such information is not otherwise delivered by Borrower to
Lender pursuant to this Agreement), so long as there are Obligations outstanding
hereunder, Borrower will supplement each Schedule or representation herein with
respect to any matter hereafter arising which, if existing or occurring at the
date of this Agreement, would have been required to be set forth or described in
such Schedule or as an exception to such representation or which is necessary to
correct any information in such Schedule or representation which has been
rendered inaccurate thereby; PROVIDED, HOWEVER, that such supplement to such
Schedule or representation shall not be deemed an amendment thereof unless
otherwise consented to by the Required Lenders.
6.11. EMPLOYEE PLANS. (a) With respect to other than a Multiemployer
Plan, for each Qualified Plan hereafter adopted or maintained by Borrower,
any of its Subsidiaries or any ERISA Affiliate, Borrower shall (i) seek, or
cause its Subsidiaries or ERISA Affiliates to seek, and receive determination
letters from the IRS to the effect that such Qualified Plan is qualified
within the meaning of Section 401(a) of the IRC; and (ii) from and after the
adoption of any such Qualified Plan, cause such plan to be qualified within
the meaning of Section 401(a) of the IRC and to be administered in all
material respects in accordance with the requirements of ERISA and Section
401(a) of the IRC.
(b) With respect to each Welfare Plan hereafter adopted or maintained
by Borrower, any of its Subsidiaries or any ERISA Affiliate, Borrower shall
comply, or cause its Subsidiaries or ERISA Affiliates to comply, with the notice
and continuation coverage requirements of Section 4980B of the IRC and the
regulations thereunder.
(c) (i) Promptly and in any event within thirty (30) days after
Borrower, any of its Subsidiaries or any ERISA Affiliate knows or has reason to
know that any ERISA Event has occurred, and (ii) promptly and in any event
within ten (10) days after Borrower, any of its Subsidiaries or any ERISA
Affiliate knows or has reason to know that a request for a minimum funding
waiver under Section 412 of the IRC has been filed with respect to any Qualified
Plan, Borrower shall furnish to Lender a written statement of the chief
financial officer or other appropriate officer of Borrower describing such ERISA
Event or waiver request and the action, if any, which Borrower, any of its
Subsidiaries or any ERISA Affiliate proposes to take with respect thereto and a
copy of any notice filed with the PBGC or the IRS pertaining thereto.
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(d) Promptly and in any event within thirty (30) days after receipt
thereof. Borrower shall furnish to Lender a copy of any adverse notice,
determination letter, ruling or opinion Borrower any of its Subsidiaries or
any ERISA Affiliate receives from the PBGC, the United States Department of
Labor or IRS with respect to any Qualified Plan.
(e) Promptly and in any event within ten (10) Business Days after
receipt thereof, Borrower shall furnish to Lender a copy of any correspondence
Borrower, any of its Subsidiaries or any ERISA Affiliate receives from the plan
sponsor (as defined by Section 4001(a)(10) of ERISA) of any Multiemployer Plan
concerning potential Withdrawal Liability of Borrower, any of its Subsidiaries
or any ERISA Affiliate, or notice of any reorganization, with respect to any
Multiemployer Plan, together with a written statement of the chief financial
officer or other appropriate officer of Borrower of the action which Borrower,
any of its Subsidiaries or any ERISA Affiliate proposes to take with respect
thereto.
(f) Promptly and in any event within thirty (30) Business Days after
the adoption thereof, Borrower shall furnish to Lender notice of (i) any
amendment to a Title IV Plan which results in an increase in benefits or the
adoption of any new Title IV Plan, and (ii) any amendment to, or adoption of, a
new Welfare Plan which Borrower or any of its Subsidiaries maintains,
contributes or has an obligation to contribute to, and which results in an
increase in benefits.
(g) Promptly and in any event after receipt of written notice of
commencement thereof, Borrower shall furnish to Lender notice of any action,
suit or proceeding before any court or other governmental authority affecting
Borrower, any of its Subsidiaries or any ERISA Affiliate with respect to any
Plan, except those which, in the aggregate, if adversely determined, could not
have a Material Adverse Effect.
(h) Promptly and in any event within thirty (30) days after notice or
knowledge thereof, Borrower shall furnish to Lender notice that Borrower or any
of its Subsidiaries becomes subject to the tax on prohibited transactions
imposed by Section 4975 of the IRC, together with a copy of Form 5330.
6.12. SEC FILINGS; CERTAIN OTHER NOTICES. Borrower shall furnish to
Lender (i) promptly after the filing thereof with the Securities and Exchange
Commission. a copy of each report, notice or other filing, if any, by
Borrower with the Securities and Exchange Commission and (ii) a copy of each
written communication received by Borrower from or delivered by Borrower to
(A) the Securities and Exchange Commission or (B) any holder of publicly held
subordinated debt of Borrower, in each case promptly after each such receipt
or delivery.
6.13. SALE OF CERTAIN ASSETS. Borrower shall use its best efforts to
sell within 36 months after the Closing Date the assets and businesses listed on
Schedule 6.13 hereof ("Permitted Dispositions"), the terms and conditions of
which shall be subject to Lender's approval.
6.14. LEASES: NEW REAL ESTATE. (a) Borrower shall provide, or shall
cause the applicable subsidiary to provide, Lender with copies of all leases of
real property or similar agreements (and all amendments thereto) entered into by
Borrower or any Subsidiary after the Closing Date, whether as lessor or lessee.
Borrower shall comply and shall cause each of its Subsidiaries to comply in all
material respects with all of its and their obligations under all Leases now
existing or hereafter entered into by it or them with respect to, real property
including, without limitation, all
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Leases listed on Schedule 4.8 hereto. Borrower shall, or shall cause the
appropriate Subsidiary to, (i) provide Lender with a copy of each notice of
default received by Borrower or such Subsidiary under any such lease immediately
upon receipt of any such notice and deliver to Lender a copy of each notice of
default sent by Borrower or such Subsidiary under any such lease simultaneously
with its delivery of such notice under such lease: (ii) notify Lender, not later
than 30 days prior to the date of the expiration of the term of any such lease,
of intention either to renew or not renew any such lease, and, if Borrower or
such Subsidiary shall intend to renew such lease, the terms and conditions of
such renewal lease; and (iii) notify Lender at least 14 days prior to the date
Borrower or such Subsidiary takes possession of or becomes liable under any new
leased premises or lease, whichever is earlier.
(b) From time to time at the request of Lender, Borrower and
Subsidiaries shall execute a first priority Mortgage (subordinate only to such
mortgages as are necessary to permit Borrower or such Subsidiary to purchase
such Real Estate) in favor of Lender covering any Real Estate now or hereafter
owned or held by Borrower or its Subsidiaries, in form and substance
satisfactory to Lender and provide Lender with title insurance satisfactory to
Lender covering such Real Estate in an amount equal to the purchase price of
such Real Estate as well as a current ALTA survey thereof, together with a
surveyor's certificate in form and substance satisfactory to Lender.
6.15. ENVIRONMENTAL MATTERS. (a) Borrower shall and shall cause each
of its Subsidiaries to (i) comply in all material respects with the
Environmental Laws applicable to it, (ii) notify Lender promptly after
knowledge in the event of any Spill upon any premises owned or occupied by
such Person, and (iii) promptly forward to Lender a copy of any order,
notice, permit, application, or any other communication or report received by
Borrower or any of its Subsidiaries in connection with any such Spill or any
other matter relating to the Environmental Laws as they may affect such
premises.
(b) Borrower shall indemnify Lender and hold Lender harmless from
and against any loss, liability, damage, or expense, including attorneys'
fees, suffered or incurred by Lender, whether as mortgagee pursuant to any
Leasehold Mortgage. as mortgagee in possession, or as successor in interest
to Borrower or any of its Subsidiaries as owner or lessee of any premises
owned or occupied by Borrower or any of its Subsidiaries by virtue of
foreclosure or acceptance in lieu of foreclosure (i) under or on account of
the Environmental Laws, including the assertion of any Lien thereunder; (ii)
with respect to any Spill affecting such premises, whether or not the same
originates or emanates from such premises or any contiguous real estate,
including any loss of value of such premises as a result of a Spill; (iii)
with respect to any liability for personal injury or property damage arising
under any statutory or common law tort theory, including, without limitation,
damages assessed for the maintenance of public or private nuisance of the
carrying on of an abnormally dangerous activity at or near any Real Estate;
and (iv) with respect to any other Environmental Liabilities and Costs with
respect to any other matter affecting such premises within the jurisdiction
of any federal, state, or municipal official administering the Environmental
Laws.
(c) In the event of any Spill affecting any premises occupied by
Borrower or any of its Subsidiaries, whether or not the same originated or
emanates from such premises or any contiguous real estate. and if Borrower or
such Subsidiary shall fail to comply with any of the requirements of the
Environmental Laws, if required to do so under the applicable lease, Lender
may, but shall not be obligated to, give such notices or cause such work to
be performed or take any and all actions deemed necessary or desirable to
remedy such Spill or cure such failure to comply and any
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amounts paid as a result thereof, together with interest thereon at the rate
set forth in Section 2.5 hereof, shall be immediately due and payable by
Borrower and, until paid, shall be added to the Obligations.
The provisions of this Section 6.15 shall apply whether or not the
Environmental Protection Agency, any other federal agency or any state or
local environmental agency has taken or threatened any action in connection
with the presence of any Spills or hazardous substances.
6.16. KEY MAN LIFE INSURANCE. If requested by Lender, Borrower shall
obtain a term life insurance policy with respect to the lives of each of
Henry Huta and C. Stephen Beal in an amount of not less than $2,000.000.
6.17. ADDITIONAL SECURITY. If requested by Lender, Borrower shall
cause any Subsidiary designated by Lender to enter into a security agreement
and/or one or more mortgages for the benefit of Lender, pursuant to which
security agreement and mortgages such Subsidiary shall grant Lender a first
priority security interest in substantially all of such Subsidiary's real and
personal property assets. In connection therewith, if Lender shall so
request, such Subsidiary shall execute and deliver security agreements,
mortgages and such further documents and instruments and make such filings as
Lender shall request to enable Lender to perfect its security interest and
Liens in such Subsidiary's assets.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, without the Required Lenders'
prior written consent, from and after the date hereof and until the
Termination Date:
7.1. MERGERS, ETC. Neither Borrower nor any Subsidiary of Borrower
shall directly or indirectly, by operation of law or otherwise, merge with,
consolidate with, acquire all or substantially all of the assets or capital
stock of, or otherwise combine with, any Person nor form any Subsidiary.
7.2. INVESTMENTS; LOANS AND ADVANCES. Except as otherwise permitted
by Section 7.3 or 7.4 hereof, Borrower shall not and shall not permit any
Subsidiary of Borrower to make any investment in, or make or accrue loans or
advances of money to any Person, through the direct or indirect holding of
securities or otherwise; PROVIDED, HOWEVER, that Borrower shall be permitted
hereunder and may permit hereunder its Subsidiaries to make one or more
investments in, or make or accrue loans or advances of money to, Borrower or
any other Subsidiary and PROVIDED, FURTHER, that Borrower and its
Subsidiaries may make and own investments in (i) marketable direct
obligations issued or unconditionally guaranteed by the United States of
America or any agency thereof maturing within one year from the date of
acquisition thereof; (ii) commercial paper maturing no more than one year
from the date of creation thereof and at the time of their acquisition having
the highest rating obtainable from either Standard & Poor's Corporation or
Moody's Investors Service, Inc.; and (iii) certificates of deposit, maturing
no more than one year from the date of creation thereof, issued by commercial
banks incorporated under the laws of the United States of America, each
having combined capital, surplus and undivided profits of not less than
$200,000,000 and having a rating of "A" or better by a nationally recognized
rating agency (the investments described in the preceding clauses (i)-(iii)
being hereinafter referred to as "Cash Equivalents").
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7.3. INDEBTEDNESS. (a) Except as otherwise expressly permitted by
this Section 7.3 or by any other section of this Agreement. Borrower shall
not, nor shall it permit any of its Subsidiaries to, create, incur, assume
or permit to exist any Indebtedness, except (i) Indebtedness secured by Liens
permitted under Section 7.10 hereof, (ii) the Term Loan Advances, (iii) the
Letter of Credit Obligations in an amount not to exceed (A) $3,500,000 for
the three months ending September 30, 1995; (B) $2,800,000 for the three
months ending December 31, 1995; (C) $2,400,000 for the three months ending
March 31, 1996; (D) $1,300,000 for the nine months ending December 31, 1996;
and (E) $200,000 thereafter, (iv) the Sanwa Obligations, (v) all deferred
taxes, (vi) all unfunded pension fund and other employee benefit plan
obligations and liabilities but only to the extent they are permitted to
remain unfunded under applicable law, (vii) intercompany debt to any
Guarantor or to Borrower, and (viii) Indebtedness of Subsidiaries of Borrower
created under the Guaranty.
(b) Except as otherwise expressly permitted by Sections 6.13 and 7.9
hereof. Borrower shall not and shall not permit any Subsidiary of Borrower to
sell or transfer, either with or without recourse, any assets, of any nature
whatsoever, in respect of which a Lien is granted or to be granted pursuant
to any Loan Document or engage in any sale-leaseback or similar transaction
involving any of such assets.
7.4. EMPLOYEE LOANS. Schedule 7.4 attached hereto shows the
outstanding amount of all loans to employees, including the identity of the
employee, the principal amount of and interest rate of the indebtedness, and
the maturity date thereof. Except as set forth on Schedule 7.4, Borrower
shall not, and shall not permit any Subsidiary of Borrower to, make or accrue
any loans or other advances of money to any employee of Borrower or such
Subsidiary in excess at any one time of $50,000 in the aggregate for all such
loans, provided that such loans are made only in the ordinary course of
Borrower's or such Subsidiary's business.
7.5. MAINTENANCE OF BUSINESS. Borrower shall not and shall not
permit any Subsidiary of Borrower to engage in any business other than the
business currently engaged in by Borrower or such Subsidiary.
7.6. GUARANTEED INDEBTEDNESS. Borrower shall not and shall not
permit any Subsidiary of Borrower to incur any Guaranteed Indebtedness
(excluding the Guaranteed Indebtedness pursuant to the Guaranty) except (i)
by endorsement of instruments or items of payment for deposit to the general
account of Borrower or such Subsidiary, and (ii) for Guaranteed Indebtedness
incurred for the benefit of Borrower or any Subsidiary of Borrower if the
primary obligation is permitted by this Agreement.
7.7. LIENS. Borrower shall not and shall not permit any Subsidiary
of Borrower to create or permit any Lien on any of its properties or assets
except:
(a) presently existing or hereafter created Liens in favor of Lender;
and
(b) Permitted Encumbrances.
7.8. CAPITAL EXPENDITURES. Borrower shall not and shall not permit
any of its Subsidiaries to make Capital Expenditures that, in the aggregate,
shall exceed $100,000 for the period
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from and after the Closing Date through and including December 31, 1995, and
for each Fiscal Year thereafter.
7.9. SALES OF ASSETS. Except as otherwise provided in Section 6.13.
Borrower shall not and shall not permit any Subsidiary of Borrower to sell,
transfer, convey or otherwise dispose of any assets or properties: PROVIDED,
HOWEVER, that the foregoing shall not prohibit (i) the sale of Inventory in
the ordinary course of business, (ii) the sale of surplus or obsolete
equipment and fixtures, and (iii) transfers resulting from any casualty or
condemnation of assets or properties.
7.10. CANCELLATION OF INDEBTEDNESS. Borrower shall not and shall not
permit any Subsidiary of Borrower to cancel any claim or debt owing to it,
except for reasonable consideration and in the ordinary course of business.
7.11. EVENTS OF DEFAULT. Borrower shall not and shall not permit any
Subsidiary of Borrower to take or omit to take any action, which act or
omission would constitute (i) a default or an event of default pursuant to,
or noncompliance with any of, the terms of any of the Loan Documents or the
Ancillary Agreements or (ii) a material default or an event of default
pursuant to, or noncompliance with any other contract, lease, mortgage, deed
of trust or instrument to which it is a party or by which it or any of its
property is bound, or any document creating a Lien, unless such default,
event of default or non-compliance would not have a Material Adverse Effect.
7.12. HEDGING TRANSACTIONS. Borrower shall not and shall not permit
any of its Subsidiaries to engage in any speculative interest rate hedging
swaps, caps or similar transaction other than currency hedging in the
ordinary course of business.
7.13. RESTRICTED PAYMENTS. Borrower shall not and shall not permit
any Subsidiary of Borrower to make any Restricted Payments nor shall Borrower
permit any Subsidiary to make such payments with respect to Borrower's Stock.
7.14. COMPENSATION. Borrower shall not and shall not permit any
Subsidiary of Borrower to, increase the salary and bonus in any year of the
ten highest paid employees of Borrower and its Subsidiaries, if as a result
of such increase, any such employee's total cash Compensation would increase
by more than five percent (5%) of his total cash Compensation for the prior
year.
7.15. ERISA. Neither Borrower nor any of its Subsidiaries shall
establish or become obligated to any new Retiree Welfare Plan, or modify any
existing Retiree Welfare Plan, which would result in the present value of
future liabilities under any such plans to increase by more than $100.000.
Neither Borrower nor any of its Subsidiaries shall establish or become
obligated to any new unfunded Pension Plan, or modify any existing unfunded
Pension Plan, which would result in the present value of future liabilities
under any such plans to increase by more than $100,000. Borrower shall not
directly or indirectly, and shall not permit its Subsidiaries or any ERISA
Affiliate to (a) satisfy any liability under any Qualified Plan by purchasing
annuities from an insurance company or (b) invest the assets of any Qualified
Plan with an insurance company, unless, in each case, such insurance company
is rated AAA by Standard & Poor's Corporation and the equivalent by each
other nationally recognized rating agency at the time of the investment.
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8. TERM
8.1 TERMINATION. Subject to the provisions of Section 2 hereof, the
financing arrangement contemplated hereby in respect of the Term Loan
Advances shall be in effect until the Commitment Termination Date; PROVIDED,
HOWEVER, that in the event of a prepayment of the entire Term Loan prior to
the Commitment Termination Date with funds borrowed from any Person other
than Lender, Borrower shall simultaneously therewith pay to Lender, in
immediately available funds, all Obligations in full, in accordance with the
terms of the agreements creating and instruments evidencing such Obligations.
8.2. SURVIVAL OF OBLIGATIONS UPON TERMINATION OF FINANCING
ARRANGEMENT. Except as otherwise expressly provided for in the Loan
Documents, no termination or cancellation (regardless of cause or procedure)
of any financing arrangement under this Agreement shall in any way affect or
impair the powers, obligations, duties, rights and liabilities of Borrower
or the rights of Lender relating to any transaction or event occurring prior
to such termination. Except as otherwise expressly provided herein or in any
other Loan Document, all undertakings, agreements, covenants, warranties and
representations contained in the Loan Documents shall survive such
termination or cancellation and shall continue in full force and effect until
such time as all of the Obligations have been paid in full in accordance with
the terms of the agreements creating such Obligations, at which time the same
shall terminate.
8.3. TERMINATION PRIOR TO CLOSING DATE. Borrower hereby covenants
and agrees with Lender that Borrower will: (a) use its best efforts to
satisfy, and to cause to be satisfied, fully and promptly each of the
conditions set forth in Sections 3.1, 3.2 and 3.3 hereof and to consummate
each of the transactions contemplated by this Agreement; (b) refrain from
taking, or permitting to be taken, any action, of any nature whatsoever,
which shall impede, preclude or otherwise interfere with the satisfaction of
any such condition; and (c) indemnify and hold Lender harmless from and
against any and all claims, damages, liabilities and expenses which may be
incurred by or asserted against Lender in connection with or arising out of
any investigation, litigation or proceeding relating to this Agreement, any
other Loan Document or any transaction contemplated hereby or thereby, except
to the extent that any such claim, damage. liability or expense is the result
of the gross negligence or willful misconduct of Lender.
9. EVENTS OF DEFAULT: RIGHTS AND REMEDIES
9.1. EVENTS OF DEFAULT. The occurrence of any one or more of the
following events (regardless of the reason therefor) shall constitute an
"Event of Default" hereunder:
(a) Borrower shall fail to make any payment of principal of, or
interest on or any other amount owing in respect of, the Term Loan or any of
the other Obligations when due and payable or declared due and payable,
except that with respect to expenses payable under this Agreement, or other
Obligations owing under any Loan Document other than this Agreement, such
failure shall have remained unremedied for a period of ten (10) days after
Borrower has received notice of such failure from Lender.
(b) Borrower shall fail or neglect to perform, keep or observe any
of the provisions of Section 6.3 ("Financial Covenants") or Section 7 of this
Agreement.
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<PAGE>
(c) Borrower shall fail or neglect to perform, keep or observe
any other provision of this Agreement or of any of the other Loan Documents, or
any other Loan Party shall fail or neglect to perform, keep or observe any of
the provisions of any other Loan Document and the same shall remain
unremedied for a period ending on the first to occur of ten (10) days after
Borrower shall receive written notice of any such failure from any Lender or
thirty (30) days after Borrower shall become aware thereof.
(d) A default shall occur under any other agreement, document or
instrument to which any Loan Party is a party or by which any Loan Party or
any Loan Party's property is bound, and such default (i) involves the failure
to make any payment (whether of principal, interest or otherwise) due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) in respect of any Indebtedness of any Loan Party in an aggregate
amount exceeding $25,000, or (ii) causes (or permits any holder of such
Indebtedness or a trustee to cause) such Indebtedness or a portion thereof in
an aggregate amount exceeding $25,000, to become due prior to its stated
maturity or prior to its regularly scheduled dates of payment.
(e) Any representation or warranty herein or in any Loan Document or
in any written statement pursuant thereto or hereto, report, financial
statement or certificate made or delivered to Lender by any Loan Party shall
be untrue or incorrect in any material respect, as of the date when made or
deemed made (including those made or deemed made pursuant to Section 3.3).
(f) Any of the assets of any Loan Party shall be attached, seized,
levied upon or subjected to a writ or distress warrant, or come within the
possession of any receiver, trustee, custodian or assignee for the benefit of
creditors of any Loan Party and shall remain unstayed or undismissed for
thirty (30) consecutive days; or any Person other than any Loan Party shall
apply for the appointment of a receiver, trustee or custodian for any of the
assets of any Loan Party and shall remain unstayed or undismissed for thirty
(30) consecutive days; or any Loan Party shall have concealed, removed or
permitted to be concealed or removed, any part of its property, with intent
to hinder, delay or defraud its creditors or any of them or made or suffered
a transfer of any of its property or the incurring of an obligation which may
be fraudulent under any bankruptcy, fraudulent conveyance or other similar
law.
(g) A case or proceeding shall have been commenced against any Loan
Party in a court having competent jurisdiction seeking a decree or order in
respect of such Loan Party (i) under title 11 of the United States Code, as
now constituted or hereafter amended, or any other applicable federal, state
or foreign bankruptcy or other similar law, (ii) appointing a custodian,
receiver, liquidator, assignee, trustee or sequestrator (or similar official)
of such Loan Party or of any substantial part of its or their properties, or
(iii) ordering the winding-up or liquidation of the affairs of such Loan
Party and such case or proceeding shall remain undismissed or unstayed for
thirty (30) consecutive days or such court shall enter a decree or order
granting the relief sought in such case or proceeding.
(h) Any Loan Party shall (i) file a petition seeking relief under
title 11 of the United States Code, as now constituted or hereafter amended,
or any other applicable federal, state or foreign bankruptcy or other similar
law, (ii) consent to the institution of proceedings thereunder or to the
filing of any such petition or to the appointment of or taking possession by
a custodian, receiver, liquidator, assignee, trustee or sequestrator (or
similar official) of Borrower or such Loan Party or of
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any substantial part of its properties, (iii) fail generally to pay its debts
as such debts become due, or (iv) take any corporate action in furtherance of
any such action.
(i) Both of Henry Huta, the Chairman and Chief Executive Officer of
Borrower, and C. Stephen Beal, shall, for any reason, cease to be active
full-time employees of Borrower.
(j) Final judgment or judgments (after the expiration of all times
to appeal therefrom) for the payment of money in excess of $25,000 in the
aggeregate shall be rendered against Borrower or any of its Subsidiaries and
the same shall not be (i) fully covered by insurance in accordance with
Section 6.8 hereof, or (ii) vacated, stayed, bonded, paid or discharged for a
period of fifteen (15) days.
(k) Any other event shall have occurred which would have a Material
Adverse Effect and Lender shall have given Borrower at least ten (10) days
notice thereof.
(l) (i) With respect to any Plan, a prohibited transaction within
the meaning of Section 4975 of the IRC or Section 406 of ERISA occurs which
in the reasonable determination of Lender could result in direct or indirect
liability to Borrower or any of its Subsidiaries, (ii) with respect to any
Title IV Plan, the filing of a notice to voluntarily terminate any such plan
in a distress termination, (iii) with respect to any Multiemployer Plan,
Borrower, any of its subsidiaries or any ERISA Affiliate shall incur any
Withdrawal Liability, (iv) with respect to any Qualified Plan, Borrower, any
of its Subsidiaries or any ERISA Affiliate shall incur an accumulated funding
deficiency or request a funding waiver from the IRS, or (v) with respect to
any Title IV Plan or Multiemployer Plan which has an ERISA Event not
described in clauses (ii) - (iv) hereof, in the reasonable determination of
Lender there is a reasonable likelihood for termination of any such plan by
the PBGC; PROVIDED, HOWEVER, that the events listed in clauses (i) - (v)
hereof shall constitute Events of Default only if the liability, deficiency
or waiver request of Borrower, any of its Subsidiaries or any ERISA
Affiliate, whether or not assessed, exceeds $100,000 in any case set forth in
(i) - (v) above, or exceeds $100,000 in the aggregate for all such cases.
(m) Any provision of any Collateral Document or the Guaranty, after
delivery thereof pursuant to Section 3.1. shall for any reason cease to be
valid or enforceable in accordance with its terms, or any security interest
created under any Collateral Document shall cease to be a valid and perfected
first priority security interest or Lien (except as otherwise stated therein)
in any of the Collateral purported to be covered thereby.
9.2. REMEDIES. If any Event of Default shall have occurred and be
continuing, Lender shall at the request, or may with the consent, of the
Required Lenders, without notice, (i) terminate this facility with respect to
further Term Loan Advances, whereupon no Term Loan Advances may be made
hereunder, and/or (ii) declare all Obligations to be forthwith due and
payable, whereupon all Obligations shall become and be due and payable,
without presentment, demand, protest or further notice of any kind, all of
which are expressly waived by Borrower; PROVIDED, HOWEVER, that upon the
occurrence of an Event of Default specified in Section 9.1(f), (g) or (h)
hereof, the Obligations shall become due and payable without declaration,
notice or demand by Lender. Lender shall take such action with respect to any
Default or Event of Default as shall be directed by the Required Lenders;
PROVIDED that, unless and until Lender shall have received such directions,
Lender may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it
shall deem advisable in the best interests
-38-
<PAGE>
of Lender and the Assignee Lenders taken as a whole, including any action (or
the failure to act) pursuant to the Loan Documents.
9.3. WAIVERS BY BORROWER. Except as otherwise provided for in
this Agreement and applicable law, Borrower waives (i)) presentment, demand
and protest and notice of presentment, dishonor, notice of intent to
accelerate, notice of acceleration, protest, default, nonpayment, maturity,
release, compromise, settlement, extension or renewal of any or all
commercial paper, accounts, contract rights, documents, instruments, chattel
paper and guaranties at any time held by Lender or any Assignee Lender on
which Borrower may in any way be liable and hereby ratifies and confirms
whatever Lender or any Assignee Lender may do in this regard, (ii) all rights
to notice and a hearing prior to Lender's taking possession or control of, or
to Lender's replevy, attachment or levy upon, the Collateral or any bond or
security which might be required by any court prior to allowing Lender to
exercise any of its remedies, and (iii) the benefit of all valuation,
appraisal and exemption laws, Borrower acknowledges that it has been advised
by counsel of its choice with respect to this Agreement, the other Loan
Documents and the transactions evidenced by this Agreement and the other Loan
Documents.
9.4. RIGHT OF SET-OFF. Upon the occurrence and during the
continuance of any Event of Default, Lender and each Assignee Lender is
hereby authorized at any time and from time to time, to the fullest extent
permitted by law, to set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by Lender or such Assignee Lender to or for
the credit or the account of Borrower against any and all of the obligations
of Borrower now or hereafter existing under this Agreement, and the Notes
held by Lender or such Assignee Lender irrespective of whether or not Lender
or such Assignee Lender shall have made any demand under this Agreement or
any such Note and although such obligations may be unmatured. Lender and each
Assignee Lender agrees promptly to notify Borrower after any such set-off and
application made by Lender or such Assignee Lender; PROVIDED, HOWEVER, that
the failure to give such notice shall not affect the validity of such set-off
and application. The rights of Lender and each Assignee Lender under this
Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which Lender and each Assignee Lender
may have.
10. MISCELLANEOUS
10.1. COMPLETE AGREEMENT: MODIFICATION OF AGREEMENT: SALE OF
INTEREST. (a) The Loan Documents constitute the complete agreement between
the parties with respect to the subject matter hereof and may not be
modified, altered or amended except by an agreement in writing signed by
Borrower and Lender in accordance with Section 10.1(d) hereof. Borrower may
not sell, assign or transfer any of the Loan Documents or any portion
thereof, including, without limitation, Borrower's rights, title, interests,
remedies, powers and duties hereunder or thereunder. Borrower hereby consents
to Lender's and each Assignee Lender's sale of participations, assignment,
transfer or other disposition, at any time or times, of any of the Loan
Documents or of any portion thereof or interest therein, including, without
limitation, Lender's and each Assignee Lender's rights, title, interests,
remedies, powers or duties thereunder, whether evidenced by a writing or not.
Borrower agrees that it will use its best efforts to assist and cooperate
with Lender in any manner reasonably requested by Lender to effect the sale
of participations in or assignments of any of the Loan Documents or of any
portion thereof or interest therein.
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<PAGE>
(b) In the event Lender or any Assignee Lender assigns or otherwise
transfers all or any part of any Term Note, Borrower shall, upon the request
of Lender or such Assignee Lender, issue new Term Notes to effectuate such
assignment or transfer.
(c) Lender may sell, assign, transfer or negotiate to one or more
other lenders, commercial banks insurance companies, other financial
institutions or any other Person all or a portion of its rights and
obligations under any Term Note held by Lender and this Agreement. From and
after the effective date of such an assignment, the assignees thereunder
shall, in addition to the rights and obligations hereunder held by it
immediately prior to such effective date, have the rights and obligations
hereunder that have been assigned to it pursuant to such assignment,
relinquish its rights and be released from its obligations under the
Agreement (and, in the case of an assignment and acceptance covering all or
the remaining portion of an assigning Lender's rights and obligations under
this Agreement, such Lender shall cease to be a party hereto).
(d) No amendment or waiver of any provision of this Agreement or any
Term Notes or any other Loan Document, nor consent to any departure by
Borrower therefrom, shall in any event be effective unless the same shall be
in writing and signed by the Required Lenders, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given; PROVIDED, HOWEVER, that no amendment, waiver or
consent shall, unless in writing and signed by Lender and all Assignee
Lenders affected thereby do any of the following: (i) increase the amount of
Lender's commitment to make Term Loan Advances hereunder or subject Lender or
any Assignee Lender to any additional obligations, (ii) reduce the principal
of, or interest on, any Term Notes or other amounts payable hereunder other
than those payable only to WES Acquisition Corp. which may be reduced by WES
Acquisition Corp. unilaterally, (iii) postpone any date fixed for any payment
of principal of, or interest on, any Term Notes or other amounts payable
hereunder, other than those payable only to WES Acquisition Corp. which may
be postponed by WES Acquisition Corp. unilaterally, (iv) change the aggregate
unpaid principal amount of any Term Notes, or the number of Lenders and
Assignee Lenders which shall be required for the Lenders and Assignee Lenders
or any of them to take any action hereunder, (v) release or discharge any
Person liable for the performance of any obligations of any Loan Party
hereunder or under any of the Loan Documents, or (vi) amend this Section
10.1(d); and PROVIDED, FURTHER, HOWEVER, that no amendment, waiver or consent
shall, unless in writing and signed by all Lenders holding Term Notes,
increase the amount of the commitment to make Term Loan Advances hereunder;
and PROVIDED, FURTHER, HOWEVER, that no amendment, waiver or consent shall
unless in writing and signed by Lender in addition to the Required Lenders
required above to take such action, affect the rights or duties of Lender
under this Agreement, any Term Note or any Loan Document.
10.2. FEES AND EXPENSES. Borrower shall pay all reasonable
out-of-pocket expenses of Lender in connection with the preparation of the
Loan Documents (including the reasonable fees and expenses of all of its
counsel and advisors retained in connection with the Loan Documents and the
transactions contemplated thereby and advice in connection therewith). If, at
any time or times, regardless of the existence of an Event of Default (except
with respect to paragraphs (iii) and (iv), which shall be subject to an Event
of Default having occurred and be continuing), Lender (or in the case of
paragraphs (iii) and (iv) below, any Assignee Lender) shall employ counsel or
other advisors for advice or other representation or shall incur reasonable
legal or other costs and expenses in connection with:
- 40 -
<PAGE>
(i) any amendment, modification or waiver, or consent with
respect to, any of the Loan Documents or advice in connection with the
administration of the loans made pursuant hereto or its rights
hereunder or thereunder;
(ii) any litigation, contest, dispute, suit, proceeding or
action (whether instituted by Lender or any Assignee Lender, Borrower,
any Subsidiary of Borrower or any other Person) in any way relating to
the Collateral, any of the Loan Documents or any other agreements to
be executed or delivered in connection herewith;
(iii) any attempt to enforce any rights of Lender or any Assignee
Lender against Borrower, any Subsidiary of Borrower or any other
Person, that may be obligated to any Lender by virtue of any of the
Loan Documents;
(iv) any attempt to verify, protect, collect, sell, liquidate or
otherwise dispose of the Collateral;
then, and in any such event, the attorneys' and other parties' fees arising
from such services, including those of any appellate proceedings, and all
expenses, costs, charges and other fees incurred by such counsel and others
in any way or respect arising in connection with or relating to any of the
events or actions described in this Section 10.2 shall be payable, on demand,
by Borrower to Lender (or as provided above to an Assignee Lender) and shall
be additional Obligations secured under this Agreement and the other Loan
Documents. Without limiting the generality of the foregoing, such expenses,
costs, charges and fees may include: paralegal fees, costs and expenses;
accountants' and investment bankers' fees, costs and expenses; court costs
and expenses; photocopying and duplicating expenses; court reporter fees,
costs and expenses; long distance telephone charges; air express charges;
telegram charges; secretarial overtime charges; and expenses for travel,
lodging and food paid or incurred in connection with the performance of such
legal services.
10.3. NO WAIVER BY LENDER. Lender's or any Assignee Lender's
failure, at any time or times, to require strict performance by any Loan
Party of any provision of this Agreement and any of the other Loan Documents
shall not waive, affect or diminish any right of Lender thereafter to demand
strict compliance and performance therewith. Any suspension or waiver by
Lender or Assignee Lender of an Event of Default by any Loan Party under the
Loan Documents shall not suspend, waive or affect any other Event of Default
by any Loan Party under this Agreement and any of the other Loan Documents
whether the same is prior or subsequent thereto and whether of the same or of
a different type. None of the undertakings, agreements, warranties, covenants
and representations of any Loan Party contained in this Agreement or any of
the other Loan Documents and no Event of Default by Borrower under this
Agreement and no defaults by any Loan Party under any of the other Loan
Documents shall be deemed to have been suspended or waived by Lender or
Assignee Lender, unless such suspension or waiver is by an instrument in
writing signed by an officer of Lender and Required Lenders and directed to
such Loan Party specifying such suspension or waiver.
10.4. REMEDIES. Lender's and each Assignee Lender's rights and
remedies under this Agreement shall be cumulative and nonexclusive of any
other rights and remedies which Lender and Assignee Lenders may have under
any other agreement, including without limitation, the Loan Documents, by
operation of law or otherwise. Recourse to the Collateral shall not be
required.
- 41 -
<PAGE>
10.5. WAIVER OF JURY TRIAL. The parties hereto waive all right to
trial by jury in any action or proceeding to enforce or defend any rights
under the Loan Documents.
l0.6. SEVERABILITY. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
10.7. PARTIES. This Agreement and the other Loan Documents shall be
binding upon, and inure to the benefit of, the successors of Borrower.
Lender and any Assignee Lender and the assigns, transferees and endorsees of
Lender and any Assignee Lenders.
10.8. CONFLICT OF TERMS. Except as otherwise provided in this
Agreement or any of the other Loan Documents by specific reference to the
applicable provisions of this Agreement, if any provision contained in this
Agreement is in conflict with, or inconsistent with, any provision in any of
the other Loan Documents, the provision contained in this Agreement shall
govern and control.
10.9. AUTHORIZED SIGNATURE. Until Lender shall be notified by
Borrower to the contrary, the signature upon any document or instrument
delivered pursuant hereto of an officer of Borrower listed in Schedule 10.9
hereto shall bind Borrower and be deemed to be the act of Borrower affixed
pursuant to and in accordance with resolutions duly adopted by Borrower's
Board of Directors.
10.10. GOVERNING LAW. Except as otherwise expressly provided in any
of the Loan Documents, in all respects, including all matters of
construction, validity and performance, this Agreement and the Obligations
arising hereunder shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York applicable to contracts
made and performed in such state, without regard to the principles thereof
regarding conflict of laws, and any applicable laws of the United States of
America. Lender, each Assignee Lender and Borrower agree to submit to
personal jurisdiction and to waive any objection as to venue in the County of
New York, State of New York. Service of process on Borrower, Lender or any
Assignee Lender in any action arising out of or relating to any of the Loan
Documents shall be effective if mailed to such party at the address listed in
Section 10.11 hereof. Nothing herein shall preclude Lender, any Assignee
Lender or Borrower from bringing suit or taking other legal action in any
other jurisdiction.
10.11. NOTICES. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon
any of the parties by another, or whenever any of the parties desires to give
or serve upon another any communication with respect to this Agreement, each
such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and either shall be delivered in person
with receipt acknowledged or by registered or certified mail, return receipt
requested, postage prepaid, or telecopied and confirmed by telecopy
answerback addressed as follows:
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<PAGE>
(a) If to the Lender, at:
WES Acquisition Corp.
c/o Wexford Capital Corporation
411 West Putnam Avenue
Greenwich, Connecticut 06830
Attention: Robert M. Davies
Telephone: (203) 862-7400
Telecopier: (203) 862-7490
With a copy to:
Berlack, Israels & Liberman LLP
120 West 45th Street
New York, New York 10036
Attention: Stephen B. Selbst
Telephone: (212) 704-0100
Telecopier: (212) 704-0196
(b) If to Borrower, at:
Wahlco Environmental Systems, Inc.
3600 West Segerstrom Avenue
Santa Ana, California 92704
Attention: Henry Huta
With a copy to:
Roger M. Barzun, Esq.
60 Hubbard Street
Concord, Massachusetts 01742
Telephone: (508) 287-4275
Telecopier: (508) 287-4276
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in
writing by the party entitled to receive such notice. Every notice, demand,
request, consent, approval, declaration or other communication hereunder
shall be deemed to have been duly given or served on the date on which
personally delivered, with receipt acknowledged, telecopied and confirmed by
telecopy answerback or three (3) Business Days after the same shall have been
deposited in the United States mail. Failure or delay in delivering copies of
any notice, demand, request, consent, approval, declaration or other
communication to the persons designated above to receive copies shall in no
way adversely affect the effectiveness of such notice, demand, request,
consent, approval, declaration or other communication.
10.12. SURVIVAL. The representations and warranties of Borrower in
this Agreement shall survive the execution, delivery and acceptance hereof by
the parties hereto and the closing of the transactions described herein or
related hereto.
- 43 -
<PAGE>
10.13. SECTION TITLES. The Section titles and Table of Contents
contained in this Agreement are and shall be without substantive meaning or
content of any kind whatsoever and are not a part of the agreement between
the parties hereto.
10.14. COUNTERPARTS. This Agreement may be executed in any number of
separate counterparts, each of which shall, collectively and separately,
constitute one agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
date first written above.
WAHLCO ENVIRONMENTAL SERVICES, INC.
By: /s/ Henry N. Huta
--------------------------------
Name: Henry N. Huta
Title: Chairman & CEO
WES ACQUISITION CORP.
By: /s/ illegible
--------------------------------
Name:
Title:
- 44 -
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,903
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<RECEIVABLES> 12,069
<ALLOWANCES> 0
<INVENTORY> 4,738
<CURRENT-ASSETS> 23,223
<PP&E> 5,190
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0
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<COMMON> 176
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<TOTAL-LIABILITY-AND-EQUITY> 29,820
<SALES> 36,346
<TOTAL-REVENUES> 43,051
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