SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21054
SYNAGRO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0511324
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
1800 BERING, SUITE 1000, HOUSTON, TEXAS 77057
(Address of principal (Zip code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 369-1700
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.002 Par Value
Preferred Stock Purchase Rights
(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 __
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 this Form 10-K or any amendment to this
Form 10-K. [x]
The number of shares outstanding of the issuer's Common Stock as of
February 26, 1999 was 13,251,705. The aggregate market value of the 8,120,544
shares of the Company's Common Stock held by non-affiliates of the Company,
based on the market price of the Common Stock of $3.875 per share as of February
26, 1999, was approximately $31,467,108.
The registrant's proxy statement to be filed in connection with the
registrant's 1999 Annual Meeting of Stockholders is incorporated by reference
into Part III of this report.
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1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1 History of the Business.................................... 1
Business of the Company.................................... 1
Mergers, Acquisitions and Dispositions..................... 2
Government Regulation...................................... 3
Marketing.................................................. 5
Seasonality................................................ 5
Bonding Requirements....................................... 5
Competition................................................ 6
Patent and Trademarks...................................... 6
Employees.................................................. 6
Factors Which May Effect Future Results.................... 6
2 Properties................................................. 7
3 Legal Proceedings.......................................... 8
4 Submission of Matters to a Vote of Security Holders........ 8
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 9
6 Selected Financial Data.................................... 9
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 10
Results of Operations...................................... 10
Bonding.................................................... 13
Liquidity and Capital Resources............................ 13
Year 2000.................................................. 15
7A Quantitative and Qualitative Disclosures About Market Risk. 16
8 Financial Statements and Supplementary Data................ 16
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 16
PART III
10 Directors and Executive Officers of the Registrant......... 17
11 Executive Compensation..................................... 17
12 Security Ownership of Certain Beneficial Owners and
Management................................................. 17
13 Certain Relationships and Related Transactions............. 17
PART IV
14 Exhibits. Financial Statement Schedules and Reports on Form
8-K........................................................ 18
Financial Statements....................................... 18
Exhibit Index.............................................. 18
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This annual report on Form 10-K contains "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, that involve
risks and uncertainties. When used in this document, the words "anticipate,"
"believe," "estimate" and "expect" and similar expressions, as they relate to
the Company, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including those discussed in Item 1 below. The Company's actual results could
differ materially from those anticipated in the forward-looking statements as a
result of these factors. See "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
PART I
ITEM 1. BUSINESS.
HISTORY OF THE COMPANY
Synagro Technologies, Inc. ("Synagro" or the "Company") was originally
incorporated on May 9, 1986 as a Nevada corporation under the name N-Viro
Recovery, Inc. On October 28, 1994, the Company changed its name to "Synagro
Technologies, Inc." to reflect the diversity of biosolids treatment services
provided by the Company.
The Company reincorporated in Delaware on August 16, 1996 by means of a
merger (the "Reincorporation Merger") of the Company with and into a
wholly-owned subsidiary of the Company in Delaware known as Synagro
Technologies, Inc. ("Synagro Delaware"). On the effective date of the
Reincorporation Merger, each issued and outstanding share of common stock of the
Company was converted into one share of common stock of Synagro Delaware (the
"Common Stock"). Synagro Delaware succeeded to all of the assets, liabilities
and business of the Company and possesses all of the rights and powers of the
Company. (Synagro Delaware and the Company are collectively referred to
hereinafter as the "Company").
BUSINESS OF THE COMPANY
The Company engages in the business of biosolids management, primarily
through beneficial reuse programs. The Company provides transportation,
treatment, site monitoring, land application and environmental regulatory
compliance services with respect to biosolids to local and state agencies,
municipalities and private companies. The Company's services also include
dredging, dewatering, and cleaning out municipal and industrial lagoons and
digesters. The Company currently operates under approximately 212 contracts.
Pursuant to these contracts, the Company provides a variety of biosolids
management options to prospective customers. These methods include land
application, composting, lime stabilization, and drying/pelletizing. These
biosolids management services account for substantially all of the Company's
revenues.
There are two standards of pathogen reduction--Class A and Class B. The
Company is able to treat biosolids with Class A pathogen reduction and certain
levels of vector attraction reduction (i.e., insects and rodents), to produce
"Exceptional Quality Biosolids." Exceptional Quality Biosolids can be
beneficially used on the land without limitations or site restrictions.
Biosolids that are not Exceptional Quality, also known as Class B biosolids,
while less expensive to process, are subject to monitoring and detailed record
keeping requirements. These alternative methods provide choices to prospective
customers who may prefer to use methods which currently require lower initial
cost, but which may require additional future costs for monitoring of the
related disposal sites.
The Company primarily conducts its business through its wholly-owned
subsidiaries, CDR Environmental, Inc., a Texas corporation ("CDR"), Pima Gro
Systems, Inc., an Arizona corporation ("Pima Gro"), A&J Cartage, Inc., a
Wisconsin corporation, Michigan Organic Resources, Inc., a Michigan corporation,
A&J Cartage Southeast, Inc., a Florida corporation, Recyc, Inc. a California
company and Environmental Waste Recycling, Inc., a North Carolina corporation.
The Company's subsidiaries operate throughout the United States.
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MERGERS, ACQUISITIONS AND DISPOSITIONS
The Company's business plan has developed through the acquisition of
privately held biosolids treatment companies and their integration into the
business operations of the Company and its subsidiaries. The Company's
acquisition strategy has been developed with the intent to increase the
efficiency and profitability of each of these acquisition targets through
operational and marketing synergies with the Company's existing business
operations. There can be no assurances that the Company's acquisition strategy
will generate these synergies or result in profitable operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ENVIRONMENTAL WASTE RECYCLING, INC. In November 1998, the Company
purchased the stock of Environmental Waste Recycling, Inc. ("EWR"). The
consideration paid in this transaction was based on management's analysis of
historical and projected sales and earnings of EWR, the estimated market value
of EWR and the synergies estimated to be achieved through the transaction.
The purchase price was approximately $9,487,000 consisting of 865,125
shares of Common Stock with a market trading value of approximately $2,812,000,
$200,000 in debt and approximately $6,475,000 in cash and acquisition costs. The
Common Stock was valued in accordance with the provisions of Emerging Issues
Task Force ("EITF") 95-19. The transaction was recorded using the purchase
method of accounting. The balance sheet at December 31, 1998 includes a
preliminary allocation of the purchase price and is subject to final adjustments
which management believes will not be material. The preliminary allocation
resulted in approximately $7,091,000 of goodwill that is being amortized over 40
years. The purchase agreement provides for the payment of additional cash and
stock consideration in an aggregate amount not to exceed $2,956,216 in the event
certain financial targets are realized during the twelve-month period after
closing. The Company financed the cash portion of the merger consideration with
borrowings under its credit facility with Bank of America.
RECYC, INC. In July 1998, the Company purchased the stock of Recyc, Inc.
("Recyc"). The consideration paid in this transaction was based on management's
analysis of historical and projected sales and earnings of Recyc, the estimated
market value of Recyc, and the synergies estimated to be achieved through the
transaction.
The purchase price was approximately $15,573,000 consisting of 1,475,323
shares of Common Stock with a market trading value of approximately $8,573,000,
approximately $2,305,000 in new debt, approximately $3,341,000 in assumed debt,
and approximately $1,354,000 in cash and acquisition costs. The Common Stock was
valued in accordance with the provisions of EITF 95-19. The transaction was
recorded using the purchase method of accounting. The balance sheet at December
31, 1998 includes a preliminary allocation of the purchase price and is subject
to final adjustments which management believes will not be material. The
preliminary allocation resulted in approximately $14,964,000 of goodwill, that
is being amortized over 40 years. The unsecured note issued to the prior owners
is payable in November 2000. The note bears an annual interest rate of 7% and
interest is paid quarterly with the first payment made in November 1998. The
note has no financial covenants. The principal owed under the promissory note
may be offset, and up to 375,000 of the shares issued to the owners may be
returned to the Company, if certain post-closing conditions are not met as
defined in the purchase agreement. In connection with the acquisition, the
Company entered into a lease agreement for a composting facility with the prior
owners of Recyc, as trustees of a family trust of the prior owners. The Company
has a five year purchase option for $2,250,000. In addition, the Company entered
into a transportation agreement with Recyc Trucking, Inc. ("RTI"), a company
owned by prior owners of Recyc, with an initial term of two years for the
provision by RTI of certain transportation services relating to Recyc's
operations.
A&J COMPANIES. In June 1998, the Company purchased the stock of A&J
Cartage, Inc., Michigan Organics Resources, Inc. and A&J Cartage Southeast,
Inc. (collectively "A&J"). The consideration paid in this transaction was
based on management's analysis of historical and projected sales and earnings
of A&J, the estimated market value of A&J and the synergies estimated to be
achieved through the transaction.
The purchase price was approximately $19,802,000, consisting of 1,812,533
shares of Common Stock with a market trading value of approximately $12,398,000,
approximately $5,823,000 debt, and approximately
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$1,581,000 in cash and acquisition costs. The Common Stock was valued in
accordance with the provisions of EITF 95-19. The transactions were recorded
using the purchase method of accounting. The balance sheet at December 31, 1998
includes a preliminary allocation of the purchase price and is subject to final
adjustments, which management believes will not be material. The preliminary
allocation resulted in approximately $17,372,000 of goodwill which is being
amortized over 40 years. The unsecured notes issued to the prior owner are
payable quarterly through January 2001 with the first installment paid January
1, 1999. The notes bear an annual interest rate of 7% and have no financial
covenants.
BFI ORGANICS DIVISION. Effective August 1997, the Company purchased
certain assets and revenue contracts of the Organics Division of Browning Ferris
Industries, Inc. in the District of Columbia, Georgia, Maryland, Ohio,
Pennsylvania, and Virginia for approximately $946,000. The acquisition was
financed through the issuance of third-party debt, which bears an interest rate
equal to 30 day commercial paper plus 2.77%.
PIMA GRO SYSTEMS, INC. Effective July 1996, the Company entered into an
agreement pursuant to which the Company acquired 100% of the issued and
outstanding stock of Pima Gro. The consideration paid in the transaction was
determined based on management's analysis of historical and projected sales and
earnings of Pima Gro, the estimated market value of Pima Gro and the synergies
estimated to be achieved through the transaction.
The purchase price for the acquisition of Pima Gro was approximately
$3,096,000, consisting of 155,000 shares of Common Stock, with a market trading
value of approximately $223,000, cash of approximately $1,277,000, and a
promissory note in the aggregate principal amount of approximately $1,595,000.
The Common Stock was valued in accordance with the provision of EITF 95-19. The
promissory note issued by the Company had interest at the rate of 8% per annum
and was payable in four semi-annual installments of principal and accrued
interest, commencing January 1, 1997; final payment was made on July 1, 1998.
The note had no financial covenants.
ORGANI-GRO. In December 1996, the Company determined the Organi-Gro
operation, which focused on poultry bedding production and sales, was not
consistent with the Company's core business of biosolids management. In March
1997, the Company sold the operations of Organi-Gro to its former owners.
Consideration included two subordinated notes of approximately $1.4 million, the
assumption of approximately $978,000 in debt and approximately $392,000 in trade
payables, for which the Company is not contingently liable. As a result of the
sale, the Company recorded a charge to operations in the fourth quarter of 1996
amounting to approximately $2,500,000 to adjust the carrying value of
Organi-Gro's net assets to its estimated fair market value. These charges are
included in "losses on assets held for sale and other special charges (credits)"
in the Company's consolidated statements of operations for the year ended
December 31, 1996.
GOVERNMENT REGULATION
Federal and state environmental authorities regulate the activities of the
Company's primary customers, wastewater treatment plants ("WWTP"), and enforce
standards for the WWTP's discharge (effluent wastewater) via permits issued
under the authority of the Clean Water Act ("CWA") and state water quality
control acts. The treatment of wastewater produces wastewater solids and sewage
sludge, and the treatment of these materials produces biosolids. To the extent
demand for the Company's biosolids treatment methods is created by the need to
comply with such environmental laws and regulations, any modification of the
standards created by such laws and regulations may reduce the demand for the
Company's biosolids treatment methods. Changes in these laws or regulations may
also adversely affect the operations of the Company by imposing additional
regulatory compliance costs on the Company, requiring the modification of and/or
adversely affecting the market for the Company's biosolids management services.
The Company operates in a highly regulated environment and the WWTP's and
other plants at which the Company's biosolids management services may be
implemented are usually required to have permits, registrations and/or approvals
from federal, state and/or local governments for the operation of such
facilities. State and/or local authorities, in some jurisdiction, have
prohibited and, in other jurisdictions, have sought and may seek to prohibit the
land application or agricultural use of biosolid products.
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Any of the permits, registrations or approvals noted above, or
applications therefor, may be subject to denial, revocation or modification
under various circumstances. In addition, if new environmental legislation or
regulations are enacted or existing legislation or regulations are amended or
are enforced differently, the Company may be required to obtain additional
operating permits, registrations or approvals. The process of obtaining a
required permit, registration or approval can be lengthy and expensive and the
issuance of such permit or the obtaining of such approval may be subject to
public opposition. There can be no assurances that the Company will be able to
meet applicable regulatory requirements or that further attempts by state or
local authorities to prohibit the land application or agricultural use of
biosolids will not be successful.
During 1998, the Recyc composting facility was cited for three permit
violations involving odor and vector control. While these citations are under
appeal, such infractions can result in a reduction of the term of the operating
permit in increments of three months. The Company has implemented odor and
vector control measures that should minimize that exposure; however there can be
no assurance that violations will not recur in the future.
The CWA, as amended, regulates the use and disposal of sewage sludge and
biosolids and establishes use and disposal standards for sewage sludge and
biosolids that are applicable to approximately 35,000 publicly and privately
owned WWTP's in the United States. Under this regulation, sewage sludge and
biosolids may be surface disposed or incinerated, or biosolids may be applied to
land for beneficial use in accordance with the requirements established by the
regulation. Biosolids and sewage sludge may also be disposed in municipal solid
waste landfills.
Land application regulations apply to generators of sewage sludge and
biosolids, persons who treat sewage sludge and biosolids and persons who apply
biosolids to land. Beneficial use through land application includes placement on
agricultural land, non-agricultural land (forests and range lands), public
contact sites (parks and golf courses), reclamation sites and home gardens.
"Land application" in the context of the regulation includes bulk and bagged
biosolids and biosolids products.
Any biosolids used for land application must have pollutant concentration
levels below the ceiling concentrations established for nine inorganic
pollutants. Biosolids that contain at least one of the nine pollutants in
concentrations exceeding the ceiling limits cannot be applied to land. Biosolids
that have pollutant concentration below certain levels are not subject to
cumulative loading rates.
Biosolids with pollutant concentration below certain levels are considered
to be "High Quality Biosolids". High Quality Biosolids that meet one of six
Class A pathogen reduction alternatives and meet one of eight vector attraction
reduction options are considered to be Exceptional Quality Biosolids and are not
subject to either the general requirements or the management practices of the
regulations. Exceptional Quality Biosolids may be used as fertilizers and may be
applied to a site in most states without the requirement of a permit.
In addition, many states enforce landfill restrictions for nonhazardous
biosolids and some states have site restrictions or other management practices
governing lands. These regulations typically require a permit to sell or use
biosolid products as landfill cover material. There can be no assurance that
landfill operators will be able to obtain required permits.
There are two classifications for pathogen reduction: Class A and Class B.
There are three alternative methods available to achieve Class B and six
alternative methods available to achieve Class A. Each alternative for Class A
requires testing for pathogen densities (fecal coliform or salmonella bacteria).
Class A treatment methods include composting, heat drying, heat treatment,
thermophilic aerobic digestion and alkaline stabilization.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") generally imposes strict, joint and several liability for cleanup
costs upon (1) present owners and operators of facilities at which hazardous
substances were disposed; (2) past owners and operators at the time of disposal;
(3) generators of hazardous substances that were disposed at such facilities;
and (4) parties who arranged for the disposal of hazardous substances at such
facilities. CERCLA Section 107 liability extends to cleanup costs necessitated
by a release or threat of release of a hazardous substance. However, the
definition of "release" under CERCLA excludes
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the "normal application of fertilizer." EPA regulations regard biosolids applied
to land as a fertilizer substitute or soil conditioner. The EPA has indicated in
a published document that it considers biosolids applied to land in compliance
with the applicable regulations not to constitute a "release." Although the
biosolids and alkaline waste products may contain hazardous substances (as
defined under CERCLA), the Company has developed plans to manage the risk of
CERCLA liability, including training of operators, regular testing of the
biosolids and the alkaline admixtures to be used in treatment methods and
reviewing incineration and other permits held by the entities from which
alkaline admixtures are obtained.
The Company currently maintains environmental impairment liability
insurance in the amount of $10,000,000, which is deemed to be adequate; however,
the Company could be adversely affected by a claim that is not covered or is
only partially covered by liability insurance.
Many states have regulations or guidelines covering the land application
of biosolids which set either a maximum allowable concentration or maximum
pollutant loading rate for at least one pollutant. In addition, some states have
established management practices for land application of biosolids. In some
jurisdictions, state and/or local authorities have imposed permit requirements
for, or have prohibited, the land application or agricultural use of biosolid
products, including Exceptional Quality Biosolids. There can be no assurance
that any such permits will be issued or that any further attempts to require
permits for, or to prohibit, the land application or agricultural use of
biosolid products will not be successful.
MARKETING
The Company markets its services by soliciting prospective customers,
attending trade shows, obtaining referrals and competitive bidding on potential
contracts. The Company's primary marketing and promotion targets are: (i)
government personnel (municipal, county and state); (ii) WWTP operators and
landfill operators; (iii) politicians; (iv) consulting engineers and
construction contractors; (v) equipment and building products manufacturers and
distributors; (vi) the agricultural and horticultural industry; (vii)
transportation service companies; and (viii) the public.
The Company provides services for the transportation, treatment and land
application and composting of biosolids as well as compliance monitoring for all
of the above. The Company primarily markets Class B biosolids processing and
land applications to customers who prefer this method due to higher costs
associated with Class A biosolids processing methods.
SEASONALITY
The Company's business historically has not been seasonal, but has been
subject to certain unusual weather conditions and unseasonably heavy rainfall
which can temporarily reduce the availability of land application sites in close
proximity to the Company's business.
In June 1998, the Company acquired A&J, whose operations are subject to
significant seasonal variations. During the winter months, the ground is frozen
and land application cannot be performed. Generally, the product is stored by
the customer during the winter months with transportation and land application
services performed as the ground thaws. The Company now expects its revenues and
operational results to be generally lower in the first calendar quarter.
BONDING REQUIREMENTS
Commercial, federal, state and municipal projects often require
contractors to post both performance and payment bonds at the execution of a
contract. Contractors without adequate bonding may be ineligible to bid or
negotiate on many projects. The Company has frequently been required to obtain
such bonds, and the Company will continue to be required to obtain such bonds in
the future, particularly with government contracts. As of December 31, 1998, the
Company had a bonding capacity of approximately $20,000,000, with approximately
$7,878,000 utilized as of that date. Management believes the existing capacity
is sufficient to meet bonding needs
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for the foreseeable future, but is also currently negotiating to expand that
availability as new contract opportunities arise. To date, no payments have been
made by any bonding company for bonds issued for the Company.
COMPETITION
The Company provides a variety of services relating to the transportation
and treatment of biosolids. The Company is in direct and indirect competition
with other businesses which provide some or all of the same services. While
most of the private (non-governmental) competitors are small, privately-owned
businesses, some are larger, more firmly established and have greater capital
resources.
The Company competes principally through offering quality services at
competitive prices. Management of the Company believes that the full range of
biosolids management services provided by the Company provides a competitive
advantage over other entities which offer a lesser complement of services.
However, there can be no assurances that the Company will be able to achieve and
maintain a competitive position.
PATENTS AND TRADEMARKS
The Company makes use of its trade secrets or "know-how" developed in the
course of its experience in the marketing of the Company's services. To the
extent that the Company relies upon trade secrets, unpatented know-how and the
development of improvements in establishing and maintaining a competitive
advantage in the market for the Company's services, there can be no assurances
that such proprietary technology will remain a trade secret or that others will
not develop substantially equivalent or superior technologies to compete with
the Company's services.
EMPLOYEES
As of February 26, 1999, the Company had approximately 294 full-time
employees. These employees include: 4 executive officers, 7 non-executive
officers, 28 operations managers, 11 environmental specialists, 27 maintenance
personnel, 73 drivers, 24 land applications specialists, 77 general operation
specialists and 43 financial and administrative employees. Additionally, the
Company uses contract labor for various operating functions, including hauling
and spreading services, when it is economically advantageous. The loss of the
services of key employees could have an adverse effect on the Company's
business.
The Company's employees are not represented by a labor union or covered by
a collective bargaining agreement, and the Company believes it has good
relations with its employees. The Company provides its employees with certain
benefits, including health, life and dental insurance and 401(k) benefits.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
ACQUISITION STRATEGY. The Company's current strategy is to expand as a
provider of biosolids management and beneficial reuse of organic materials and
related services through an on-going acquisition program of businesses in the
biosolids management industry in selected markets. Inherent in such strategy are
certain risks, such as increasing demand for liquidity and capital resources and
increasing debt service requirements. The market for such acquisition prospects
is highly competitive, and management expects that certain potential acquirers
will have significantly greater capital than the Company. The success of the
Company's strategy and its ability to repay increased debt service will depend
in part on the Company's ability to continue to contract for, finance and
integrate into its business future acquisitions. There can be no assurance the
current strategy will result in the desired effect of improving the Company's
competitive position and financial condition.
POTENTIAL ACQUISITION LIABILITIES. The Company has expanded its business
operations significantly since 1992 through the acquisition of existing
businesses. Liabilities may exist with respect to future acquisition candidates
or completed acquisitions that the Company has failed or has been unable to
discover, including liabilities arising from non-compliance with environmental
laws by prior owners, and for which the Company, as a successor owner, may be
responsible. Warranties and indemnity provisions in such related acquisition
agreements,
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if obtained, may not fully cover any actually determined liabilities due to
their limited scope, amount or duration, or other reasons. Additionally, the
indemnitor or warrantor may not be sufficiently solvent or have sufficient
assets to satisfy any resulting claim by the Company, in which case the
Company's financial condition and results of operations could be materially
adversely affected.
GOODWILL. The consolidated balance sheet at December 31, 1998, includes
goodwill representing approximately 67.1% of assets and 127.8% of stockholders'
equity. An intangible asset, goodwill arises when a buyer accounts for a
business acquisition under the purchase method of accounting and the purchase
price exceeds the fair value of the tangible and separately measurable
intangible net assets of that business. Generally accepted accounting principles
require that the buyer amortize this and all other intangible assets over the
period benefited. This amortization represents a noncash deduction in the
determination of current operating net income which does not affect cash flows,
but does reduce reported earnings.
The Company has determined the estimated benefits period for goodwill to be 20
to 40 years with a substantial majority of such goodwill with a life of 40
years. If the Company has understated or overlooked a material intangible asset
having a benefit period less than the amortization period being used, or has
overlooked factors indicating that a shorter benefit period for goodwill is
appropriate, (1) earnings reported in periods immediately following the
acquisition will be overstated and (2) earnings subsequently would be burdened
by a continuing charge without the associated benefit to income that is expected
in arriving at the consideration paid for acquisitions. Earnings in later years
also could be significantly affected if management then determines that the
remaining balance of goodwill has become impaired. The Company has reviewed all
the factors and related future cash flows considered in arriving at the amount
paid for acquisitions. The Company has concluded that (1) the anticipated future
cash flows associated with the intangible assets recognized in the acquisitions
will continue throughout the period of amortization selected and (2) no
persuasive evidence exists that any material portion will dissipate over a
shorter period. The Company's conclusion may prove to be incorrect. Moreover, if
generally accepted accounting principles are amended, as the Financial
Accounting Standards Board has tentatively decided, to require the Company to
amortize purchase goodwill over a period of less than 20 years, the value of
Common Stock could drop as a result of a perception that the higher noncash
charges would adversely affect the Company's financial condition or results of
operations. The Company believes that an increase in the amortization rate will
not have an impact on its ability to borrow under its credit facility.
ITEM 2. PROPERTIES.
The Company currently leases approximately 11,300 square feet of office
space located in Houston, Texas. This facility serves as the Company's principal
place of business. The Company pays approximately $16,500 per month on this
office space which expires in February 2004. The Company also leases district
offices in: Hockley, Texas; Redlands, California; Oxford, Pennsylvania;
Milwaukee, Wisconsin; Marona, Arizona; Suisun City, California; Corona,
California; Wyoming, Michigan; and Advance, North Carolina.
The Company owns a 35 acre farm in Maysville, Arkansas with a 130,000
square foot composting facility for the processing of biosolids.
The Company currently leases a 162.39 acre composting facility in
Riverside County California. The term of the lease is 30 years commencing July
1998 and terminating July 2028. The Company has the option to terminate this
lease upon 30 days written notice in the event the Conditional Use Permit
("CUP") (as defined in the agreement) expires. The CUP may be reduced by 3
months for permit violations. The Company also has a 5 year option to purchase
the property for $2,250,000 which expires in July 2003. Currently, the Company
pays rent in the amount of $36,000 per annum for the first three years and
$192,000 per annum thereafter.
The Company maintains permits, registrations or licensing agreements on
approximately 173,000 acres of land for applications of biosolids.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation and claims arising in the ordinary
course of its business. Management believes, based on consultation with legal
counsel and accruals provided, that the ultimate outcome of these matters will
not have a material adverse impact on the Company's operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been listed for trading on The Nasdaq
SmallCap Market ("Nasdaq"), under the symbol "SYGR", since October 1994. The
reported high and low bid prices of the Company's Common Stock on The Nasdaq for
the past two fiscal years as adjusted for the reverse stock split are as
follows:
HIGH LOW
---- ----
YEAR ENDED DECEMBER 31, 1998
1st Quarter.................... $5.19 $ 2.41
2nd Quarter.................... 8.16 5.06
3rd Quarter.................... 6.25 2.75
4th Quarter.................... 4.50 2.56
YEAR ENDED DECEMBER 31, 1997
1st Quarter.................... 3.00 1.88
2nd Quarter.................... 2.38 1.50
3rd Quarter.................... 3.66 1.94
4th Quarter.................... 4.25 2.50
As of February 26, 1999, the Company had 13,251,705 shares of Common Stock
issued and outstanding. On that date, the market price for the Company's Common
Stock on the Nasdaq was $3.875 per share. As of February 26, 1999, the Company
had 257 stockholders of record.
On November 5, 1998, the Company issued 865,125 shares of Common Stock to
the former owners of EWR in connection with the acquisition of that entity
pursuant to an exemption from registration under Section 4(2) of the Securities
Act.
On July 24, 1998, the Company issued 1,475,323 shares of Common Stock to
the former owners of Recyc in connection with the acquisition of that entity
pursuant to an exemption from registration under Section 4(2) of the Securities
Act.
On June 23, 1998, the Company issued 1,812,533 shares of Common Stock to
the former shareholders of A&J in connection with the acquisition of that entity
by the Company pursuant to an exemption from registration under Section 4(2) of
the Securities Act.
On March 31, 1998, the Company issued 1,458,335 shares of Series B
Preferred Stock, $.002 par value per share (the "Preferred Stock"), with a
beneficial conversion feature. The Company recognized the value of the
beneficial conversion feature of approximately $3,514,000 as a preferred stock
dividend. On June 10, 1998, the Preferred Stock was converted into 1,458,335
shares of Common Stock.
Historically, the Company has not paid any dividends on its Common Stock
and has no present plans to pay such dividends. The payment of any future
dividends on Common Stock would depend, among other things, upon the current and
retained earnings and financial condition of the Company. Also, the Company has
a bank covenant restricting dividend payments.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data with respect to the
Company and should be read in conjunction with the Consolidated Financial
Statements:
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YEAR ENDED DECEMBER 31
---------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales...................... $ 29,967 $25,303 $22,977 $17,976 $13,197
Gross profit................... 4,961 4,296 3,723 2,858 2,502
Selling, general and
administrative expenses........ 4,630 3,669 6,141 4,150 3,900
Other charges (credits), net... (64) (721) 4,842 2,444 3,169
Interest expense, net.......... 1,441 924 673 938 626
Net income (loss) before
redeemable preferred stock
dividends...................... (737) 832 (7,589) (4,553) (4,165)
Redeemable preferred stock
dividend....................... $ 3,935 -- -- -- --
Net income (loss) ............. (4,672) 832 (7,589) (4,553) (4,165)
Net income (loss) per share
(basic and diluted)............ (.46) .11 (1.21) (1.59)* (2.19)*
Working capital (deficit)...... 5,250 (796) (2,075) 1,889 (667)
Total assets................... 64,393 19,848 18,631 20,212 23,154
Total long-term debt, net...... 26,794 5,495 8,263 4,448 8,396
Stockholders' equity........... 33,702 7,381 3,802 10,972 10,212
*As adjusted for the 1 for 15 reverse split consummated on July 3, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of the Company's operations should
be read in conjunction with the "Business of the Company," "Government
Regulation" and "Competition" sections herein. Certain statements are
forward-looking, based on the Company's expectations and, as such, these
statements are subject to uncertainty and risks.
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Selected
Financial Data, as a percentage of net sales for the periods indicated:
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------- --------- -------
STATEMENT OF OPERATIONS DATA:
Net sales................................. 100% 100% 100%
Gross profit.............................. 16.6 17.0 16.2
Selling, general and administrative expenses 15.5 14.5 26.7
Other charges (credits), net.............. (.2) (2.9) 21.1
Interest expense, net..................... 4.8 3.7 2.9
Net income (loss) before redeemable
preferred dividends....................... (2.5) 3.3 (33.0)
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND 1997.
For the year ended December 31, 1998, net sales were approximately
$29,967,000 compared to approximately $25,303,000 for the same period in 1997,
an increase of approximately $4,664,000 or 18.4%. The increase relates to the
acquisitions of A&J (approximately $4,378,000), Recyc (approximately
$2,713,000), EWR (approximately $1,269,000), the purchase of certain revenue
contracts from BFI's organics division (approximately $2,119,000), partially
offset by the divestiture of Organi-Gro (approximately $1,608,000), reduced
volume in Arkansas and Dallas (approximately $3,021,000) due to non-renewal of
certain low margin contracts, and lower volumes related to operations in the
Houston area (approximately $837,000).
Cost of operations and gross profit for the year ended December 31, 1998
were approximately $25,006,000 and $4,961,000 respectively, compared to
approximately $21,007,000 and $4,296,000 respectively for the year ended 1997,
resulting in a decrease in gross profit as a percentage of sales from 17.0% in
1997 to 16.6% in 1998.
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Gross profit increased by approximately $665,000 due primarily to the increased
net sales volume associated with businesses acquired. The decrease in gross
profit as a percentage of sales was primarily a result of unusual weather
conditions in the Mid-Atlantic Region, unseasonably heavy rainfall in
California, and a new biosolids land application restriction for certain months
of the year in one California county, which resulted in (a) additional expenses
incurred by the Company to transport material to land application sites
unaffected by the conditions and (b) land disposal costs which were incurred
when land application sites were not available, Specifically, landfill disposal
costs increased by approximately $1,180,000 compared to 1997 levels.
Additionally, costs associated with transporting material to alternate land
application sites increased by approximately $400,000 for the year ended 1998.
These costs were partially offset by higher margins of the biosolids composting
operation obtained in the Recyc acquisition.
Selling, general and administrative expenses were approximately $4,630,000
for the year ended December 31, 1998 compared to approximately $3,669,000 for
1997, an increase of approximately $961,000, or 26.2%. The increase relates
primarily to increased corporate staffing (approximately $466,000) to implement
the Company's acquisitions strategies, additional selling, general and
administrative costs associated with the businesses acquired (approximately
$938,000), partially offset by the divestiture of Organi-Gro (approximately
$164,000), staff reductions at the operational level implemented throughout 1997
(approximately $196,000), and a reduction of bonuses paid based upon operating
results (approximately $146,000).
Interest expense for the year ended December 31, 1998 was approximately
$1,411,000 compared to approximately $924,000 for the same period in 1997. The
increase in interest expense is related to the additional debt incurred to
finance acquisitions.
Other charges (credits) were ($63,799) for the year ended December 31,
1998, compared to ($721,268) for the same period 1997. The decrease resulted
from less income being recognized in 1998 related to notes receivable previously
reserved of approximately ($280,000), partially offset by current year severance
costs of approximately $220,000. See note (11) to the Notes to Consolidated
Financial Statements.
Other income for the year ended December 31, 1998 was approximately
$309,000 compared to approximately $407,000 for the same period in 1997. The
decrease relates primarily to a reduction in gains on sale of assets.
As a result of the foregoing, a net loss of approximately $737,000 before
redeemable preferred stock dividends, or $.07 per share, was reported at
December 31, 1998, compared to net income of approximately $832,000 before
redeemable preferred stock dividends, or $.11 per share, in 1997.
In the first quarter of 1998, the Company recognized a redeemable
preferred stock dividend of approximately $3,514,000, related to redeemable
Preferred Stock issued with a beneficial conversion feature. The value of this
Preferred Stock dividend had no impact on the Company's cash flows. See note (9)
to the Notes to Consolidated Financial Statements. During the second quarter of
1998, the Company paid $420,000 in cash dividends to holders of Series B
Preferred Stock.
The Company has incurred substantial losses since inception and,
therefore, has not been subject to federal income taxes. As of December 31,
1998, the Company had generated net operating loss carryforwards for financial
reporting purposes of approximately $11.7 million. These carryforwards will
begin to expire in the year 2004 through 2018. The Company's ability to utilize
these carryforwards is limited by a "change in ownership", as such term is
defined by the federal income tax laws and regulations. As the Company has
incurred losses in recent years and the utilization of these carryforwards may
be limited as discussed above, a valuation allowance has been established to
fully offset the deferred tax asset at December 31, 1998.
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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996.
The Company's net sales increased by approximately $2,326,000, or 10.1%,
in 1997 as compared to 1996. The increase in sales is attributable to certain
BFI contracts acquired in 1997 (approximately $3,068,000) and the impact of
having a full year of revenue for PimaGro which was acquired in July 1996
(approximately $3,837,000), partially offset by the divestiture of Organi-Gro
(approximately $4,595,000).
Gross profit increased to approximately $4,296,000, or 17.0% of sales, in
1997, compared to approximately $3,723,000, or 16.2% of sales, in 1996. The
gross profit increase of approximately $573,000 was due primarily to a full year
of gross profits associated with PimaGro acquired in July 1996 which provided
incremental gross profits of approximately $750,000 during 1997. The gross
profit percentage increase from 16.2% to 17.0% related primarily to the
acquisition of PimaGro in 1996, which generated a gross profit margin of
approximately 18.4% during 1997, and the sale of Organi-Gro in 1997, which had a
gross profit margin of 10%. PimaGro in 1997 improved its gross margin
percentage from 16.7% for the half year of operations in 1996 to 18.4% in 1997
as a result of continued reductions in operating costs through obtaining land
applications sites closer to waste generators.
Selling, general and administrative expenses decreased to approximately
$3,669,000, or 14.5% of sales, in 1997, compared to $6,141,000, or 26.7% of
sales, in 1996. The decrease of approximately $2,472,000 resulted from (i)
reduced expenses related to the sale of Organi-Gro which was sold in March 1997
($500,000), (ii) the integration of administrative functions of Pima Gro into
the corporate offices during 1997 which reduced selling, general and
administrative expenses by approximately $178,000 in 1997 from 1996, (iii)
reduced legal expenses of approximately $900,000 during 1997 compared to 1996
due to additional legal claims provisions in 1996, and (iv) expenses of
approximately $695,000 in 1996 related to the clean-up of its N-Viro processing
facilities, which were closed during 1996, that did not occur in 1997.
Other charges (credits) decreased to approximately $721,000 in 1997 from
approximately $4,842,000 in 1996. The decrease relates to charges related to the
sale of assets of Organi-Gro, the write-off of the Company's interests in the
N-Viro Technology recognized in 1996, and credits in 1997 for realization of
Organi-Gro notes which had been previously reserved. See notes 5 and 11 to the
Notes to Consolidated Financial Statements.
Other income and expense (net) was in line with 1996 expenses, but
interest expense increased in 1997 to approximately $924,000, compared to
approximately $673,000 in 1996. The increase in interest expense is a result
12
<PAGE>
of additional debt incurred throughout the year due to acquisitions.
As a result of the foregoing, net income of approximately $832,000 was
reflected in 1997, as compared to a net loss of approximately $7,589,000 in
1996.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995.
The Company's net sales increased by approximately $5,001,000, or 27.8%,
in 1996 as compared to 1995. This increase in sales was directly attributable to
the acquisition of Pima Gro in July 1996. No other significant changes occurred
in the sale of other services or products in relation to the respective periods.
During the year ended December 31, 1996, cost of goods sold and gross
profit increased to approximately $19,254,000 and $3,723,000, respectively, from
approximately $15,118,000 and $2,858,000, respectively, for the year ended
December 31, 1995. Gross profit as a percent of sales increased to 16.2% in 1996
from 15.9% in 1995 primarily due to the acquisition of PimaGro.
Selling, general and administrative expenses increased to approximately
$6,141,000, or 26.7% of sales, for 1996 as compared to $4,150,000, or 23.1% of
sales, in 1995. The increase in such expenses relates to the selling, general
and administrative expenses of PimaGro for the six months following its
acquisition on July 1, 1996 and additional provisions related to legal claims of
approximately $800,000. The additional legal provision relates to five claims,
including former employee agreement disputes, various contract disputes and
acquisition claims.
In the fourth quarter of 1996, management evaluated the future value of the
investments made in Organi-Gro and the N-Viro technologies. Organi-Gro, which
manufactures and sells poultry bedding, had generated losses in 1995 and 1996
and was inconsistent with the Company's future business strategies. As a result,
the Company decided to sell all of the assets of Organi-Gro (which was
accomplished in March 1997). It was also determined at that time, to discontinue
operations relating to the N-Viro process. The Company had certain agency rights
and had invested in property and equipment relating to the N-Viro process. By
December 1996, the Company had limited customers and the Company saw no
significant prospects for making the venture financially justifiable in the
future. As a result, the property and equipment were written down to the
estimated fair value and the carrying value of the agency rights was charged to
operations. These decisions resulted in a charge to operations for the year
ended December 31, 1996 of approximately $4,842,000. See notes 5 and 11 to the
Notes to the Consolidated Financial Statements.
Interest expense for 1996 was approximately $673,000, as compared to
approximately $938,000 for 1995. This decrease of approximately $265,000 was
directly attributable to reduced average debt levels throughout the year prior
to assumption of debt related to the purchase of Pima Gro.
As a result of the foregoing, a net loss of approximately $7,589,000 was
reflected in 1996 as compared to a net loss of approximately $4,553,000 in 1995.
BONDING
The amount of bonding capacity offered by sureties is a function of
financial health of the Company requesting the bonding. As of December 31, 1998,
the Company had a bonding capacity of approximately $20,000,000 with
approximately $7,878,000 utilized as of that date. Management believes the
existing capacity is sufficient to meet bonding needs for the foreseeable
future, but is also currently negotiating to expand that availability as new
contract opportunities arise. To date, no payments have been made by any bonding
company for bonds issued for the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations principally through
the sale of equity and debt securities, a credit facility and through funds
provided by operating activities.
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On March 31, 1998, the Company issued Series B Preferred Stock for total
cash consideration of $3,500,004. This Series B Preferred Stock was convertible
into common stock on a 1:1 ratio at a conversion price of $2.40 per share. On
June 10, 1998, a cash dividend of $420,000 was paid to the holders of Series B
Preferred Stock; concurrently, the holders converted the Preferred Shares into
1,458,335 shares of Common Stock.
During 1998, the Company acquired A&J, EWR and Recyc for aggregate
consideration of approximately $45,517,000 including approximately $9,410,000 in
cash including acquisition costs. The preliminary allocations of the purchase
prices resulted in goodwill of approximately $39,426,000, that is being
amortized over 40 years.
The Company purchased additional capital assets during 1998 in the amount
of approximately $1,712,000 and sold capital assets with proceeds totaling
approximately $2,081,000.
As of December 31, 1998, the Company had current maturities on long-term
debt of approximately $4,756,000, as compared to approximately $2,552,000 in
1997. The Company currently has the intent and ability to refinance the current
maturities with its credit facility and has classified the 1998 portion of this
debt as long-term indebtedness in the consolidated balance sheet as of December
31, 1998. The Company's long-term portion of debt was approximately $22,038,000
in 1998, reflecting an increase of approximately $16,544,000 over 1997. This
increase is due primarily to the funding of the acquisitions of A&J, Recyc and
EWR, and the assumption of debt pursuant to such acquisitions.
In October 1998, the Company obtained a new $40 million bank credit
facility, which was amended in November 1998. The credit facility was used to
retire certain debt payable to various individuals and financial institutions
and fund the acquisition of EWR. The credit facility is secured by substantially
all of the Company's assets. At December 31, 1998, the Company had borrowings
from this credit facility of approximately $18,200,000 and amounts available
under the credit facility of approximately $2,579,000. Amounts under the credit
facility are subject to a borrowing base equal to 4 times earnings before
interest, taxes, depreciation and amortization ("EBITDA") based on a trailing
twelve months calculation, as defined in the credit facility less funded debt as
defined, (which includes notes payable to former owners, which can be refinanced
through the Facility until March 1999, and 3.5 times thereafter. The credit
facility requires the Company to meet certain loan covenants, and the Company
was in compliance with those covenants as of December 31, 1998. This credit
facility expires in October 2001 and management anticipates that it will
renegotiate and/or refinance this credit facility prior to that time. As of
February 26, 1999, approximately $4,685,000 was available to the Company for
additional borrowing under the facility.
At December 31, 1998, the Company had working capital of approximately
$5,250,000. Accounts receivable and prepaid expenses and other currents assets
increased by approximately $2,251,000 and $308,000, respectively, primarily due
to the acquisitions of A&J, Recyc, and EWR. The Company evaluates the
collectibility of its receivables based on a specific account-by-account review.
The Company had allowances of approximately $197,000 and $190,000 at December
31, 1998 and 1997, respectively, and writeoffs of approximately $13,000 and
$98,000 in 1998 and 1997, respectively. Accounts payable and accrued
expenses decreased by approximately $126,000 as a result of (a) the reduction of
legal accruals by approximately $650,000 (the Company had 5 significant legal
matters open at the close of 1997 and only 2 significant legal matters pending
at December 31, 1998), (b) reduced trade payables and other accruals of
approximately $294,000, of which $949,000 relates to reduced check processing
time offset by $655,000 of additional trade payables relating to acquisitions,
and (c) an increase in accrued interest of approximately $218,000 related to
additional debt incurred for the above acquisitions. The Company believes its
cash requirements for 1999 can be met with existing cash, cash flows from
operations and its borrowing availability under its credit facility.
The increase in other assets as of December 31, 1998 related primarily to
an increase in deferred bank costs of approximately $360,000 associated with the
credit facility, and non-compete agreements of approximately $307,000 with
former owners of acquired companies.
The Company has undergone significant restructuring throughout the last
two years, including changes in senior management and refinancing of its
indebtedness. As a result of these changes, management believes the Company is
better positioned to respond to opportunities in the biosolids market and
aggressively pursue its goal of acquiring additional biosolids management
companies.
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On March 1, 1999, the Company acquired all of the outstanding stock of
National Resource Recovery, Inc. ("NRR") in exchange for 1,000,001 shares of the
Company's Common Stock. NRR is a biosolids company with operations in Michigan.
YEAR 2000
IMPACT OF YEAR 2000. The Year 2000 issue exists because many computer
systems and applications currently use two-digit fields to designate the year.
As the century change occurs, computer programs, computers, and embedded
microprocessors controlling equipment with date-sensitive systems may recognize
the Year 2000 as 1900, or not at all. This inability to recognize or properly
handle the Year 2000 date may result in computer system failures or
miscalculations of financial and operational information as well as failures of
equipment controlling date-sensitive microprocessors. Most of our major
customers are municipalities with wastewater treatment plants. It is likely that
most of these plants have computer-controlled processes, some of which may slow
down or even halt delivery of biosolids. We will address all of these potential
problem areas in the sections below.
STATE OF READINESS. We began formulating a plan to address the Year 2000
issue during 1997. The plan consists of three phases: awareness, assessment, and
renovation. In the Awareness Phase, we established a Year 2000 committee with
membership from the executive, operations, legal, financial, and information
technology departments. This committee provides the leadership for developing
the plan, assessing the impact of Year 2000 issues, and giving directives to
each of the functional areas for implementation of the plan.
To date our primary focus has been on the assessment of our own internal
systems. We have inventoried all of the Company's computer hardware. Most of
this hardware was purchased after August of 1998 from a national manufacturer,
was NTSL tested prior to shipment, and is in full compliance. The remaining
hardware will either be replaced or have BIOS upgrades by the end of the third
quarter 1999.
The Company is using Microsoft Office for our desktop suite so no
significant Year 2000 impact is expected. All significant accounting and
financial reporting functions are performed at the corporate office using third
party software from a national vendor that is Year 2000 compliant. Our remote
locations are currently running proprietary software that has been written to
collect data pertaining to the pickup, hauling, land application and composting
of biosolids. There are potential issues concerning Year 2000 that could arise
if these systems are not Year 2000 compliant. We are currently implementing a
new Manifest and Compliance System that is Year 2000 compliant. The
implementation of this new system is expected to be completed by the fall of
1999. Additionally, there is the possibility that some of the spreading
equipment that we use in our land application process has embedded
microprocessors. We are currently reviewing all of this equipment to ensure its
Year 2000 compliance. If the equipment cannot be made compliant, there are
alternative land application methods available that are compliant.
We have recently begun to assess the potential for Year 2000 problems with
the information systems of our customers, vendors, sub-contractors and other
third parties. We have received some preliminary information concerning Year
2000 readiness from some of our customers, vendors, sub-contractors, and other
third parties. Additionally, we are preparing questionnaires, which we expect to
mail in spring of 1999. We expect to engage in discussions with those parties
who have failed to show proof of compliance prior to the summer of 1999 in an
attempt to determine the extent to which we are vulnerable to those parties'
non-compliance. We are currently unable to estimate the costs that we may incur
to remedy the Year 2000 issues relating to these parties.
COSTS TO ADDRESS THE YEAR 2000 ISSUE. Our costs to date for our Year 2000
program have not been material. Although we have not completed our assessment,
we do not currently believe that the future costs associated with our Year 2000
compliance program will be material.
RISK TO THE COMPANY. The risks to the Company involve the failure of our
customers, vendors, sub-contractors and third parties failure to reach
compliance. Some customers may suffer failures that cause those customers to
delay placing orders for biosolids removal from their wastewater treatment
plants. Date functionality
15
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is typically not used in process control application software. More common is
the use of relative time. We are still, however, dependent on our customers
having an effective Year 2000 compliance program in place. In the case of our
vendors and sub-contractors, we will take special care in reviewing the
compliance of all of the equipment and services needed to perform day to day
operational functions. This includes spreading equipment, transportation
equipment, necessary power, telecommunications, and financial services.
Furthermore, as a result of the Company's ongoing acquisition program, our
assessment of Year 2000 issues may change. As we acquire companies, we attempt
to assess Year 2000 issues relating to their computer systems and operating
processes. Our current integration plan also attempts to have them integrated
into our business systems within a short period of time. We feel that this
minimizes our exposure to their failure to meet Year 2000 compliance.
If any of the above uncertainties were to occur, our business, financial
conditions, and results of operations would be adversely affected. As such,
there can be no assurance that the systems of customers, vendors, newly acquired
companies, sub-contractors, and other third party relationships on which we may
rely will be made Year 2000 compliant in a timely manner or that any such
failure to be Year 2000 compliant by another company would not have an adverse
effect on our business or consolidated results of operations, financial position
or liquidity. We are currently unable to assess the likelihood of such events
occurring or the extent of the effect on the Company.
CONTINGENCY PLAN. We are in the process of developing a comprehensive
contingency plan to address avoidable or unavoidable Year 2000 risks with
internal information technology systems and with customers, vendors, newly
acquired companies, sub-contractors, and other third parties. We expect to have
this plan completed by the summer of 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company utilizes financial instruments which inherently have some
degree of market risk due to interest rate fluctuations. Management is actively
involved in monitoring exposure to market risk and continues to develop and
utilize appropriate risk management techniques. The Company is not exposed to
any other significant market risks, including commodity price risk, foreign
currency exchange risk or interest rate risks from the use of derivative
financial instruments. Management does not use derivative financial instruments
for trading or to speculate on changes in interest rates or commodity prices.
INTEREST RATE RISK
Total debt at December 31, 1998, included approximately $18,622,000 in
floating rate debt attributed to the bank credit facility borrowings and a note
to another financial institution at an average interest rate of 7.51%. As a
result, the Company's annual interest cost in 1999 will fluctuate based on
short-term interest rates. The impact on annual cash flow of a ten-percent
change in the floating rate (approximately 50 basis points) would be
approximately $94,000.
At December 31, 1998, the Company's fixed rate debt had a book value and
fair market value of $8,172,645. The floating rate debt will mature in October
2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this Item 8 are incorporated herein
by reference as set forth on pages F-1 to F-19 attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
16
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers and directors of the Company
and compliance with Section 16(a) of the Exchange Act is incorporated by
reference to the information set forth under the caption "Election of Directors"
in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is incorporated by reference
to the information set forth under the caption "Other Information--Executive
Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth under the
caption "Other Information--Principal Stockholders" and "Election of
Directors--Management Stockholdings" in the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
incorporated by reference to the information set forth under the caption "Other
Information--Certain Transactions" in the Company's Proxy Statement
for the 1999 Annual Meeting of Stockholders.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
Synagro Technologies, Inc. and Subsidiaries consolidated balance sheets as
of December 31, 1998 and 1997, and related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998.
2. FINANCIAL SCHEDULES.
All financial statement schedules are omitted for the reason that they are
not required or are not applicable, or the required information is shown in the
financial statements or the notes thereto.
3. EXHIBITS
EXHIBIT DESCRIPTION OF EXHIBIT
3.1 Restated Certificate of Incorporation of Synagro Technologies, Inc.
(the "Company") dated August 16, 1996 (Exhibit 3.1 to the Company's
Post-Effective Amendment No. 1 to Registration Statement No.
33-95028, dated October 25, 1996, is incorporated herein by
reference).
3.2 Bylaws of the Company dated August 5, 1996. (Exhibit 3.2 to the
Company's Post-Effective Amendment No. 1 to Registration Statement
No. 33-95028, dated October 25, 1996, is incorporated herein by
reference).
4.1 Specimen Common Stock Certificate of the Company. (Exhibit 4.1 to
the Company's Registration Statement on Form 10, dated December 29,
1992, is incorporated herein by reference).
4.2 Specimen Warrant Certificate of the Company. (Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (No. 33-95028),
dated July 27, 1995, and as amended, is incorporated herein by
reference).
4.3 Rights Agreement, dated as of December 20, 1996, between the Company
and Intercontinental Registrar & Transfer Agency, Inc., as Rights
Agent, which includes as Exhibit A thereto the Synagro Technologies,
Inc. Statement of Designations, Preferences, Limitations and
Relative Rights of its Series A Junior Participating Preferred
Stock, and as Exhibit C thereto the Form of Rights Certificate
(Incorporated by reference to Exhibit No. 4.1 to Registrant's
Registration Statement on Form 8-A dated December 27, 1996).
4.4 Certificate of Designation, Preferences, Rights and Limitations of
Series B Preferred Stock of Synagro Technologies, Inc. (Exhibit 4.4
to the Company's Annual Report on Form 10-K for the year-ended 1997,
is incorporated herein by reference).
4.5 Registration Rights Agreement, dated as of March 31, 1998, among the
Company, Environmental Opportunities Fund, L.P., Environmental Fund
(Cayman), L.P. and other purchasers of the Company's Series B
Preferred Stock as listed on Exhibit A thereto (Exhibit 4.5 to the
Company's Annual Report on Form 10-K for the year-ended 1997, is
incorporated herein by reference).
4.6 Specimen Series B Preferred Stock Certificate (Exhibit 4.6 to the
Company's Annual Report on Form 10-K for the year-ended 1997, is
incorporated herein by reference).
10.1 Synagro Technologies, Inc. Subscription Agreement, dated as of March
31, 1998 among the Company, Environmental Opportunities Fund, L.P.,
Environment Opportunities Fund (Cayman), L.P. and other purchasers
of the Company's Series B Preferred Stock as listed on Exhibit A
thereto (Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the year-ended 1997, is incorporated herein by reference).
10.2 Form of Indemnification Agreement. (Appendix F to the Company's
Proxy Statement on Schedule 14A for Annual Meeting of Stockholders,
dated May 9, 1996, is incorporated herein by reference).
10.3 Amended and Restated 1993 Stock Option Plan dated August 5, 1996.
(Exhibit 4.1 to the Company's Registration Statement on Form S-8
(No. 333-18029), dated December 17, 1996, is incorporated herein by
reference).
18
<PAGE>
10.4 6% Promissory Note made by Custom Poultry to Organi-Gro and the
Company in the principal amount of $1,152,381, dated April 1, 1997
(Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, is incorporated herein by reference).
10.5 Guaranty of Tony D. Childers ("Childers") for 6% Promissory Note
made by Custom Poultry to Organi-Gro, dated April 1, 1997 (Exhibit
10.9 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, is incorporated herein by reference).
10.6 6% Promissory Note made by Hodges to Organi-Gro and the Company in
the principal amount of $308,203, dated April 1, 1997. (Exhibit
10.10 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, is incorporated herein by reference).
10.7 Guaranty of Childers and Jack Hodges for 6% Promissory Note made by
Hodges to Organi-Gro, dated April 1, 1997 (Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, is incorporated herein by reference).
*10.8 Credit Agreement entered into among Synagro Technologies, Inc.,
various financial institutions, and Bank of America National Trust
and Savings Association, dated as of October 7, 1998; First
Amendment to Credit Agreement dated as of November 2, 1998; Second
Amendment to Credit Agreement dated as of November 13, 1998;
Assigment Agreement dated as of December 4, 1998.
*21.1 Subsidiaries of Synagro Technologies, Inc.
*27.1 Financial Data Schedule.
- -------------
* Filed herewith.
(b) REPORTS ON FORM 8-K.
On December 16, 1998, the Company filed a Current Report on Form 8-K
listing the acquisition of Environmental Waste Recycling, Inc.
19
<PAGE>
SYNAGRO TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998,
1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Synagro Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Synagro
Technologies, Inc. (a Delaware corporation), and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Synagro
Technologies, Inc., and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 15, 1999
F-2
<PAGE>
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 255,115 $ 166,994
Short-term investments ........................................ -- 64,504
Restricted cash, current portion .............................. 680,656 172,925
Accounts receivable, net of allowance of $196,770
and $189,862 ................................................ 6,193,720 3,942,355
Notes receivable, current portion ............................. 378,538 500,133
Prepaid expenses and other current assets ..................... 1,638,181 1,330,018
------------ ------------
Total current assets ........................ 9,146,210 6,176,929
PROPERTY, MACHINERY AND EQUIPMENT, net ........................... 10,763,073 8,914,588
OTHER ASSETS:
Goodwill, net of accumulated amortization of $1,594,918 and
$966,079...................................................... 43,130,904 4,333,277
Restricted cash, long-term portion ............................ -- 173,387
Notes receivable, long-term portion ........................... 262,829 --
Other ......................................................... 1,089,533 249,938
------------ ------------
Total assets ................................ $ 64,392,549 $ 19,848,119
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................. $ -- $ 2,552,401
Notes payable to prior owners, current portion ................ -- 398,890
Accounts payable and accrued expenses ......................... 3,896,047 4,021,610
------------ ------------
Total current liabilities ................... 3,896,047 6,972,901
LONG-TERM DEBT:
Long-term debt ................................................ 20,115,209 5,494,549
Notes payable to prior owners ................................. 6,679,039 --
------------ ------------
Total long-term debt......................... 26,794,248 5,494,549
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.002 par value, 10,000,000 shares authorized,
none issued and outstanding ................................. -- --
Common stock, $.002 par value, 100,000,000 shares authorized,
13,251,705 shares and 7,610,305 issued and outstanding ...... 26,503 15,221
Additional paid-in capital .................................... 56,305,873 25,323,915
Accumulated deficit ........................................... (22,630,122) (17,958,467)
------------ ------------
Total stockholders' equity .................. 33,702,254 7,380,669
------------ ------------
Total liabilities and stockholders' equity .. $ 64,392,549 $ 19,848,119
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES ............................................. $ 29,966,511 $ 25,303,069 $ 22,977,404
COST OF SERVICES ...................................... 25,005,754 21,007,387 19,254,903
------------ ------------ ------------
Gross profit ................... 4,960,757 4,295,682 3,722,501
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .......... 4,629,859 3,668,765 6,141,013
OTHER CHARGES (CREDITS):
Loss on assets held for sale and other special
charges / (credits) .............................. (63,799) (721,286) 4,841,807
------------ ------------ ------------
Income (loss) from operations . 394,697 1,348,203 (7,260,319)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income, net .................................. 309,484 407,177 344,095
Interest ........................................... (1,441,251) (923,879) (672,706)
------------ ------------ ------------
(1,131,767) (516,702) (328,611)
------------ ------------ ------------
NET INCOME (LOSS) BEFORE REDEEMABLE PREFERRED DIVIDENDS
AND INCOME TAXES ...................................... (737,070) 831,501 (7,588,930)
PROVISION FOR INCOME TAXES ............................ -- -- --
------------ ------------ ------------
NET INCOME (LOSS) BEFORE REDEEMABLE PREFERRED DIVIDENDS (737,070) 831,501 (7,588,930)
REDEEMABLE PREFERRED STOCK DIVIDENDS .................. 3,934,585 -- --
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK .......... $ (4,671,655) $ 831,501 $ (7,588,930)
============ ============ ============
INCOME PER COMMON AND COMMON SHARE EQUIVALENT:
Net income (loss), basic ........................... $ (.46) $ .11 $ (1.21)
Net income (loss), diluted ......................... $ (.46) $ .11 $ (1.21)
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC ............ 10,207,248 7,545,113 6,266,759
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED .......... 10,207,248 7,740,344 6,266,759
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 .................... 6,052,757 $ 12,106 $ 22,160,585 $(11,201,038) $ 10,971,653
Shares issued in acquisition ............... 155,000 310 222,425 -- 222,735
Conversion of long-term debt ............... 144,344 289 189,711 -- 190,000
Exercise of options ........................ 3,333 7 6,659 -- 6,666
Net loss ................................... -- -- -- (7,588,930) (7,588,930)
----------- ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 .................... 6,355,434 12,712 22,579,380 (18,789,968) 3,802,124
Redemption of warrants, net ................ 1,324,243 2,648 2,947,412 -- 2,950,060
Shares exchanged in repayment of
notes receivable .......................... (74,372) (149) (212,867) -- (213,016)
Exercise of options ........................ 5,000 10 9,990 -- 10,000
Net income ................................. -- -- -- 831,501 831,501
----------- ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 .................... 7,610,305 15,221 25,323,915 (17,958,467) 7,380,669
Shares issued in acquisitions ................. 4,152,981 8,306 23,773,983 -- 23,782,289
Conversion of preferred stock ................. 1,458,335 2,916 3,429,968 -- 3,432,884
Issuance of warrants .......................... -- -- 200,000 -- 200,000
Exercise of options and warrants .............. 30,084 60 63,422 -- 63,482
Preferred stock dividends ..................... -- -- 3,514,585 (3,934,585) (420,000)
Net loss ...................................... -- -- -- (737,070) (737,070)
----------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 .................... 13,251,705 $ 26,503 $ 56,305,873 $(22,630,122) $ 33,702,254
=========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before preferred stock dividends .... $ (737,070) $ 831,501 $(7,588,930)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation ...................................... 1,668,397 1,498,255 1,951,518
Amortization ...................................... 667,845 228,895 255,690
Loss on assets held for sale and other special
charges (credits) ...................................... (251,476) (721,286) 4,841,807
Gain on sale of property, machinery and equipment . (145,333) (251,470) (261,319)
Other ............................................. -- (113,133) --
(Increase) decrease in the following, excluding
the effects of acquisitions-
Accounts receivable ........................... (429,644) (1,408,821) (635,872)
Inventory ..................................... -- -- 111,429
Prepaid expenses and other current assets ..... (141,349) (1,111,794) 758,253
Other assets .................................. (316,093) (143,407) (27,627)
Increase (decrease) in the following, excluding
the effects of acquisitions-
Accounts payable and accrued expenses ......... (809,327) (9,315) 1,472,235
----------- ----------- -----------
Net cash provided by (used in) operating
activities ............................................. (494,050) (1,200,575) 877,184
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired .......... (9,411,182) -- (1,277,265)
Purchase of property, machinery and equipment ......... (1,712,407) (1,089,076) (1,404,815)
Proceeds from sale of property, machinery and equipment 2,081,026 456,564 640,404
Sales of short-term investments, net .................. 64,504 495,496 455,743
Proceeds from notes receivable ........................ 138,999 121,286 --
----------- ----------- -----------
Net cash used in investing activities ............ (8,839,060) (15,730) (1,585,933)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt .................................... 7,728,701 1,082,410 5,797,696
Payments on debt ...................................... (1,049,492) (3,301,330) (7,135,023)
Increase in restricted cash ........................... (334,344) (950) (5,105)
Preferred stock dividend .............................. (420,000) -- --
Redemption of warrants, net ........................... -- 2,950,060 --
Issuance of preferred stock, net of offering costs .... 3,432,884 -- --
Exercise of options and warrants....................... 63,482 10,000 6,666
----------- ----------- -----------
Net cash provided by (used in) financing
activities ............................................. 9,421,231 740,190 (1,335,766)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... 88,121 (476,115) (2,044,515)
CASH AND CASH EQUIVALENTS, beginning of year ............. 166,994 643,109 2,687,624
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year ................... $ 255,115 $ 166,994 $ 643,109
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE>
SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Continued)
1998 1997 1996
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $891,462 $942,877 $760,339
Taxes paid --- --- ---
NONCASH INVESTING AND FINANCING ACTIVITIES
On March 31, 1998, the Company issued 1,458,335 shares of Series B Preferred
Stock, $.002 par value per share (the "Preferred Stock"), with a beneficial
conversion feature. The Company recognized the value of the beneficial
conversion feature of $3,514,585 as a preferred dividend.
On June 10, 1998, the Preferred Stock was converted into 1,458,335 shares of the
Company's Common Stock.
The Company sold the operations of a wholly-owned subsidiary in 1997. The net
assets and liabilities sold were approximately $978,000 net of a loss allowance
of approximately $2.4 million and assumed debt by the purchaser was
approximately $978,000 in exchange for a note receivable of approximately $1.4
million which was initially reserved at the date of sale. (NOTE 11)
In 1997, $946,000 of assets were purchased in accordance with a purchase and
sale agreement. The purchase was financed through debt.
In 1997, approximately $213,000 of notes receivable was repaid with 74,372
shares of Common Stock.
In 1996, $190,000 of debentures were converted into 144,344 shares of Common
Stock.
In 1996, $1,325,150 of machinery and equipment was acquired with debt.
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
<PAGE>
SYNAGRO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
BUSINESS AND ORGANIZATION
Synagro Technologies, Inc., a Delaware corporation ("Synagro"), and collectively
with its subsidiaries (the "Company") is engaged in the biosolids management
business. The Company does this through beneficial reuse of organic materials,
transportation and monitoring of biosolids, and the marketing of end products
from the treatment of such materials. The Company is headquartered in Houston,
Texas and operates throughout the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synagro and its
wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all investments with an original maturity of three months
or less when purchased to be cash equivalents. Short-term investments have
maturities greater than three months at the date of purchase. At December 31,
1997, short-term investments consisted of certificates of deposit. All
short-term investments have been classified as held-to-maturity at December 31,
1997. These investments have various maturity dates which do not exceed one
year. These securities are carried at cost, which approximates fair value.
PROPERTY, MACHINERY AND EQUIPMENT
Property, machinery and equipment is stated at cost. Depreciation is being
provided using straight-line and accelerated methods over estimated useful lives
of three to twenty years. Leasehold improvements are capitalized and amortized
over the lesser of the life of the lease or the estimated useful life of the
asset.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property, machinery and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
In the second quarter of 1997, the Company changed the estimated useful
lives of certain fixed assets. The change which had an impact of less than
one-half of $0.01 on net income per share did not materially effect the
Company's results of operations.
GOODWILL
Goodwill represents the aggregate purchase price paid by the Company in
acquisitions accounted for as a purchase over the fair value of the net tangible
assets acquired. Goodwill is amortized on a straight-line basis over the
estimated period of benefit ranging from 20 to 40 years.
In the event that facts and circumstances indicate that goodwill may be
impaired, an evaluation of recoverability would be performed. If an evaluation
were required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value was necessary. The
Company believes the goodwill remaining as of December 31, 1998, is fully
realizable.
At December 31, 1998, goodwill of approximately $3,879,000 is being amortized
over a 20 year life. The Company's remaining goodwill is being amortized over a
40 year life. Goodwill amortization expense was $255,690, $228,895 and $628,839
for 1996, 1997 and 1998, respectively.
F-8
<PAGE>
OTHER ASSETS
Included in other assets are non-compete agreements. These agreements are valued
at cost and amortized on a straight-line basis over the term of the agreement,
which is generally for two to five years. Amortization expense was approximately
$40,000 in 1998 and -0- in 1997 and 1996, respectively. Additionaly, the Company
had deferred financing costs in connection with the credit facility disclosed in
Note 6, the costs are being expensed over the term of the agreement.
REVENUE RECOGNITION
Revenues are recognized as services are completed and provided.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company's adoption of SFAS No. 121 did not have a material effect on the
Company's financial position or results of its operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the 1998 presentation.
CONCENTRATION OF CREDIT RISK
The Company provides services to a broad range of geographical regions. The
Company's credit risk primarily consists of receivables from a variety of
customers including, state and local agencies, municipalities and private
industries. The Company reviews its accounts receivable and provides allowances
as deemed necessary.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This standard provides the method for determining
the appropriate asset and liability for deferred taxes which are computed by
applying applicable tax rates to temporary (timing) differences. Therefore,
expenses recorded for financial statement purposes before they are deducted for
tax purposes create temporary differences which give rise to deferred tax
assets. Expenses deductible for tax purposes before they are recognized in the
financial statements create temporary differences which give rise to deferred
tax liabilities.
NEW ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes new standards for segment reporting which are based on the way
management organizes segments within a company for making operating decisions
and assessing performance. Through December 31, 1998, the Company operated in
one segment namely, the biosolids management business segment.
F-9
<PAGE>
In February 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits," which becomes effective for financial statements for the year ended
December 31, 1998. SFAS No. 132 requires revised disclosures about pensions and
other postretirement benefit plans. The Company has adopted the provisions of
SFAS No. 132, and it does not have a material effect on the Company's
consolidated financial position or result of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for financial
statements beginning after June 15, 1999. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company is evaluating SFAS No. 133 and
the impact on existing accounting policies and financial reporting disclosures.
However, the Company has not historically engaged in activities or entered into
arrangements normally associated with derivative instruments.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP provides guidance with
respect to accounting for the various types of costs incurred for computer
software developed or obtained for the Company's use. The Company is required to
and will adopt SOP 98-1 by the first quarter of fiscal 1999 and believes that
adoption will not have a material effect on its consolidated financial position
or result of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires costs of start-up activities to be expensed as
incurred, and upon adoption, previously deferred costs should be charged as a
cumulative effect of a change in accounting principle. The statement is
effective for financial statements beginning after December 15, 1998. The
adoption of this standard is not expected to have a material effect on the
Company's consolidated financial position or result of operations.
(2) ACQUISITIONS -
Environmental Waste Recycling, Inc.
On November 5, 1998, the Company acquired Environmental Waste Recycling
Inc. ("EWR"), a biosolids management company for approximately $9,487,000. The
acquisition was financed through the issuance of 865,125 shares of Common Stock
with a market value of approximately $2,812,000, $200,000 in debt and
approximately $6,475,000 in cash and acquisition costs. The Common Stock was
valued in accordance with the provisions of Emerging Issues Task Force ("EITF")
95-19. The transaction was recorded using the purchase method of accounting. The
accompanying balance sheet as of December 31, 1998, includes a preliminary
allocation of the purchase price and is subject to final adjustments which
management believes will not be material. The preliminary allocation resulted in
approximately $7,091,000 of goodwill, that is being amortized over 40 years. The
purchase agreement provides for the payment of additional cash and stock
consideration in an aggregate amount not to exceed $2,956,216 in the event
certain financial targets are realized during the twelve-month period after
closing. The Company financed the cash portion of the merger consideration with
borrowings under its credit facility with Bank of America.
F-10
<PAGE>
Recyc, Inc.
On July 24, 1998, the Company acquired Recyc, Inc. ("Recyc"), a biosolids
composting company, for approximately $15,573,000. The acquisition was financed
through the issuance of 1,475,323 shares of Common Stock with a market trading
value of approximately $8,573,000, $5,646,000 in debt, and $1,354,000 in cash
and acquisition costs. The Common Stock issued was valued in accordance with the
provisions of EITF 95-19. The transaction was recorded using the purchase method
of accounting. The accompanying balance sheet as of December 31, 1998, includes
a preliminary allocation of the purchase price and is subject to final
adjustments which management believes will not be material. The accompanying
balance sheet as of December 31, 1998 includes a preliminary allocation
resulting in approximately $14,964,000 of goodwill that is being amortized over
40 years. An unsecured note in the approximate amount of $2,305,000 was issued
to the prior owner with principal due November, 2000. The note bears annual
interest of 7% and is payable quarterly with the first payment made in November
1998. The note has no financial covenants. The principal owed under the
promissory note may be offset, and up to 375,000 of the shares issued to the
prior owners may be returned to the Company if certain postclosing conditions
are not met. In connection with the acquisition, the Company entered into a
lease agreement with an option to purchase with the prior owners, as trustees of
a family trust of said stockholders, providing for the lease by Recyc of a
composting facility. In addition, the Company entered into a transportation
agreement with an initial term of two years with Recyc Trucking, Inc., ("RTI"),
a company owned by the prior owners, for the provision by RTI of certain
transportation services relating to Recyc's operations.
A & J Cartage and Related Companies
On June 23, 1998, the Company purchased the stock of A&J Cartage, Inc., a
Wisconsin company, Michigan Organic Resources, Inc., a Michigan company, and A&J
Cartage Southeast, Inc., a Florida company (collectively "A&J") all of which
provide biosolids management services, for approximately $19,802,000. The
acquisitions were financed through the issuance of 1,812,533 shares of Common
Stock with a market trading value of approximately $12,398,000, approximately
$5,823,000 in debt and $1,581,000 in cash and acquisition costs. The Common
Stock issued was valued in accordance with the provisions of EITF 95-19. The
transactions were recorded using the purchase method of accounting. The
accompanying balance sheet as of December 31, 1998, includes a preliminary
allocation of the purchase price and is subject to final adjustments which
management believes will not be material. The preliminary allocation resulted in
approximately $17,372,000 of goodwill that is being amortized over 40 years. The
unsecured notes issued to the prior owner are payable in quarterly installments
with the first installment due January 1, 1999. The notes bear annual interest
rate of 7%. The notes have no financial covenants.
The Company purchased all of the common stock of A&J, Recyc and EWR during 1998.
The assets acquired and liabilities assumed were as follows for the year ended
December 31, 1998.
Net cash paid including
acquisition costs ........................ $ 9,410,000
Fair value of tangible assets
acquired ................................ (6,091,000)
Liabilities assumed ....................... 655,000
Notes payable - Issued and Assumed ........ 11,669,000
Common Stock issued ....................... 23,783,000
------------
Goodwill .................................. $ 39,426,000
============
BFI Organics Division
Effective August 1, 1997, the Company purchased certain assets and revenue
contracts of the Organics Division of Browning Ferris Industries, Inc. in the
District of Columbia, Georgia, Maryland, Ohio, Pennsylvania, and Virginia for
approximately $946,000. The acquisition was financed through the issuance of
third-party debt. The debt bears an interest rate equal to 30 day commercial
paper plus 2.77%.
F-11
<PAGE>
Pima Gro Systems, Inc.
Effective July 1, 1996, the Company acquired all the issued and outstanding
stock of Pima Gro Systems, Inc., and Pima Gro Systems 2, Inc. (collectively,
PimaGro), a company engaged in the business of recycling and transportation of
biosolids. The aggregate purchase price was approximately $3,096,000, consisting
of approximately $1,277,000 in cash, $1,595,000 in notes payable and 155,000
shares of the Company's Common Stock valued at approximately $223,000, subject
to an additional contingent sum on the purchase price of $5.20 for each dollar
by which the pretax earnings of PimaGro, for each of the fiscal years during
1996 through 1998, exceed the base amount of $380,000 in 1996 and, subject to
certain adjustments to the base amount, during the two following fiscal years.
The additional contingent sum may be payable by the Company, if at all, in cash,
Common Stock or promissory notes, or any combination thereof. Such amounts which
may be payable as contingent sum payments will be held in escrow until March 31,
1999, and subject to reduction based on amounts expended by the Company for
certain capital expenditures and costs reserved for the development of certain
business sites. As of December 31, 1998, there were no additional contingent
amounts payable by the Company. The acquisition has been accounted for under the
purchase method and, accordingly, the operating results of PimaGro have been
included in the operating results of the Company since the date of acquisition.
The excess of the total acquisition cost over the fair value of the net assets
acquired (goodwill) in the amount of $1,419,000 is being amortized on a
straight-line basis over 40 years.
The Company purchased all of the common stock of PimaGro during 1996. The
assets acquired and liabilities assumed were as follows for the year ended
December 31, 1996:
Net cash paid ............................................. $ 1,277,000
Fair value of tangible assets acquired .................... (4,792,000)
Liabilities assumed ....................................... 3,116,000
Notes payable - issued .................................... 1,595,000
Common Stock issued ....................................... 223,000
-----------
Goodwill .................................................. $ 1,419,000
===========
The following unaudited pro forma information for the periods set forth below
gives effect to the acquisitions of A&J, Recyc and EWR as if they had occurred
at the beginning of 1997. The unaudited pro forma information is presented for
information purposes only and is not necessarily indicative of actual results
which might have occurred if the acquisitions had been made at the beginning of
the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 (UNAUDITED)
----------------------------
1998 1997
------------ ----------
<S> <C> <C>
Net sales ........................................ $ 44,673,978 47,400,708
Net income (loss) before Preferred Stock Dividends 1,055,921 2,790,560
Net income (loss) applicable to Common Stock ..... (2,878,664) 2,790,560
Net income (loss) per share ...................... (.23) .24
Basic
Diluted ................................ (.23) .23
</TABLE>
(3) PROPERTY, MACHINERY AND EQUIPMENT --
Property, machinery and equipment consists of the following:
F-12
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
-----------
ESTIMATED USEFUL
LIFE-IN YEARS 1998 1997
------------- ----------- -----------
<S> <C> <C>
Land ................................. -- $ 444,958 $ 576,884
Buildings ............................ 20 -- 252,093
Machinery and equipment .............. 3-10 15,004,869 12,678,260
Office furniture and equipment ....... 3-10 531,302 362,578
Leasehold improvements ............... 20 181,683 93,080
Construction in process .............. -- 225,644 116,725
----------- -----------
16,388,456 14,079,620
Less- Accumulated depreciation and
amortization ....................... 5,625,383 5,165,032
----------- -----------
$10,763,073 $ 8,914,588
=========== ===========
</TABLE>
(4) DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS --
Activity of the Company's allowance for doubtful accounts consists of the
following:
DECEMBER 31,
------------
1998 1997
--------- ---------
Balance at beginning of year ....................... $ 189,862 $ 287,514
Deductions for recoveries and for uncollectible
receivables written off ......................... (13,092) (97,652)
Allowance for doubtful accounts of purchased
companies at acquisition date ...................... 20,000 --
========= =========
Balance at end of year ............................. $ 196,770 $ 189,862
========= =========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
---------------------------
1998 1997
---------- ----------
Accounts payable ............................. $2,673,395 $2,461,811
Accrued legal and other claims costs ......... 287,378 937,065
Accrued salaries and benefits ................ 72,616 77,803
Accrued interest ............................. 294,723 77,025
Other accrued expenses ....................... 567,935 467,906
---------- ----------
Total ..................... $3,896,047 $4,021,610
========== ==========
F-13
<PAGE>
(5) AGENCY RIGHTS --
The Company had the exclusive agency rights to market the "N-Viro Process" in
the southwestern United States. The "N-Viro Process" is a process to convert
biological organic waste into marketable products. The Company acted as the
agent to collect all of the fees from any licensees and to pay to N-Viro
International any amounts not payable to the Company as compensation pursuant to
the agency and license agreements.
In December 1996, the Company decided to wind down and discontinue its
operations relating to the N-Viro Process and accordingly determined that a
permanent impairment had occurred in the value of the agency rights. The
carrying value of the agency rights of approximately $1,178,000 was charged to
operations. In addition, the Company sold certain assets related to these
operations and recorded a charge to operations in the fourth quarter of 1996
amounting to approximately $1,200,000 to adjust the carrying values of these
assets to their estimated fair market values. These charges are included in
"loss on assets held for sale and other special charges (credits)" in the
accompanying consolidated statements of operations. The remaining assets in the
amount of approximately $397,000 in 1998 and 1997, respectively, have been
classified as property, machinery and equipment in the accompanying consolidated
balance sheet at December 31, 1998 and 1997.
(6) LONG-TERM DEBT OBLIGATIONS --
Long-term debt obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Term loan with a bank, repaid with credit facility ........................ $ -- $ 4,000,000
Revolving credit facility with a bank ..................................... 18,200,000 1,037,270
Economic development revenue bonds ........................................ 630,000 945,000
Note payable to a financial institution, maturing in varying installments
through the year 2002, secured by certain assets of the
Company, with an interest rate of 4% ................................... 245,757 300,000
Notes payable to financial institution and individuals, maturing in varying
installments through the year 2001, secured by equipment with
interest rates ranging from 8% to 10% .................................. 1,039,452 1,764,680
----------- -----------
Total debt ............................. 20,115,209 8,046,950
Less:
Current maturities ........................................................ -- 2,552,401
----------- -----------
Long-term debt, net of current maturities ..... $20,115,209 $ 5,494,549
=========== ===========
</TABLE>
CREDIT FACILITY
On October 7, 1998, the Company obtained a $40 million bank credit facility (the
"Facility"). The Facility was used to retire certain debt payable to various
individuals and financial institutions. The Facility is secured by substantially
all of the Company's assets.
The Facility expires October 5, 2001, and bears interest at the bank eurodollar
rate plus a margin based upon a pricing schedule per the Facility agreement
(7.4% at December 31, 1998). The weighted average interest rate in 1998 was
7.51%. The Facility is subject to a borrowing base equal to 4 times earnings
before interest, taxes, depreciation and amortization ("EBITDA") based on a
trailing twelve months calculation, as defined in the Facility, less funded debt
as defined, (which includes notes payable to prior owners, which can be
refinanced through the Facility), until March 1999, and 3.75 times EBITDA
thereafter. Amounts available for additional borrowing under the Facility at
December 31, 1998 totaled approximately $2,579,000.
The Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payments of cash dividends,
limits the issuance of indebtedness and requires the Company to comply with
certain financial covenants, including a minimum net worth requirement, maximum
senior and total debt to pro forma EBITDA and interest coverage ratio. The
Company was in compliance with all covenants as of December 31, 1998.
F-14
<PAGE>
The Facility was used to payoff the Company's previous facility with LaSalle
National Bank ("LaSalle") which had been obtained through two of the Company's
subsidiaries. The previous facility consisted of a $5 million revolving line of
credit and a $5 million term loan. The amount under the line of credit was
subject to a borrowing base of 85% of eligible accounts receivable, as defined
in the agreement. The term loan required principal payments of $1 million a
year. The revolving line of credit required the Company to direct all its
account debtors to make all payments on the accounts to a lockbox designated by,
and under the control of, LaSalle. Additionally, the bank had the right to
accelerate borrowings outstanding in the event the bank reasonably felt insecure
for any material reason. As a result, in order to comply with EITF Pronouncement
95-22, the Company classified the revolving line of credit portion of the
Facility as a current liability in the accompanying balance sheet as of December
31, 1997. This previous facility was to expire in September 1999.
REVENUE BONDS
The economic development revenue bonds are expected to be paid in September
1999. Interest was payable at 6.7 and 6.9 percent per annum in 1998 and 1997,
respectively. Included in the accompanying consolidated balance sheets as of
December 31, 1998 and 1997, is restricted cash of $680,656 and $346,312,
respectively, for future payment of principal and interest on the bonds.
NOTES PAYABLE TO PRIOR OWNERS
The Company issued notes in the amount of $8,050,311 to prior owners of certain
purchased companies as partial consideration of the acquisition price. These
notes had a balance of $6,361,822 and $398,890 at December 31, 1998 and 1997
respectively. The terms of the outstanding notes include varying principal
installments starting August 1998 and continuing through November 2000 and
annual interest rates of 7% to be paid quarterly. The notes have no financial
covenants. The note related to the Recyc acquisition with a balance of
approximately $2,212,000 at December 31, 1998 may be offset if certain
postclosing conditions are not met. No adjustments have been made as of December
31, 1998. Additionally, the Company has notes to prior owners relating to
non-compete agreements; these notes have a balance of $317,217 at December 31,
1998. The notes are paid in varying installments starting July 1998, and have an
annual imputed interest rate of 9%. These notes have no financial covenants.
At December 31, 1998, future principal payments of total long-term debt are as
follows:
YEAR ENDING LONG-TERM NOTES PAYABLE TO
DECEMBER 31 DEBT PRIOR OWNERS
----------- ----------- ---------------------
1999 $ 1,229,525 $ 3,526,552
2000 210,600 2,969,154
2001 18,429,327 100,000
2002 245,757 83,333
----------- -----------
Total $20,115,209 $ 6,679,039
=========== ===========
F-15
<PAGE>
The Company had current maturities on total long term debt of $4,756,077 at
December 31, 1998. The Company has the ability and intent to refinance such
maturities related to long term debt with the Facility and has therefore
classified such indebtedness as long-term in the consolidated balance sheet as
of December 31, 1998. The Company estimates the fair value of long-term debt as
of December 31, 1998 and 1997, to be approximately the same as the recorded
value.
(7) INCOME TAXES --
Significant components of the Company's deferred tax liabilities and assets for
federal income taxes consist of the following:
DECEMBER 31
------------------------
1998 1997
----------- -----------
Deferred tax assets-
Net operating loss carryforwards ................ $ 3,978,000 $ 3,756,000
Accrual not currently deductible for tax purposes 157,000 240,000
Allowance for bad debts ......................... 200,000 65,000
Write-off of assets not currently deductible for
tax purposes .................................. 520,000 505,000
Other ........................................... 1,000 1,000
----------- -----------
Total deferred tax assets ..... 4,856,000 4,567,000
Valuation allowance for deferred tax assets ........ (4,160,000) (4,143,000)
Deferred tax liability-
Differences between book and tax bases of fixed
assets ........................................ (696,000) (424,000)
----------- -----------
Net deferred tax liability .... $ -- $ --
=========== ===========
As of December 31, 1998, the Company has generated net operating loss ("NOL")
carryforwards of approximately $11,690,000 available to reduce future income
taxes. These carryforwards begin to expire in 2004 through 2018. A change in
ownership, as defined by federal income tax regulations, could significantly
limit the Company's ability to utilize its carryforwards. Accordingly, the
Company's ability to utilize its NOLs to reduce future taxable income and tax
liabilities may be limited. Additionally, because federal tax laws limit the
time during which these carryforwards may be applied against future taxes, the
Company may not be able to take full advantage of these attributes for federal
income tax purposes. As the Company has incurred losses in recent years and the
utilization of these carryforwards could be limited as discussed above, a
valuation allowance has been established to fully offset the net deferred tax
asset at December 31, 1998 and 1997. The valuation allowance increased $17,000
and $357,000 for the year ended December 31, 1998 and 1997, respectively, due to
the Company's tax losses.
(8) COMMITMENTS AND CONTINGENCIES --
LEASES
The Company leases certain facilities for its corporate and operations offices
under non-cancelable long-term lease agreements. Minimum annual rental
commitments under these leases are as follows:
Year ending December 31-
1999 $1,034,401
2000 705,958
2001 460,934
2002 414,339
2003 and thereafter 6,656,999
----------
$9,272,631
==========
Rental expense was $1,060,703, $530,685 and $633,751 for 1998, 1997 and 1996,
respectively.
Concurrent with certain acquisitions, the Company entered into various
agreements with prior owners to lease land and buildings used in the Company's
operations. The terms of these leases range from three years to thirty years and
provide for certain escalations in rental expense. One such lease which expires
in 2028 has an option to terminate upon 30 days notice in the event a
conditional use permit (as defined in the agreement) relating to the leased land
expires. Additionally the Company has a 5 year option to purchase such leased
property for $2,250,000 which expires in July 2003. Currently, the Company pays
rent in the amount of $36,000 per annum for the first three years and $192,000
per annum thereafter on the lease. The charge for the lease costs are being
expensed on a straight-line basis. Included in 1997 rent expense above is
approximately $210,500 of rent paid to related parties.
F-16
<PAGE>
LITIGATION
The Company is involved in litigation and claims arising in the ordinary course
of its business. Management believes, based on consultation with legal counsel
and accruals provided, that the ultimate outcome of these matters will not have
a material adverse impact on the Company's operations or financial position.
(9) STOCKHOLDERS' EQUITY --
COMMON STOCK AND WARRANTS
In October 1995, the Company completed a secondary public offering of its Common
Stock. The offering consisted of 500,000 units at $12.00 per unit, each unit
consisting of six shares of Common Stock and six redeemable Common Stock
purchase warrants. The 3,000,000 warrants have an exercise price of $2.40 per
share and expire in October 2000. These warrants are redeemable by the Company
at $0.10 per warrant, subject to certain events occurring. The underwriters were
issued a warrant which expires in October 2000 to purchase 50,000 units
(includes 300,000 warrants) at $16.20 per unit. During 1998 approximately 4,646
warrants were converted to Common Stock.
On December 23, 1996, the Company called the 3,000,000 warrants for redemption
on February 22, 1997. Prior to redemption, 1,324,243 warrants were converted
into Common Stock providing net proceeds to the Company of $3,117,636 in 1997.
In February 1997, the remaining 1,675,757 warrants were redeemed by the Company
for $167,576.
The Company had issued warrants to purchase 16,667 shares of Common Stock, which
were exercisable at $90.00 per share that expired December 1998.
On October 7, 1998 the Company issued warrants to purchase 170,000 shares
of Common Stock, in connection with the new Facility (Note 6). The warrants are
exercisable at $6.00 and expire October 2002. The Company estimated the fair
market value of the warrants to be approximately $200,000, which was recorded as
deferred loan costs and additional paid in capital. These deferred loan costs
are being amortized over the term of the credit facility.
PREFERRED STOCK -
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock. The Preferred Stock may be issued in one or more series or classes by the
Board of Directors of the Company prior to issuance of the shares. Each such
series or class shall have such powers, preferences, rights and restrictions as
determined by resolution of the Board of Directors. Series A Junior
Participating Preferred Stock will be issued upon exercise of the Stockholder
Rights described below.
SERIES B REDEEMABLE PREFERRED STOCK
On March 31, 1998, the Company issued 1,458,335 shares of Series B
Preferred Stock for $3,500,004. The Series B Preferred Stock is convertible by
the holders to Common Stock at a rate of 1:1, with a beneficial conversion
feature permitting the shareholders to convert their holdings to Common Stock at
$2.40. The market price of the Common Stock at date of issuance was $4.81. The
Company recognized the value of the beneficial conversion feature of
approximately $3.5 million as a Preferred Stock dividend. The value of such
Preferred Stock dividend had no impact on the Company's cash flows, but reduced
basic and diluted earnings available to holders of Common Stock.
On June 10, 1998, a cash dividend of $420,000 was paid to the holders of
Series B Preferred Stock as consideration for converting the shares of Series B
Preferred Stock held by them into 1,458,335 shares of Common Stock. All of the
shares of Series B Preferred Stock were converted to Common Stock at that time.
F-17
<PAGE>
EARNINGS PER SHARE
The FASB issued SFAS No. 128, "Earnings Per Share" in February 1997.
Implementation of SFAS No. 128 is required for periods ending after December 15,
1997. SFAS No. 128 requires dual presentation of earnings per share ("EPS");
basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue Common Stock were exercised or converted
into Common Stock. For purposes of the calculation, outstanding stock options,
warrants and redeemable preferred stock are considered Common Stock equivalents.
For the year ended December 31, 1997, the difference in weighted average numbers
of Common Stock between basic and diluted earnings per share represents the
impact of stock options. The adjusted number of shares for the years ended
December 31, 1998 and December 31, 1996 that would be increased related to stock
options were approximately 990,772 and -0-, respectively; however, diluted per
share amounts are not applicable for loss periods. The following table
summarizes the basic EPS and diluted EPS computations for the fiscal years 1998,
1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Net income (loss) before redeemable:
Preferred stock dividends $ (737,070) $ 831,501 $ (7,588,930)
Redeemable preferred stock dividends 3,934,585 -- --
------------ ------------- -------------
Net earnings (loss) on Common Stock $ (4,671,655) $ 831,501 $ (7,588,930)
============ ============= =============
Basic earnings (loss) per share:
Earning per share prior to preferred stock
dividends.................................... $ (.07) $ .11 $ (1.21)
Preferred stock dividends ..................... (.39) -- --
------------ ------------- -------------
Basic earnings (loss) per common share ........ $ (.46) $ .11 $ (1.21)
============ ============= =============
Diluted earnings (loss) per share:
Earnings per share prior to preferred dividends $ (.07) $ .11 $ (1.21)
Preferred stock dividends ..................... (.39) -- --
------------ ------------- -------------
Diluted earning (loss) per common share ....... $ (.46) $ .11 $ (1.21)
============ ============= =============
Weighted average number of common shares, basic .. 10,207,248 7,545,113 6,266,579
Weighted average shares outstanding, diluted ..... 10,207,248 7,740,344 6,266,579
</TABLE>
STOCKHOLDERS' RIGHTS PLAN
In December 1996, the Company adopted a stockholders' rights plan (the "Rights
Plan"). The Rights Plan provides for a dividend distribution of one preferred
stock purchase right ("Right") for each outstanding share of the Company's
Common Stock, to stockholders of record at the close of business on January 10,
1997. The Rights Plan is designed to deter coercive takeover tactics and to
prevent an acquirer from gaining control of the Company without offering a fair
price to all of the Company's stockholders. The Rights will expire on December
31, 2006.
Each Right entitles stockholders to buy one one-thousandth of a newly issued
share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $10. The Rights are exercisable only if a person or group
acquires beneficial ownership of 15% or more of the Company's Common Stock or
commences a tender or exchange offer which, if consummated, would result in that
person or group owning 15% or more of the Common Stock of the Company. However,
the Rights will not become exercisable if Common Stock is acquired pursuant to
an offer for all shares which a majority of the Board of Directors determines to
be fair to and otherwise in the best interests of the Company and its
stockholders. If, following an acquisition of 15% or more of the Company's
Common Stock, the Company is acquired by that person or group in a merger or
other business combination transaction, each Right would then entitle its holder
to purchase common stock of the acquiring company having a value of twice the
exercise price. The effect will be to entitle the Company stockholder to buy
stock in the acquiring company at 50% of its market price.
The Company may redeem the Rights at $.001 per Right at any time on or prior to
the tenth business day following the acquisition of 15% or more of its Common
Stock by a person or group or commencement of a tender offer for such 15%
ownership.
F-18
<PAGE>
(10) STOCK OPTION PLANS
At December 31, 1998, the Company had outstanding stock options granted under
the Amended and Restated 1993 Stock Option Plan ("the Plan") for officers,
directors and key employees of the Company.
Under the Plan, the Company has reserved 1,325,171 shares of Common Stock for
issuance. The exercise price of options granted shall be at least 100 percent
(110 percent for 10 percent or greater stockholders) of the fair value of Common
Stock on the date of grant. Options must be granted within 10 years from the
date of the Plan and become exercisable at such times as determined by the Plan
committee. Options are exercisable for no longer than five years for certain 10
percent or greater stockholders and for no longer than 10 years for others.
A summary of the Company's stock option plans as of December 31, 1998, 1997 and
1996, and changes during those years is presented below:
WEIGHTED
AVERAGE
SHARES UNDER EXERCISE EXERCISE
OPTION PRICE RANGE PRICE
------ ----------- -----
Options outstanding at December 31, 1995 . 91,928 $ 2.00 to 10.80 $9.24
Granted ............................... 174,667 2.00 2.00
Canceled/expired ...................... (162,662) 2.00 to 10.80 5.12
Exercised ............................. (3,333) 2.00 2.00
---------
Options outstanding at December 31, 1996 . 100,600 2.00 to 10.80 3.57
Granted ............................... 206,000 2.00 to 3.50 2.13
Canceled/expired ...................... (29,000) 2.00 to 10.80 2.91
Exercised ............................. (5,000) 2.00 2.00
---------
Options outstanding at December 31, 1997 . 272,600 2.00 to 8.25 2.58
Granted ............................... 772,000 2.75 to 5.75 2.91
Canceled/expired ...................... (11,556) 2.00 2.00
Exercised ............................. (25,438) 2.00 2.00
---------
Options outstanding at December 31, 1998 . 1,007,606 2.00 to 8.25 2.85
=========
Exercisable at December 31, 1998 ......... 430,106 2.00 to 8.25 3.20
=========
At December 31, 1998, there were 267,794 options for shares of Common Stock
reserved under the Plan for the future grants.
OTHER OPTIONS
In addition to options issuable under the Plan, the Company has other options
outstanding to employees and directors of the Company. The options were issued
at exercise prices equal to the fair market value at the grant date of the
options.
F-19
<PAGE>
The following summarizes the stock option transactions of the "other" options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES UNDER EXERCISE EXERCISABLE
OPTION PRICE RANGE PRICE
------------ ----------- -----
<S> <C> <C> <C>
Options outstanding at December 31, 1995 . 400,000 $2.00 $ 2.00
Granted ............................... 221,296 2.00 2.00
------------
Options outstanding at December 31, 1996 . 621,296 2.00 2.00
Granted ............................... 806,800 2.00 to 3.38 3.03
------------
Options outstanding at December 31, 1997 . 1,428,096 2.00 to 3.38 2.58
Granted ............................... 1,400,000 2.75 to 6.94 4.29
Canceled .............................. (162,163) 3.38 3.38
------------
Options outstanding at December 31, 1998 . 2,665,933 2.00 to 6.94 4.09
------------
Exercisable at December 31, 1998 ......... 1,662,602 $2.00 to 6.94 $ 4.06
============
</TABLE>
During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123, which is effective for fiscal years beginning after
December 15, 1995, establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from non-employees.
SFAS No. 123 requires, among other things, that compensation cost be calculated
for fixed stock options at the grant date by determining fair value using an
option-pricing model. The Company has the option of recognizing the compensation
cost over the vesting period as an expense in the income statement or making pro
forma disclosures in the notes to the financial statements for employee
stock-based compensation.
The Company continues to apply APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
in the accompanying consolidated financial statements for its stock option
plans. Had the Company elected to apply SFAS No. 123, the Company's net loss and
loss per share would have approximated the pro forma amounts indicated below:
1998 1997 1996
----------- ---------- -------------
Net income (loss)
As reported ................... $(4,671,655) $ 831,501 $ (7,588,930)
Pro forma for FAS No. 123 ..... $(5,943,126) (1,309,604) (7,781,351)
Diluted earnings (loss) per share-
As reported ................... $ (.46) $ .11 $ (1.21)
Pro forma for FAS No. 123 ..... (.58) (.17) (1.24)
The following ranges of options were outstanding as of December 31, 1998:
Outstanding
Shares Under Exercise Price Weighted Average Weighted Average
Option Range Exercise Price Contractual Life Exercisable
- ------------ -------------- ---------------- ---------------- -----------
2,225,969 $2.00 - 3.00 $2.48 8.76 years 1,299,138
927,637 3.01 - 4.50 3.31 8.4 601,637
106,333 4.51 - 6.75 4.98 8.0 45,000
413,600 6.76 - 8.25 6.98 9.4 146,933
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model resulting in a weighted average fair value of
$3.59, $2.79, and $.78 per share for grants made during the years ended December
31, 1998, 1997, and 1996, respectively. The following assumptions were used for
option grants in 1998, 1997 and 1996, respectively: expected volatility of 92
percent, 70 percent and 87 percent; risk-free interest rates of 5.66 percent,
6.45 percent, and 6.47 percent; expected lives of up to 6.3 years and no
expected dividends to be paid. The compensation expense included in the above
pro forma net income data, may not be indicative of amounts to be included in
future periods as the fair value of options granted prior to 1995 was not
determined.
F-20
<PAGE>
(11) OTHER CHARGES (CREDITS) TO OPERATIONS --
SALE OF ORGANI-GRO, INC.
In March 1997, the Company sold the operations of Organi-Gro, a wholly-owned
subsidiary, to its former owners. Consideration included two subordinated notes
of approximately $1.4 million, the assumption of approximately $978,000 in debt
and approximately $392,000 in trade payables for which the Company is not
contingently liable. As a result of the sale, the Company recorded a charge to
operations in the fourth quarter of 1996 amounting to approximately $2.5 million
to adjust the carrying value of Organi-Gro's net assets to its estimated fair
market value. These charges (credits) are included in "losses on assets held for
sale and other special charges (credits)" for the year ended December
31, 1996. The first note of approximately $1.152 million ("Note 1") is to be
repaid from the proceeds received from the sale of products by the purchaser
which is to be remitted on a monthly basis with a total amount of approximately
$604,000 due no later than September 16, 1998. The remaining balance of
approximately $548,000 is payable in equal monthly installments of
approximately $11,000 including interest for 59 months. Note 1 bears interest at
an annual rate of 6%. The second note of approximately $308,000 ("Note 2") is
payable in equal monthly installments of $3,700 including interest for 48 months
following the first anniversary date of Note 2 with the unpaid balance due March
31, 2002 and bears interest at an annual rate of 6%. The notes were reserved at
the date of sale due to considerable doubt relative to realization.
In December 1997, Note 2 was substantially paid off. The Company received Common
Stock held by former owners with a market trading value of approximately
$213,000, and charged against the reserve approximately $45,000. The remaining
balance of $50,000 is to be paid off by providing repair services on equipment
in the amount of $1,000 per month with $41,000 remaining outstanding as of
December 31, 1998. Additionally, the Company has received approximately $332,000
in cash since inception on Note 1. The monthly installments of $11,000 relating
to Note 1 have been received on a timely basis and are current, resulting in a
$375,000 balance outstanding as of December 31, 1998. The portion of Note 1
which had a remaining balance of approximately $445,000, which was due no later
than September 16, 1998, was not paid when due. The former owners were unable to
pay the remainder without liquidating some of the assets securing the note. The
Company agreed to accept $265,000 in cash in full payment of the installment
due, which was received in January 1999. The remaining balance of the
installment due was charged against the allowance.
The Company has recognized special credits related to such notes of
approximately $721,000 in 1997 and $380,000 in 1998. Based upon historical
collections, the financial condition of the obligor to meet future debt
installments and the underlying value of the assets securing the loan, the
Company expects the unreserved amount of approximately $641,000 at December 31,
1998 to be realizable. Subsequent to year-end through February 26, 1999, the
Company has collected approximately $287,000 on the notes.
SEVERANCE CHARGES
During 1998, the company recorded a charge of approximately $320,000 related to
severance costs of two former officers. The charge is included in "Other Charges
(credits)" for the year ended December 31, 1998.
(12) EMPLOYEE BENEFIT PLANS --
Certain of the Company's subsidiaries sponsor various defined contribution
retirement plans for full time and some part-time employees. The plans cover
employees at all of the Company's operating locations. The defined contribution
plans provide for contributions ranging from 1% to 15% of covered employees'
salaries or wages. The Company may make a matching contribution as a percentage
set at the end of each plan year. The matching contributions totaled
approximately $38,000 for 1998, approximately $28,000 for 1997 and approximately
$22,000 for 1996.
(13) EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED) --
ACQUISITION OF NATIONAL RESOURCE RECYCLING, INC.
During March 1999, Synagro Technologies completed the acquisition of all the
common stock of National Resource Recycling, Inc. ("NRR"), in a business
combination to be accounted for as a "pooling-of-interests" transaction NRR,
headquartered in Michigan, provides biosolids management services. Synagro
issued 1,000,001 shares of common stock in exchange for all of the common stock
of NRR. There were no transactions between Synagro and NRR during the periods
prior to the business combination.
The following table summarizes the unaudited restated revenues, net income and
per share data of Synagro after giving effect to the pooling transaction (in
thousands, except per share data).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
NET NET NET
REVENUES INCOME REVENUES INCOME REVENUES INCOME
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income-
As reported ............. $ 22,977 $ (7,589) $ 25,303 $ 832 $ 29,967 $ (4,672)
NRR (unaudited).......... 1,197 2 2,733 203 3,598 200
-------- --------- -------- --------- -------- ---------
As Restated .......... $ 24,174 $ (7,587) $ 28,036 $ 1,035 $ 33,565 $ (4,472)
======== ========= ======== ========= ======== =========
Basic earnings per share-
As reported ............. $ (1.21) $ 0.11 $ (0.46)
NRR ..................... .17 0.01 0.06
--------- --------- ---------
As restated .......... $ (1.04) $ 0.12 $ (0.40)
========= ========= =========
Diluted earnings per share-
As reported ............. $ (1.21) $ 0.11 $ (0.46)
NRR ..................... -- 0.01 0.06
--------- --------- ---------
As restated .......... $ (1.04) $ 0.12 $ (0.40)
========= ========= =========
</TABLE>
F-21
<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 on April 15, 1999.
SYNAGRO TECHNOLOGIES, INC.
By: /s/ ROSS M. PATTEN
Ross M. Patten
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 15, 1999.
By: /s/ ROSS M. PATTEN Chairman of the Board and Chief
Ross M. Patten Executive Officer
By: /s/ PAUL SELLEW President
Paul Sellew
By: /s/ RANDY JENNINGS Chief Financial Officer
Randy Jennings (Principal Accounting Officer)
By: /s/ IRWIN I. GELBART Director
Irwin I. Gelbart
By: /s/ GENE MEREDITH Director
Gene Meredith
By: /s/ KENNETH CHUAN-KAI LEUNG Director
Kenneth Chuan-kai Leung
By: /s/ ALFRED TYLER, 2ND Director
Alfred Tyler, 2nd
By: /s/ DR. MARK MYERS Director
Dr. Mark Myers
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
3.1 Restated Certificate of Incorporation of Synagro Technologies,
Inc. (the "Company") dated August 16, 1996 (Exhibit 3.1 to the
Company's Post-Effective Amendment No. 1 to Registration Statement
No. 33-95028, dated October 25, 1996, is incorporated herein by
reference).
3.2 Bylaws of the Company dated August 5, 1996. (Exhibit 3.2 to the
Company's Post-Effective Amendment No. 1 to Registration Statement
No. 33-95028, dated October 25, 1996, is incorporated herein by
reference).
4.1 Specimen Common Stock Certificate of the Company. (Exhibit 4.1
to the Company's Registration Statement on Form 10, dated December
29, 1992, is incorporated herein by reference).
4.2 Specimen Warrant Certificate of the Company. (Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (No. 33-95028), dated
July 27, 1995, and as amended, is incorporated herein by reference).
4.3 Rights Agreement, dated as of December 20, 1996, between the Company
and Intercontinental Registrar & Transfer Agency, Inc., as Rights
Agent, which includes as Exhibit A thereto the Synagro Technologies,
Inc. Statement of Designations, Preferences, Limitations and
Relative Rights of its Series A Junior Participating Preferred
Stock, and as Exhibit C thereto the Form of Rights Certificate
(Incorporated by reference to Exhibit No. 4.1 to Registrant's
Registration Statement on Form 8-A dated December 27, 1996).
4.4 Certificate of Designation, Preferences, Rights and Limitations
of Series B Preferred Stock of Synagro Technologies, Inc. (Exhibit
4.4 to the Company's Annual Report on Form 10-K for the year-ended
1997, is incorporated herein by reference).
4.5 Registration Rights Agreement, dated as of March 31, 1998, among the
Company, Environmental Opportunities Fund, L.P., Environmental Fund
(Cayman), L.P. and other purchasers of the Company's Series B
Preferred Stock as listed on Exhibit A thereto (Exhibit 4.5 to the
Company's Annual Report on Form 10-K for the year-ended 1997, is
incorporated herein by reference).
4.6 Specimen Series B Preferred Stock Certificate (Exhibit 4.6 to the
Company's Annual Report on Form 10-K for the year-ended 1997, is
incorporated herein by reference).
10.1 Synagro Technologies, Inc. Subscription Agreement, dated as of March
31, 1998 among the Company, Environmental Opportunities Fund, L.P.,
Environment Opportunities Fund (Cayman), L.P. and other purchasers
of the Company's Series B Preferred Stock as listed on Exhibit A
thereto (Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the year-ended 1997, is incorporated herein by reference).
10.2 Form of Indemnification Agreement. (Appendix F to the Company's
Proxy Statement on Schedule 14A for Annual Meeting of Stockholders,
dated May 9, 1996, is incorporated herein by reference).
10.3 Amended and Restated 1993 Stock Option Plan dated August 5, 1996.
(Exhibit 4.1 to the Company's Registration Statement on Form S-8
(No. 333-18029), dated September 30, 1998, is incorporated herein
by reference).
10.4 6% Promissory Note made by Custom Poultry to Organi-Gro and the
Company in the principal amount of $1,152,381, dated April 1, 1997
(Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, is incorporated herein by reference).
10.5 Guaranty of Tony D. Childers ("Childers") for 6% Promissory Note
made by Custom Poultry to Organi-Gro, dated April 1, 1997 (Exhibit
10.9 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, is incorporated herein by reference).
10.6 6% Promissory Note made by Hodges to Organi-Gro and the Company in
the principal amount of $308,203, dated April 1, 1997. (Exhibit
10.10 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, is incorporated herein by reference).
10.7 Guaranty of Childers and Jack Hodges for 6% Promissory Note made by
Hodges to Organi-Gro, dated April 1, 1997 (Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, is incorporated herein by reference).
*10.8 Credit Agreement entered into among Synagro Technologies, Inc.,
various financial institutions, and Bank of America national Trust
and Savings Association, dated as of October 7, 1998; First
Amendment to Credit Agreement dated as of November 2, 1998; Second
Amendment to Credit Agreement dated as of November 13, 1998;
Assigment Agreement dated as of December 4, 1998
*21.1 Subsidiaries of Synagro Technologies, Inc.
*23.1 Consent of Aurthur Andersen LLP
*27.1 Financial Data Schedule.
* Filed herewith.
EXHIBIT 10.8
EXECUTION COPY
===============================================================================
CREDIT AGREEMENT
dated as of October 7, 1998
among
SYNAGRO TECHNOLOGIES, INC.,
VARIOUS FINANCIAL INSTITUTIONS
and
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Agent
===============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1 DEFINITIONS............................................................................................1
1.1 Definitions............................................................................................1
1.2 Other Interpretive Provisions.........................................................................14
SECTION 2 COMMITMENTS OF THE BANKS; BORROWING, CONVERSION AND
LETTER OF CREDIT PROCEDURES...........................................................................15
2.1 Commitments...........................................................................................15
2.1.1 Loan Commitment...............................................................................15
2.1.2 L/C Commitment................................................................................15
2.2 Loan Procedures.......................................................................................16
2.2.1 Various Types of Loans........................................................................16
2.2.2 Borrowing Procedures..........................................................................16
2.2.3 Conversion and Continuation Procedures........................................................17
2.3 Letter of Credit Procedures...........................................................................18
2.3.1 L/C Applications...............................................................................18
2.3.2 Participations in Letters of Credit............................................................18
2.3.3 Reimbursement Obligations......................................................................19
2.3.4 Limitation on Obligations of Issuing Banks.....................................................19
2.3.5 Funding by Banks to Issuing Banks..............................................................20
2.4 Commitments Several...................................................................................20
2.5 Certain Conditions....................................................................................20
SECTION 3 NOTES EVIDENCING LOANS................................................................................21
3.1 Notes.................................................................................................21
3.2 Recordkeeping.........................................................................................21
SECTION 4 INTEREST..............................................................................................21
4.1 Interest Rates........................................................................................21
4.2 Interest Payment Dates................................................................................22
4.3 Setting and Notice of Eurodollar Rates................................................................22
4.4 Computation of Interest...............................................................................22
SECTION 5 FEES..................................................................................................22
5.1 Non-Use Fee...........................................................................................22
5.2 Letter of Credit Fees.................................................................................23
5.3 Agent's Fees..........................................................................................23
SECTION 6 REDUCTION AND TERMINATION OF THE COMMITMENTS; PREPAYMENTS.............................................23
6.1 Reduction or Termination of the Commitments...........................................................23
6.2 Prepayments...........................................................................................24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 7 MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES........................................................24
7.1 Making of Payments.....................................................................................24
7.2 Application of Certain Payments........................................................................24
7.3 Due Date Extension.....................................................................................24
7.4 Setoff.................................................................................................25
7.5 Proration of Payments..................................................................................25
7.6 Taxes..................................................................................................25
SECTION 8 INCREASED COSTS; SPECIAL PROVISIONS FOR EURODOLLAR LOANS...............................................27
8.1 Increased Costs........................................................................................27
8.2 Basis for Determining Interest Rate Inadequate or Unfair...............................................28
8.3 Changes in Law Rendering Eurodollar Loans Unlawful.....................................................29
8.4 Funding Losses.........................................................................................30
8.5 Right of Banks to Fund through Other Offices...........................................................30
8.6 Discretion of Banks as to Manner of Funding............................................................30
8.7 Mitigation of Circumstances; Replacement of Affected Bank..............................................31
8.8 Conclusiveness of Statements; Survival of
Provisions.............................................................................................31
SECTION 9 WARRANTIES.............................................................................................32
9.1 Organization, etc......................................................................................32
9.2 Authorization; No Conflict.............................................................................32
9.3 Validity and Binding Nature............................................................................32
9.4 Financial Condition....................................................................................33
9.5 No Material Adverse Change.............................................................................33
9.6 Litigation and Contingent Liabilities..................................................................33
9.7 Ownership of Properties; Liens.........................................................................33
9.8 Subsidiaries...........................................................................................34
9.9 Pension of Plans.......................................................................................34
9.10 Investment Company Act.................................................................................34
9.11 Public Utility Holding Company Act.....................................................................34
9.12 Regulation U...........................................................................................35
9.13 Taxes..................................................................................................35
9.14 Solvency, etc..........................................................................................35
9.15 Environmental Matters..................................................................................35
9.16 Year 2000 Problem......................................................................................37
9.17 Information............................................................................................37
SECTION 10 COVENANTS.............................................................................................38
10.1 Reports, Certificates and Other Information...........................................................38
10.1.1 Audit Report..................................................................................38
10.1.2 Quarterly Reports.............................................................................38
10.1.3 Monthly Reports...............................................................................39
10.1.4 Compliance Certificates.......................................................................39
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.1.5 Reports to SEC and to Shareholders..........................................................39
10.1.6 Notice of Default, Litigation and ERISA Matters.............................................39
10.1.7 Subsidiaries................................................................................41
10.1.8 Management Reports..........................................................................41
10.1.9 Projections.................................................................................41
10.1.10 Other Information..........................................................................41
10.2 Books, Records and Inspections......................................................................41
10.3 Insurance 42
10.4 Compliance with Laws; Payment of Taxes and Liabilities..............................................42
10.5 Maintenance of Existence, etc.......................................................................42
10.6 Financial Covenants.................................................................................42
10.6.1 Minimum Net Worth...........................................................................42
10.6.2 Minimum Interest Coverage...................................................................43
10.6.3 Funded Debt to EBITDA Ratio.................................................................43
10.6.4 Senior Funded Debt to EBITDA Ratio..........................................................43
10.6.5 Debt to Capitalization Ratio.................................................................43
10.6.6 Capital Expenditures........................................................................44
10.7 Limitations on Debt.................................................................................44
10.8 Liens...............................................................................................45
10.9 Operating Leases....................................................................................46
10.10 Restricted Payments.................................................................................46
10.11 Mergers, Consolidations, Sales......................................................................46
10.12 Use of Proceeds.....................................................................................47
10.13 Further Assurances..................................................................................47
10.14 Transactions with Affiliates........................................................................48
10.15 Employee Benefit Plans..............................................................................48
10.16 Environmental Laws..................................................................................48
10.17 Unconditional Purchase Obligations..................................................................48
10.18 Inconsistent Agreements.............................................................................48
10.19 Business Activities.................................................................................48
10.20 Advances and Other Investments......................................................................49
SECTION 11 EFFECTIVENESS; CONDITIONS OF LENDING, ETC...........................................................50
11.1 Effectiveness.......................................................................................50
11.1.1 Notes.......................................................................................50
11.1.2 Resolutions.................................................................................50
11.1.3 Consents, etc...............................................................................50
11.1.4 Incumbency and Signature Certificates.......................................................51
11.1.5 Guaranty....................................................................................51
11.1.6 Security Agreement..........................................................................51
11.1.7 Pledge Agreements...........................................................................51
11.1.8 Opinion of Counsel for the Company and the Guarantors.......................................51
11.1.9 Other.......................................................................................51
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
11.2 Conditions 51
11.2.1 Compliance with Warranties, No Default, etc.....................................................51
11.2.2 Confirmatory Certificate........................................................................52
SECTION 12 EVENTS OF DEFAULT AND THEIR EFFECT......................................................................53
12.1 Events of Default.......................................................................................53
12.1.1 Non-Payment of the Loans, etc...................................................................53
12.1.2 Non-Payment of Other Debt.......................................................................53
12.1.3 Other Material Obligations......................................................................53
12.1.4 Bankruptcy, Insolvency, etc.....................................................................53
12.1.5 Non-Compliance with Provisions of This Agreement................................................54
12.1.6 Warranties......................................................................................54
12.1.7 Pension Plans...................................................................................54
12.1.8 Judgments.......................................................................................55
12.1.9 Invalidity of Guaranty, etc.....................................................................55
12.1.10 Invalidity of Collateral Documents, etc........................................................55
12.1.11 Change in Control..............................................................................55
12.2 Effect of Event of Default..............................................................................56
SECTION 13 THE AGENT...............................................................................................57
13.1 Appointment and Authorization...........................................................................57
13.2 Delegation of Duties....................................................................................57
13.3 Liability of Agent......................................................................................57
13.4 Reliance by Agent.......................................................................................58
13.5 Notice of Default.......................................................................................58
13.6 Credit Decision.........................................................................................59
13.7 Indemnification.........................................................................................59
13.8 Agent in Individual Capacity............................................................................61
13.9 Successor Agent.........................................................................................61
13.10 Withholding Tax.........................................................................................62
13.11 Collateral Matters......................................................................................64
SECTION 14 GENERAL.................................................................................................64
14.1 Waiver; Amendments......................................................................................64
14.2 Confirmations...........................................................................................65
14.3 Notices................................................................................................ 65
14.4 Computations............................................................................................65
14.5 Regulation U............................................................................................66
14.6 Costs, Expenses and Taxes...............................................................................66
14.7 Subsidiary References...................................................................................66
14.8 Captions................................................................................................66
14.9 Assignments; Participations.............................................................................67
14.9.1 Assignments.....................................................................................67
14.9.2 Participations..................................................................................68
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
14.10 Governing Law..........................................................................................69
14.11 Counterparts...........................................................................................69
14.12 Successors and Assigns.................................................................................69
14.13 Indemnification by the Company.........................................................................70
14.14 Interest...............................................................................................70
14.15 Forum Selection and Consent to Jurisdiction............................................................72
14.16 Waiver of Jury Trial...................................................................................73
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULES
<S> <C> <C>
SCHEDULE 1.1 Pricing Schedule
SCHEDULE 2.1 Banks and Percentages
SCHEDULE 9.6 Litigation and Contingent Liabilities
SCHEDULE 9.8 Subsidiaries
SCHEDULE 9.15 Environmental Matters
SCHEDULE 10.7(b) Existing Unsecured Debt
SCHEDULE 10.7(c) Existing Secured Debt
SCHEDULE 10.8 Existing Liens
SCHEDULE 10.9 Existing Operating Leases
SCHEDULE 10.11 Assets Held for Sale
SCHEDULE 12.1.11 Key Executives
SCHEDULE 14.3 Addresses for Notices
EXHIBITS
EXHIBIT A Form of Note (Section 3.1)
EXHIBIT B Form of Compliance Certificate (Section 10.1.3)
EXHIBIT C Form of Guaranty (Section 1)
EXHIBIT D Form of Security Agreement (Section 1)
EXHIBIT E Form of Company Pledge Agreement (Section 1)
EXHIBIT F Form of Subsidiary Pledge Agreement (Section 11.1.7)
EXHIBIT G Form of Assignment Agreement (Section 14.9)
</TABLE>
vi
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT, dated as of October 7, 1998 (this
"Agreement"), is entered into among SYNAGRO TECHNOLOGIES, INC., a Delaware
corporation (the "Company"), various financial institutions (together with their
respective successors and assigns, the "Banks"), and BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION (in its individual capacity, "BofA"), as agent for
the Banks.
WHEREAS, the Banks have agreed to extend a revolving credit facility
(with letter of credit subfacility) to the Company;
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, the parties hereto agree as follows:
SECTION 1 DEFINITIONS.
1.1 Definitions. When used herein the following terms shall have the
following meanings:
Affected Bank means any Bank that has given notice to the Company
(which has not been rescinded) of (i) any obligation by the Company to pay any
amount pursuant to Section 7.6 or 8.1 or (ii) the occurrence of any
circumstances of the nature described in Section 8.2 or 8.3.
Affiliate of any Person means (i) any other Person which, directly
or indirectly, controls or is controlled by or is under common control with such
Person and (ii) any officer or director of such Person.
Agent means BofA in its capacity as agent for the Banks hereunder
and any successor thereto in such capacity.
Agent-Related Persons means BofA and any successor agent arising
under Section 13.9, together with their respective Affiliates (including, in the
case of BofA, the Arranger), and the officers, directors, employees, agents and
attorneys-in-fact of such Persons and Affiliates.
Agreement - see the Preamble.
Assignee - see Section 14.9.1.
Assignment Agreement - see Section 14.9.1.
<PAGE>
Bank - see the Preamble. References to the "Banks" shall include the
Issuing Bank; for purposes of clarification only, to the extent that BofA (or
any successor Issuing Bank) may have rights or obligations in addition to those
of the other Banks due to its status as Issuing Bank, its status as such will be
specifically referenced.
Base Rate means at any time the greater of (a) the Federal Funds
Rate plus 0.5% and (b) the Reference Rate.
Base Rate Loan means any Loan which bears interest at or by
reference to the Base Rate.
Base Rate Margin - see Schedule 1.1.
BofA - see the Preamble.
Business Day means any day on which BofA is open for commercial
banking business in Chicago, New York and San Francisco and, in the case of a
Business Day which relates to a Eurodollar Loan, on which dealings are carried
on in the interbank eurodollar market.
Capital Expenditures means all expenditures which, in accordance
with GAAP, would be required to be capitalized and shown on the consolidated
balance sheet of the Company, but excluding expenditures made in connection with
the replacement, substitution or restoration of assets to the extent financed
(i) from insurance proceeds (or other similar recoveries) paid on account of the
loss of or damage to the assets being replaced or restored or (ii) with awards
of compensation arising from the taking by eminent domain or condemnation of the
assets being replaced.
Capital Lease means, with respect to any Person, any lease of (or
other agreement conveying the right to use) any real or personal property by
such Person that, in conformity with GAAP, is accounted for as a capital lease
on the balance sheet of such Person.
Cash Equivalent Investment means, at any time, (a) any evidence of
Debt, maturing not more than one year after such time, issued or guaranteed by
the United States Government or any agency thereof, (b) commercial paper,
maturing not more than one year from the date of issue, or corporate demand
notes, in each
<PAGE>
case (unless issued by a Bank or its holding company) rated at least A-l by
Standard & Poor's Ratings Group or P-l by Moody's Investors Service, Inc., (c)
any certificate of deposit (or time deposits represented by such certificates of
deposit) or bankers acceptance, maturing not more than one year after such time,
or overnight Federal Funds transactions that are issued or sold by a commercial
banking institution that is a member of the Federal Reserve System and has a
combined capital and surplus and undivided profits of not less than
$500,000,000, (d) any repurchase agreement entered into with any Bank (or other
commercial banking institution of the stature referred to in clause (c)) which
(i) is secured by a fully perfected security interest in any obligation of the
type described in any of clauses (a) through (c) and (ii) has a market value at
the time such repurchase agreement is entered into of not less than 100% of the
repurchase obligation of such Bank (or other commercial banking institution)
thereunder and (e) investments in short-term asset management accounts offered
by any Bank for the purpose of investing in loans to any corporation (other than
the Company or an Affiliate of the Company), state or municipality, in each case
organized under the laws of any state of the United States or of the District of
Columbia.
CERCLA - see Section 9.15.
Code means the Internal Revenue Code of 1986.
Collateral Documents means the Company Pledge Agreement, each
Subsidiary Pledge Agreement, the Security Agreement and any other agreement
pursuant to which the Company or any Guarantor grants collateral to the Agent
for the benefit of the Banks.
Commitment Amount means $40,000,000 as reduced from time to time
pursuant to Section 6.1.
Commitment means, as to any Bank, such Bank's commitment to make
Loans, and to issue or participate in Letters of Credit, under this Agreement.
Company - see the Preamble.
Company Pledge Agreement means a pledge agreement between the
Company and the Agent, substantially in the form of Exhibit E.
Computation Period means each of the following periods: (a) the
period of three consecutive Fiscal Quarters ending September 30, 1998; and (b)
each period of four consecutive Fiscal Quarters ending on the last day of a
Fiscal Quarter on or after December 31, 1998.
<PAGE>
Consolidated Net Income means, with respect to the Company and its
Subsidiaries for any period, the net income (or loss) of the Company and its
Subsidiaries for such period, excluding any extraordinary gains during such
period.
Controlled Group means all members of a controlled group of
corporations and all members of a controlled group of trades or businesses
(whether or not incorporated) under common control which, together with the
Company, are treated as a single employer under Section 414 of the Code or
Section 4001 of ERISA.
Debt of any Person means, without duplication, (a) all indebtedness
of such Person for borrowed money, whether or not evidenced by bonds,
debentures, notes or similar instruments, (b) all obligations of such Person as
lessee under Capital Leases which have been or should be recorded as liabilities
on a balance sheet of such Person, (c) all obligations of such Person to pay the
deferred purchase price of property or services (excluding trade accounts
payable in the ordinary course of business), (d) all indebtedness secured by a
Lien on the property of such Person, whether or not such indebtedness shall have
been assumed by such Person (it being understood that if such Person has not
assumed or otherwise become personally liable for any such indebtedness, the
amount of the Debt of such Person in connection therewith shall be limited to
the lesser of the face amount of such indebtedness or the fair market value of
all property of such Person securing such indebtedness), (e) all obligations,
contingent or otherwise, with respect to the face amount of all letters of
credit (whether or not drawn) and banker's acceptances issued for the account of
such Person (including the Letters of Credit), (f) all Hedging Obligations of
such Person, (g) all Suretyship Liabilities of such Person and (h) all Debt of
any partnership in which such Person is a general partner. The amount of any
Person's Debt in respect of any obligation to pay the deferred purchase price of
property or services where such obligation is contingent upon sales, revenues,
the achievement of a particular business goal or any similar test shall be the
maximum amount which (at any date of determination) is reasonably expected to be
paid in respect of such obligation as estimated by the Company (subject to the
approval of the Required Banks, which shall not be unreasonably withheld).
Debt to be Repaid means the Debt listed on Schedule 10.7(g).
Disposal - see the definition of "Release".
<PAGE>
Dollar and the sign "$" mean lawful money of the United States of
America.
EBITDA means, for any period, Consolidated Net Income for such
period plus (a) to the extent deducted in determining such Consolidated Net
Income, Interest Expense, income tax expense, depreciation and amortization for
such period; and (b) for the Computation Periods ending September 30, 1998 and
December 31, 1998, $900,000, for the Computation Period ending March 31, 1999,
$600,000, and for the Computation Period ending June 30, 1999, $300,000;
provided that for purposes of calculating EBITDA for any period, the
consolidated net income of any Person acquired by the Company or any Subsidiary
during such period (plus, to the extent deducted in determining such
consolidated net income, interest expense, income tax expense, depreciation and
amortization of such Person) shall be included on a pro forma basis for such
period (assuming the consummation of each such acquisition and the incurrence or
assumption of any Debt in connection therewith occurred on the first day of such
period, but adjusted to add back non-recurring expenses (such as owner
compensation) to the extent disclosed to and approved by the Required Banks)
based upon (a) to the extent available, (i) the audited consolidated balance
sheet of such acquired Person and its consolidated Subsidiaries as at the end of
the fiscal year of such Person preceding the acquisition of such Person and the
related audited consolidated statements of income, stockholders' equity and cash
flows for such fiscal year and (ii) any subsequent unaudited financial
statements for such Person for the period prior to the acquisition of such
Person so long as such statements were prepared on a basis consistent with the
audited financial statements referred to above or (b) to the extent the items
listed in clause (a) are not available, such historical financial statements and
other information as is disclosed to, and approved by, the Required Banks;
provided, further, that for purposes of calculating EBITDA for any Computation
Period ending on or before June 30, 1999, Recyc EBITDA shall be excluded.
Effective Date - see Section 11.1.
Environmental Claims means all claims, however asserted, by any
governmental, regulatory or judicial authority or other Person alleging
potential liability or responsibility for violation of any Environmental Law, or
for release of Hazardous Substances (as defined in Section 9.5) or injury to the
environment.
<PAGE>
Environmental Laws means all federal, state or local laws, statutes,
common law duties, rules, regulations, ordinances and codes, together with all
administrative orders, directed and enforceable duties, licenses, authorizations
and permits of, and agreements with, any governmental authority, in each case
relating to environmental matters.
ERISA means the Employee Retirement Income Security Act of 1974.
Eurocurrency Reserve Percentage means, with respect to any
Eurodollar Loan for any Interest Period, a percentage (expressed as a decimal)
equal to the daily average during such Interest Period of the percentage in
effect on each day of such Interest Period, as prescribed by the FRB, for
determining the aggregate maximum reserve requirements applicable to
"Eurocurrency Liabilities" pursuant to Regulation D or any other then applicable
regulation of the FRB which prescribes reserve requirements applicable to
"Eurocurrency Liabilities" as presently defined in Regulation D.
Eurodollar Loan means any Loan which bears interest at a rate
determined by reference to the Eurodollar Rate (Reserve Adjusted).
Eurodollar Margin - see Schedule 1.1.
Eurodollar Office means with respect to any Bank the office or
offices of such Bank which shall be making or maintaining the Eurodollar Loans
of such Bank hereunder or, if applicable, such other office or offices through
which such Bank determines the Eurodollar Rate. A Eurodollar Office of any Bank
may be, at the option of such Bank, either a domestic or foreign office.
Eurodollar Rate means, with respect to any Eurodollar Loan for any
Interest Period, the rate per annum at which Dollar deposits in immediately
available funds are offered to the Eurodollar Office of BofA two Business Days
prior to the beginning of such Interest Period by major banks in the interbank
eurodollar market as at or about 10:00 A.M., Chicago time, for delivery on the
first day of such Interest Period, for the number of days comprised therein and
in an amount equal or comparable to the amount of the Eurodollar Loan of BofA
for such Interest Period.
Eurodollar Rate (Reserve Adjusted) means, with respect to any
Eurodollar Loan for any Interest Period, a rate per annum (rounded upwards, if
necessary, to the nearest 1/16 of 1%) determined pursuant to the following
formula:
Eurodollar Rate = Eurodollar Rate
(Reserve Adjusted) ---------------
1-Eurocurrency
Reserve Percentage
<PAGE>
Event of Default means any of the events described in Section 12.1.
EWR Acquisition means the acquisition by the Company of
Environmental Waste Recycling, Inc., a North Carolina corporation, for a total
purchase price not exceeding $12,500,000, an immediate cash payment not
exceeding $7,000,000 and contingent cash payments not exceeding $3,000,000, and
otherwise on terms and conditions reasonably satisfactory to the Required Banks.
Exemption Representation - see Section 7.6.
Federal Funds Rate means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York (including any
such successor publication, "H.15(519)") on the preceding Business Day opposite
the caption "Federal Funds (Effective)"; or, if for any relevant day such rate
is not so published on any such preceding Business Day, the rate for such day
will be the arithmetic mean as determined by the Agent of the rates for the last
transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York
City time) on that day by each of three leading brokers of Federal funds
transactions in New York City selected by the Agent.
Financial Letter of Credit means any Letter of Credit determined by
the applicable Issuing Bank to be a "financial guaranty-type Standby Letter of
Credit" as defined in footnote 13 to Appendix A to the Risk Based Capital
Guidelines issued by the Comptroller of the Currency (or in any successor
regulation, guideline or ruling by any applicable banking regulatory authority).
Fiscal Quarter means a fiscal quarter of a Fiscal Year.
Fiscal Year means the fiscal year of the Company and its
Subsidiaries, which period shall be the 12-month period ending on December 31 of
each year. References to a Fiscal Year with a number corresponding to any
calendar year (e.g., "Fiscal Year 1998") refer to the Fiscal Year ending on
December 31 of such calendar year.
FRB means the Board of Governors of the Federal Reserve System or
any successor thereto.
<PAGE>
Funded Debt means all Debt of the Company and its Subsidiaries,
excluding (i) contingent obligations in respect of undrawn letters of credit and
Suretyship Liabilities (except, in each case, to the extent constituting
Suretyship Liabilities in respect of Debt of a Person other than the Company or
any Subsidiary), (ii) Hedging Obligations and (iii) Debt of the Company to
Subsidiaries and Debt of Subsidiaries to the Company or to other Subsidiaries.
Funded Debt to EBITDA Ratio means (a) for the Computation Periods
ending September 30, 1998 and December 31, 1998, the ratio of (i) Funded Debt as
of the last day of such Computation Period to (ii) the sum of (1) EBITDA for
such Computation Period (multiplied, solely in the case of the Computation
Period ending September 30, 1998, by 1.33) plus (2) the lesser of (A) $1,983,000
and (B) Recyc EBITDA for such Computation Period; (b) for the Computation
Periods ending March 31, 1999 and June 30, 1999, the ratio of (i) Funded Debt as
of the last day of such Computation Period to (ii) the sum of (1) EBITDA for
such Computation Period plus (2) Recyc EBITDA for such Computation Period; and
(c) for any Computation Period ending thereafter, the ratio of (i) Funded Debt
as of the last day of such Computation Period to (ii) EBITDA for such
Computation Period.
GAAP means generally accepted accounting principles set forth from
time to time in the opinions and pronouncements of the Accounting Principles
Board and the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the U.S. accounting
profession), which are applicable to the circumstances as of the date of
determination.
Group - see Section 2.2.1.
Guarantor means, on any day, each Subsidiary that has executed a
counterpart of the Guaranty on or prior to that day (or is required to execute a
counterpart of the Guaranty on that date).
Guaranty means a guaranty substantially in the form of Exhibit C.
Hazardous Substances - see Section 9.15.
Hedging Obligations means, with respect to any Person, all
liabilities of such Person under interest rate, currency and commodity swap
agreements, cap agreements and collar agreements, and all other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates, currency exchange rates or commodity prices.
Highest Lawful Rate means, with respect to any indebtedness owed to
any Bank hereunder or under any Note, the maximum nonusurious interest rate, if
any, that at any time or from time to time may be contracted for, taken,
reserved, charged or received by such Bank with respect to such indebtedness
under applicable law.
<PAGE>
Immaterial Law means any provision of any Environmental Law the
violation of which will not (a) violate any judgment, decree or order which is
binding upon the Company or any Subsidiary, (b) result in or threaten any injury
to public health or the environment or any material damage to the property of
any Person or (c) result in any liability or expense (other than any de minimis
liability or expense) for the Company or any Subsidiary; provided that no
provision of any Environmental Law shall be an Immaterial Law if the Agent has
notified the Company that the Required Banks have determined in good faith that
such provision is material.
Interest Coverage Computation Period means each of the following
periods: (a) the Fiscal Quarter ending September 30, 1998; (b) the period of two
consecutive Fiscal Quarters ending December 31, 1998; (c) the period of three
consecutive Fiscal Quarters ending March 31, 1999; and (d) each period of four
consecutive Fiscal Quarters ending on the last day of a Fiscal Quarter on or
after June 30, 1999.
Interest Coverage Ratio means, for any Interest Coverage Computation
Period, the ratio of (a) Consolidated Net Income before deducting Interest
Expense, income tax expense and amortization for such Interest Coverage
Computation Period to (b) Interest Expense for such Computation Period.
Interest Expense means, as to any Person for any Computation Period,
the consolidated interest expense of the Company and its Subsidiaries for such
Computation Period (including all imputed interest on Capital Leases but
excluding deferred financing fees related to any warrant or other equity
interest issued in connection with any financing).
Interest Period means, as to any Eurodollar Loan, the period
commencing on the date such Loan is borrowed or continued as, or converted into,
a Eurodollar Loan and ending on the date one, two, three or six months
thereafter, as selected by the Company pursuant to Section 2.2.3; provided that:
(i) if any Interest Period would otherwise end on a day
that is not a Business Day, such Interest Period shall be extended
to the following Business Day unless the result of such extension
would be to carry such Interest Period into another calendar month,
in which event such Interest Period shall end on the preceding
Business Day;
(ii) any Interest Period for a Eurodollar Loan that
begins on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period shall end
on the last Business Day of the calendar month at the end of such
Interest Period; and
<PAGE>
(iii) the Company may not select any Interest Period for
any Loan which would extend beyond the scheduled Termination Date.
Investment means, relative to any Person, (a) any loan or advance
made by such Person to any other Person (excluding any commission, travel or
similar advances made to directors, officers and employees of the Company or any
of its Subsidiaries), (b) any Suretyship Liability of such Person, (c) any
ownership or similar interest held by such Person in any other Person and (d)
deposits and the like relating to prospective acquisitions of businesses.
Issuing Bank means BofA in its capacity as an issuer of Letters of
Credit hereunder and any other Bank which, with the written consent of the
Company and the Agent, is the issuer of one or more Letters of Credit.
L/C Application means, with respect to any request for the issuance
of a Letter of Credit, a letter of credit application in the form being used by
the applicable Issuing Bank at the time of such request for the type of letter
of credit requested; provided that to the extent any such letter of credit
application is inconsistent with any provision of this Agreement, the applicable
provision of this Agreement shall control.
LC Fee Rate - see Schedule 1.1.
Letter of Credit - see Section 2.1.2.
Lien means, with respect to any Person, any interest granted by such
Person in any real or personal property, asset or other right owned or being
purchased or acquired by such Person which secures payment or performance of any
obligation and shall include any mortgage, lien, encumbrance, charge or other
security interest of any kind, whether arising by contract, as a matter of law,
by judicial process or otherwise.
Loan Documents means this Agreement, the Notes, the Guaranty, the
L/C Applications and the Collateral Documents.
Loans - see Section 2.1.1.
Margin Stock means any "margin stock" as defined in Regulation U of
the FRB.
Material Adverse Effect means (a) a material adverse change in, or a
material adverse effect upon, the financial condition, operations, assets,
business, properties or prospects of the Company and its Subsidiaries taken as a
whole, or (b) a material adverse effect upon any substantial portion of the
collateral under the Collateral Documents or upon the legality, validity,
binding effect or enforceability against the Company or any Guarantor of any
Loan Document.
<PAGE>
Multiemployer Pension Plan means a multiemployer plan, as such term
is defined in Section 4001(a)(3) of ERISA, and to which the Company or any
member of the Controlled Group may have any liability.
Net Worth means the Company's consolidated stockholders' equity
(excluding any equity attributable to mandatorily redeemable preferred stock).
Non-Financial Letter of Credit means any Letter of Credit other than
a Financial Letter of Credit.
Non-Use Fee Rate - see Schedule 1.1.
Note - see Section 3.1.
Operating Lease means any lease of (or other agreement conveying the
right to use) any real or personal property by the Company or any Subsidiary, as
lessee, other than any Capital Lease.
PBGC means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
Pension Plan means a "pension plan", as such term is defined in
Section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a
Multiemployer Pension Plan), and to which the Company or any member of the
Controlled Group may have any liability, including any liability by reason of
having been a substantial employer within the meaning of Section 4063 of ERISA
at any time during the preceding five years, or by reason of being deemed to be
a contributing sponsor under Section 4069 of ERISA.
Percentage means, with respect to any Bank, the percentage specified
opposite such Bank's name on Schedule 2.1 hereto, reduced (or increased) by
assignments pursuant to Section 14.9.1.
Person means any natural person, corporation, partnership, trust,
limited liability company, association, governmental authority or unit, or other
entity, whether acting in an individual, fiduciary or other capacity.
RCRA - see Section 9.15.
Recyc means Recyc, Inc., a California corporation.
Recyc EBITDA means, for any period, Recyc Net Income for such period
plus, to the extent deducted in determining such Recyc Net Income, Interest
Expense, income tax expense,
<PAGE>
depreciation and amortization for such period; provided that for the two months
ending September 30, 1998, the five months ending December 31, 1998, the eight
months ending March 31, 1999, and the eleven months ending June 30, 1999, Recyc
EBITDA shall be multiplied by 6, 2.4, 1.5, and 1.09, respectively.
Recyc Net Income means, with respect to Recyc for any period, the
net income (or loss) of Recyc for such period, excluding any extraordinary gains
during such period.
Release has the meaning specified in CERCLA and the term "Disposal"
(or "Disposed") has the meaning specified in RCRA; provided that in the event
either CERCLA or RCRA is amended so as to broaden the meaning of any term
defined thereby, such broader meaning shall apply as of the effective date of
such amendment; and provided, further, that to the extent that the laws of a
state wherein any affected property lies establish a meaning for "Release" or
"Disposal" which is broader than is specified in either CERCLA or RCRA, such
broader meaning shall apply.
Reference Rate means, for any day, the rate of interest in effect
for such day as publicly announced from time to time by BofA in San Francisco,
California, as its "reference rate." (The "reference rate" is a rate set by BofA
based upon various factors, including BofA's costs and desired return, general
economic conditions and other factors, and is used as a reference point for
pricing some loans, which may be priced at, above, or below such announced
rate.) Any change in the reference rate announced by BofA shall take effect at
the opening of business on the day specified in the public announcement of such
change.
Required Banks means Banks having Percentages aggregating 66-2/3% or
more; provided that at any time there are less than three Banks, "Required
Banks" shall mean all Banks.
SEC means the Securities and Exchange Commission.
Security Agreement means a Security Agreement substantially in the
form of Exhibit D.
Senior Funded Debt means the remainder of (a) Funded Debt minus (b)
the Debt described in Section 10.7(b).
Senior Funded Debt to EBITDA Ratio means (a) for the Computation
Periods ending September 30, 1998 and December 31, 1998, the ratio of (i) Senior
Funded Debt as of the last day of such Computation Period to (ii) the sum of (1)
EBITDA for such Computation Period (multiplied, solely in the case of the
Computation Period ending September 30, 1998, by 1.33) plus (2) the lesser of
(A) $1,983,000 and (B) Recyc EBITDA for such Computation Period; (b) for the
Computation Periods ending March 31, 1999 and June 30, 1999, the ratio of (i)
Senior Funded Debt as of the last day of such Computation Period to (ii) the sum
of (1) EBITDA for such Computation Period plus (2) Recyc EBITDA for such
Computation Period; and (c) for any Computation Period ending thereafter, the
ratio of (i) Senior Funded Debt as of the last day of such Computation Period to
(ii) EBITDA for such Computation Period.
<PAGE>
Stated Amount means, with respect to any Letter of Credit at any
date of determination, the maximum aggregate amount available for drawing
thereunder at any time during the then ensuing term of such Letter of Credit
under any and all circumstances, plus the aggregate amount of all unreimbursed
payments and disbursements under such Letter of Credit.
Subordinated Debt means Debt of the Company which has maturities and
other terms, and which is subordinated to the obligations of the Company and its
Subsidiaries hereunder and under the Loan Documents in a manner, approved in
writing by the Required Banks.
Subsidiary means, with respect to any Person, a corporation,
partnership, limited liability company or other entity of which such Person
and/or its other Subsidiaries own, directly or indirectly, such number of
outstanding shares or other ownership interests as have more than 50% of the
ordinary voting power for the election of directors or other managers of such
entity. Unless the context otherwise requires, each reference to Subsidiaries
herein shall be a reference to Subsidiaries of the Company.
Subsidiary Pledge Agreement means each pledge agreement
substantially in the form of Exhibit F issued by any Subsidiary, whether
pursuant to Section 11.1.7 or Section 10.13.
Suretyship Liability means any agreement, undertaking or arrangement
by which any Person guarantees, endorses or otherwise becomes or is contingently
liable upon (by direct or indirect agreement, contingent or otherwise, to
provide funds for payment, to supply funds to or otherwise to invest in a
debtor, or otherwise to assure a creditor against loss) any indebtedness,
obligation or other liability of any other Person (other than by endorsements of
instruments in the course of collection), or guarantees the payment of dividends
or other distributions upon the shares of any other Person. The amount of any
Person's obligation in respect of any Suretyship Liability shall (subject to any
limitation set forth therein) be deemed to be the principal amount of the debt,
obligation or other liability supported thereby.
Termination Date means the earlier to occur of (a) October 5, 2001
or (b) such other date on which the Commitments shall terminate pursuant to
Section 6 or 12.
Total Outstandings means at any time the sum of (a) the aggregate
principal amount of all outstanding Loans plus (b) the Stated Amount of all
Letters of Credit.
Type of Loan or Borrowing - see Section 2.2.1. The types of Loans or
borrowings under this Agreement are as follows: Base Rate Loans or borrowings
and Eurodollar Loans or borrowings.
<PAGE>
Unmatured Event of Default means any event that, if it continues
uncured, will, with lapse of time or notice or both, constitute an Event of
Default.
1.2 Other Interpretive Provisions. (a) The meanings of defined terms
are equally applicable to the singular and plural forms of the defined terms.
(b) Section, Schedule and Exhibit references are to this
Agreement unless otherwise specified.
(c) (i) The term "including" is not limiting and means
"including without limitation."
(ii) In the computation of periods of time from a
specified date to a later specified date, the word "from" means
"from and including"; the words "to" and "until" each mean "to but
excluding", and the word "through" means "to and including."
(d) Unless otherwise expressly provided herein, (i) references
to agreements (including this Agreement) and other contractual instruments shall
be deemed to include all subsequent amendments and other modifications thereto,
but only to the extent such amendments and other modifications are not
prohibited by the terms of any Loan Document, and (ii) references to any statute
or regulation are to be construed as including all statutory and regulatory
provisions consolidating, amending, replacing, supplementing or interpreting
such statute or regulation.
(e) This Agreement and the other Loan Documents may use several
different limitations, tests or measurements to regulate the same or similar
matters. All such limitations, tests and measurements are cumulative and shall
each be performed in accordance with their terms.
(f) This Agreement and the other Loan Documents are the result
of negotiations among and have been reviewed by counsel to the Agent, the
Company, the Banks and the other parties thereto and are the products of all
parties. Accordingly, they shall not be construed against the Agent or the Banks
merely because of the Agent's or Banks' involvement in their preparation.
SECTION 2 COMMITMENTS OF THE BANKS; BORROWING, CONVERSION AND LETTER
OF CREDIT PROCEDURES
2.1 Commitments. On and subject to the terms and conditions of this
Agreement, each of the Banks, severally and for itself alone, agrees to make
loans to, and to issue or participate in the issuance of letters of credit for
the account of, the Company as follows:
<PAGE>
2.1.1 Loan Commitment. Each Bank will make loans on a revolving
basis ("Loans") from time to time before the Termination Date in such Bank's
Percentage of such aggregate amounts as the Company may from time to time
request from all Banks; provided that the Total Outstandings will not at any
time exceed the Commitment Amount.
2.1.1 L/C Commitment.(a) The Issuing Banks will issue standby
letters of credit, in each case containing such terms and conditions as are
permitted by this Agreement and are reasonably satisfactory to the applicable
Issuing Bank and the Company (each a "Letter of Credit"), at the request of and
for the account of the Company (or jointly for the account of the Company and
any Subsidiary) from time to time before the date which is 30 days prior to the
scheduled Termination Date and (b) as more fully set forth in Section 2.3.5,
each Bank agrees to purchase a participation in each such Letter of Credit;
provided that the aggregate Stated Amount of all Letters of Credit shall not at
any time exceed the lesser of (i) $5,000,000 and (ii) the excess, if any, of the
Commitment Amount over the aggregate principal amount of all outstanding Loans.
2.2 Loan Procedures
2.2.1 Various Types of Loans. Each Loan shall be either a Base Rate
Loan or a Eurodollar Loan (each a "type" of Loan), as the Company shall specify
in the related notice of borrowing or conversion pursuant to Section 2.2.2 or
2.2.3. Eurodollar Loans having the same Interest Period are sometimes called a
"Group" or collectively "Groups". Base Rate Loans and Eurodollar Loans may be
outstanding at the same time, provided that (i) not more than five different
Groups of Eurodollar Loans shall be outstanding at any one time, (ii) the
aggregate principal amount of each Group of Eurodollar Loans shall at all times
be at least $1,000,000 and an integral multiple of $500,000 and (iii) during the
90 days immediately following the Effective Date, the Company may not select any
Interest Period for any Group of Eurodollar Loans which would end after December
31, 1998 (or such earlier date specified by the Agent from time to time). All
borrowings, conversions and repayments of Loans shall be effected so that each
Bank will have a pro rata share (according to its Percentage) of all types and
Groups of Loans.
2.2.2 Borrowing Procedures. The Company shall give written notice or
telephonic notice (followed promptly by written confirmation thereof) to the
Agent of each proposed borrowing not later than (a) in the case of a Base Rate
borrowing, 10:00 A.M., Chicago time, on the proposed date of such borrowing, and
(b) in the case of a Eurodollar borrowing, 10:00 A.M., Chicago time, at least
three Business Days prior to the proposed date of such borrowing. Each such
notice shall be effective upon receipt by the Agent, shall be irrevocable, and
shall specify the date, amount and type of borrowing and, in the case of a
Eurodollar borrowing, the initial Interest Period therefor. Promptly upon
receipt of such notice, the Agent shall advise each Bank thereof. Not later than
1:00 p.m., Chicago time, on the date of a proposed borrowing, each Bank shall
provide the Agent at the office specified by the Agent with immediately
available funds covering such Bank's Percentage of such borrowing and, so long
as the Agent has not received
<PAGE>
written notice that the conditions precedent set forth in Section 11 with
respect to such borrowing have not been satisfied, the Agent shall pay over the
requested amount to the Company on the requested borrowing date. Each borrowing
shall be on a Business Day. Each borrowing shall be in an aggregate amount of at
least $500,000 and an integral multiple of $100,000.
2.2.3 Conversion and Continuation Procedures. (a) Subject to the
provisions of Section 2.2.1, the Company may, upon irrevocable written notice to
the Agent in accordance with clause (b) below:
(i) elect, as of any Business Day, to convert any
outstanding Loan into a Loan of a different type; or
(ii) elect, as of the last day of the applicable
Interest Period, to continue any Group of Eurodollar Loans having an
Interest Period expiring on such day (or any part thereof in an
aggregate amount not less than $500,000 or a higher integral
multiple of $100,000) for a new Interest Period.
(b) The Company shall give written or telephonic (followed promptly
by written confirmation thereof) notice to the Agent of each proposed conversion
or continuation not later than (i) in the case of conversion into Base Rate
Loans, 10:00 a.m., Chicago time, on the proposed date of such conversion; and
(ii) in the case of a conversion into or continuation of Eurodollar Loans, 10:00
a.m., Chicago time, at least three Business Days prior to the proposed date of
such conversion or continuation, specifying in each case:
(1) the proposed date of conversion or continuation;
(2) the aggregate amount of Loans to be converted or
continued;
(3) the type of Loans resulting from the proposed
conversion or continuation; and
(4) in the case of conversion into, or continuation of,
Eurodollar Loans, the duration of the requested Interest Period
therefor.
(c) If upon expiration of any Interest Period applicable to any
Eurodollar Loan, the Company has failed to select timely a new Interest Period
to be applicable to such Eurodollar Loan, the Company shall be deemed to have
elected to convert such Eurodollar Loan into a Base Rate Loan effective on the
last day of such Interest Period.
(d) The Agent will promptly notify each Bank of its receipt of a
notice of conversion or continuation pursuant to this Section 2.4 or, if no
timely notice is provided by the Company, of the details of any automatic
conversion.
<PAGE>
(e) Unless the Required Banks otherwise consent, during the
existence of any Event of Default or Unmatured Event of Default, the Company may
not elect to have a Base Rate Loan converted into or continued as a Eurodollar
Loan.
2.3 Letter of Credit Procedures.
2.3.1 L/C Applications. The Company shall give notice to the Agent
and the applicable Issuing Bank of the proposed issuance of each Letter of
Credit on a Business Day which is at least three Business Days (or such lesser
number of days as the Agent and such Issuing Bank shall agree in any particular
instance) prior to the proposed date of issuance of such Letter of Credit. Each
such notice shall be accompanied by an L/C Application, duly executed by the
Company (together with any Subsidiary for the account of which the related
Letter of Credit is to be issued) and in all respects satisfactory to the Agent
and the applicable Issuing Bank, together with such other documentation as the
Agent or such Issuing Bank may reasonably request in support thereof, it being
understood that each L/C Application shall specify, among other things, the date
on which the proposed Letter of Credit is to be issued, the expiration date of
such Letter of Credit (which shall not be later than seven days prior to the
Termination Date) and whether such Letter of Credit is to be transferable in
whole or in part. So long as the applicable Issuing Bank has not received
written notice that the conditions precedent set forth in Section 11 with
respect to the issuance of such Letter of Credit have not been satisfied, such
Issuing Bank shall issue such Letter of Credit on the requested issuance date.
Each Issuing Bank shall promptly advise the Agent of the issuance of each Letter
of Credit by such Issuing Bank and of any amendment thereto, extension thereof
or event or circumstance changing the amount available for drawing thereunder.
2.3.2 Participations in Letter of Credit. Concurrently with the
issuance of each Letter of Credit, the applicable Issuing Bank shall be deemed
to have sold and transferred to each other Bank, and each other Bank shall be
deemed irrevocably and unconditionally to have purchased and received from such
Issuing Bank, without recourse or warranty, an undivided interest and
participation, to the extent of such other Bank's Percentage, in such Letter of
Credit and the Company's reimbursement obligations with respect thereto. For the
purposes of this Agreement, the unparticipated portion of each Letter of Credit
shall be deemed to be the applicable Issuing Bank's "participation" therein.
Each Issuing Bank hereby agrees, upon request of the Agent or any Bank, to
deliver to such Bank a list of all outstanding Letters of Credit issued by such
Issuing Bank, together with such information related thereto as such Bank may
reasonably request.
2.3.3 Reimbursement Obligations. The Company hereby unconditionally
and irrevocably agrees to reimburse the applicable Issuing Bank for each payment
or disbursement made by such Issuing Bank under any Letter of Credit honoring
any demand for payment made by the beneficiary thereunder, in each case on the
date that such payment or disbursement is
<PAGE>
made. Any amount not reimbursed on the date of such payment or disbursement
shall bear interest from the date of such payment or disbursement to the date
that such Issuing Bank is reimbursed by the Company therefor, payable on demand,
at a rate per annum equal to the Base Rate from time to time in effect plus the
Base Rate Margin from time to time in effect plus, beginning on the third
Business Day after receipt of notice from the Issuing Bank of such payment or
disbursement, 2%. The applicable Issuing Bank shall notify the Company and the
Agent whenever any demand for payment is made under any Letter of Credit by the
beneficiary thereunder; provided that the failure of such Issuing Bank to so
notify the Company shall not affect the rights of such Issuing Bank or the Banks
in any manner whatsoever.
2.3.4 Limitation on Obligations of Issuing Banks. In determining
whether to pay under any Letter of Credit, no Issuing Bank shall have any
obligation to the Company or any Bank other than to confirm that any documents
required to be delivered under such Letter of Credit appear to have been
delivered and appear to comply on their face with the requirements of such
Letter of Credit. Any action taken or omitted to be taken by an Issuing Bank
under or in connection with any Letter of Credit, if taken or omitted in the
absence of gross negligence and willful misconduct, shall not impose upon such
Issuing Bank any liability to the Company or any Bank and shall not reduce or
impair the Company's reimbursement obligations set forth in Section 2.3.3 or the
obligations of the Banks pursuant to Section 2.3.5.
2.3.5 Funding by Banks to Issuing Banks. If an Issuing Bank makes
any payment or disbursement under any Letter of Credit and the Company has not
reimbursed such Issuing Bank in full for such payment or disbursement by 10:00
A.M., Chicago time, on the date of such payment or disbursement, or if any
reimbursement received by such Issuing Bank from the Company is or must be
returned or rescinded upon or during any bankruptcy or reorganization of the
Company or otherwise, each other Bank shall be obligated to pay to the Agent for
the account of such Issuing Bank, in full or partial payment of the purchase
price of its participation in such Letter of Credit, its pro rata share
(according to its Percentage) of such payment or disbursement (but no such
payment shall diminish the obligations of the Company under Section 2.3.3), and
upon notice from the applicable Issuing Bank, the Agent shall promptly notify
each other Bank thereof. Each other Bank irrevocably and unconditionally agrees
to so pay to the Agent in immediately available funds for the applicable Issuing
Bank's account the amount of such other Bank's Percentage of such payment or
disbursement. If and to the extent any Bank shall not have made such amount
available to the Agent by 2:00 P.M., Chicago time, on the Business Day on which
such Bank receives notice from the Agent of such payment or disbursement (it
being understood that any such notice received after noon, Chicago time, on any
Business Day shall be deemed to have been received on the next following
Business Day), such Bank agrees to pay interest on such amount to the Agent for
the applicable Issuing Bank's account forthwith on demand for each day from the
date such amount was to have been delivered to the Agent to the date such amount
is paid, at a rate per annum equal to (a) for the first three days after demand,
the Federal Funds Rate from time to time in effect and (b) thereafter, the Base
Rate from time to time in effect. Any Bank's failure to make available to the
Agent its Percentage of any such
<PAGE>
payment or disbursement shall not relieve any other Bank of its obligation
hereunder to make available to the Agent such other Bank's Percentage of such
payment, but no Bank shall be responsible for the failure of any other Bank to
make available to the Agent such other Bank's Percentage of any such payment or
disbursement.
2.4 Commitments Several. The failure of any Bank to make a requested
Loan on any date shall not relieve any other Bank of its obligation (if any) to
make a Loan on such date, but no Bank shall be responsible for the failure of
any other Bank to make any Loan to be made by such other Bank.
2.5 Certain Conditions. Notwithstanding any other provision of this
Agreement, no Bank shall have an obligation to make any Loan, and no Issuing
Bank shall have any obligation to issue any Letter of Credit, if an Event of
Default or Unmatured Event of Default exists.
SECTION 3. NOTES EVIDENCING LOANS.
3.1 Notes. The Loans of each Bank shall be evidenced by a promissory
note (each a "Note") substantially in the form set forth in Exhibit A, with
appropriate conforming insertions, payable to the order of such Bank in a face
principal amount equal to such Bank's Percentage of the Commitment Amount.
3.2 Recordkeeping. Each Bank shall record in its records, or at its
option on the schedule attached to its Note, the date and amount of each Loan
made by such Bank, each repayment or conversion thereof and, in the case of each
Eurodollar Loan, the dates on which each Interest Period for such Loan shall
begin and end. The aggregate unpaid principal amount so recorded shall be
rebuttable presumptive evidence of the principal amount owing and unpaid on such
Note. The failure to so record any such amount or any error in so recording any
such amount shall not, however, limit or otherwise affect the obligations of the
Company hereunder or under any Note to repay the principal amount of the Loans
evidenced by such Note together with all interest accruing thereon.
SECTION 4 INTEREST.
4.1 Interest Rates. The Company promises to pay interest on the
unpaid principal amount of each Loan for the period commencing on the date such
Loan is advanced until such Loan is paid in full as follows:
(a) at all times while such Loan is a Base Rate Loan, at
a rate per annum equal to the sum of the Base Rate from time to time
in effect plus the Base Rate Margin from time to time in effect; and
<PAGE>
(b) at all times while such Loan is a Eurodollar Loan,
at a rate per annum equal to the sum of the Eurodollar Rate (Reserve
Adjusted) applicable to each Interest Period for such Loan plus the
Eurodollar Margin from time to time in effect;
provided that, unless the Required Banks otherwise agree in writing, at any time
an Event of Default exists the interest rate applicable to each Loan shall be
increased by 2%.
4.2 Interest Payment Dates. Accrued interest on each Base Rate Loan
shall be payable in arrears on the last Business Day of each calendar month and
at maturity. Accrued interest on each Eurodollar Loan shall be payable on the
last day of each Interest Period relating to such Loan (and, in the case of a
Eurodollar Loan with a six-month Interest Period, on the three-month anniversary
of the first day of such Interest Period) and at maturity. After maturity,
accrued interest on all Loans shall be payable on demand.
4.3 Setting and Notice of Eurodollar Rates. The applicable
Eurodollar Rate for each Interest Period shall be determined by the Agent, and
notice thereof shall be given by the Agent promptly to the Company and each
Bank. Each determination of the applicable Eurodollar Rate by the Agent shall be
conclusive and binding upon the parties hereto, in the absence of demonstrable
error. The Agent shall, upon written request of the Company or any Bank, deliver
to the Company or such Bank a statement showing the computations used by the
Agent in determining any applicable Eurodollar Rate hereunder.
4.4 Computation of Interest. All determinations of interest for Base
Rate Loans when the Base Rate is determined by the Reference Rate shall be made
on the basis of a year of 365 or 366 days, as the case may be, and the actual
number of days elapsed. All other computations of interest shall be computed for
the actual number of days elapsed on the basis of a year of 360 days. The
applicable interest rate for each Base Rate Loan shall change simultaneously
with each change in the Base Rate.
SECTION 5 FEES.
5.1 Non-Use Fee. The Company agrees to pay to the Agent for the
account of each Bank a non-use fee, for the period from _______, 1998 to the
Termination Date, at a rate per annum equal to the Non-Use Fee Rate in effect
from time to time of the daily average of the unused amount of such Bank's
Percentage of the Commitment Amount. For purposes of calculating usage under
this Section, the Commitment Amount shall be deemed used to the extent of the
Total Outstandings. Such non-use fee shall be payable in arrears on the last
Business Day of each calendar quarter and on the Termination Date for any period
then ending for which such non-use fee shall not have theretofore been paid. The
non-use fee shall be computed for the actual number of days elapsed on the basis
of a year of 360 days.
<PAGE>
5.2 Letter of Credit Fees. (a) The Company agrees to pay to the
Agent for the account of the Banks pro rata according to their respective
Percentages a letter of credit fee for each Letter of Credit in an amount equal
to the applicable LC Fee Rate (based on the type of Letter of Credit) per annum
in effect from time to time of the undrawn amount of such Letter of Credit
(computed for the actual number of days elapsed on the basis of a year of 360
days); provided that, unless the Required Banks otherwise agree in writing, the
rate applicable to each Letter of Credit shall be increased by 2% at any time
that an Event of Default exists. Such letter of credit fee shall be payable in
arrears on the last Business Day of each calendar quarter and on the Termination
Date (and, if any Letter of Credit remains outstanding on the Termination Date,
thereafter on demand) for the period from the date of the issuance of each
Letter of Credit to the date such payment is due or, if earlier, the date on
which such Letter of Credit expired or was terminated.
(b) The Company agrees to pay each Issuing Bank a fronting fee for
each Letter of Credit issued by such Issuing Bank in the amount separately
agreed to between the Company and such Issuing Bank.
(c) In addition, with respect to each Letter of Credit, the Company
agrees to pay to the applicable Issuing Bank, for its own account, such fees and
expenses as such Issuing Bank customarily requires in connection with the
issuance, negotiation, processing and/or administration of letters of credit in
similar situations.
5.3 Agent's Fees. The Company agrees to pay to the Agent such
agent's fees as are mutually agreed to from time to time by the Company and the
Agent.
SECTION 6 REDUCTION AND TERMINATION OF THE COMMITMENTS; PREPAYMENTS.
6.1 Reduction or Termination of the Commitments. The Company may
from time to time on at least five Business Days' prior written notice received
by the Agent (which shall promptly advise each Bank thereof) permanently reduce
the Commitment Amount to an amount not less than the Total Outstandings. Any
such reduction shall be in an amount not less than $5,000,000 or a higher
integral multiple of $1,000,000. The Company may at any time on like notice
terminate the Commitments upon payment in full of all Loans and all other
obligations of the Company hereunder and cash collateralization in full,
pursuant to documentation in form and substance reasonably satisfactory to the
Banks, of all obligations arising with respect to the Letters of Credit. All
reductions of the Commitment Amount shall reduce the Commitments pro rata among
the Banks according to their respective Percentages.
6.2 Prepayments. The Company may from time to time prepay the Loans
in whole or in part, without premium or penalty, provided that the Company shall
give the Agent (which shall promptly advise each Bank) notice thereof not later
than 10:00 A.M., Chicago time, on the day of such prepayment (which shall be a
Business Day), specifying the Loans to be prepaid and the date and amount of
prepayment. Each partial prepayment shall be in a principal amount of
<PAGE>
$100,000 or a higher integral multiple thereof. Any prepayment of a Eurodollar
Loan on a day other than the last day of an Interest Period therefor shall
include interest on the principal amount being repaid and shall be subject to
Section 8.4.
SECTION 7 MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES.
7.1 Making of Payments. All payments of principal of or interest on
the Loans, and of all non-use fees and Letter of Credit fees, shall be made by
the Company to the Agent in immediately available funds at the office specified
by the Agent not later than noon, Chicago time, on the date due; and funds
received after that hour shall be deemed to have been received by the Agent on
the next following Business Day. The Agent shall promptly remit to each Bank its
share of all such payments received in collected funds by the Agent for the
account of such Bank. All payments under Section 8.1 shall be made by the
Company directly to the Bank entitled thereto.
7.2 Application of Certain Payments. Each payment of principal shall
be applied to such Loans as the Company shall direct by notice to be received by
the Agent on or before the date of such payment or, in the absence of such
notice, as the Agent shall determine in its discretion. Concurrently with each
remittance to any Bank of its share of any such payment, the Agent shall advise
such Bank as to the application of such payment.
7.3 Due Date Extension. If any payment of principal or interest with
respect to any of the Notes, or of non-use fees or Letter of Credit fees, falls
due on a day which is not a Business Day, then such due date shall be extended
to the immediately following Business Day (unless, in the case of a Eurodollar
Loan, such immediately following Business Day is the first Business Day of a
calendar month, in which case such date shall be the immediately preceding
Business Day) and, in the case of principal, additional interest shall accrue
and be payable for the period of any such extension.
7.4 Setoff. The Company agrees that the Agent and each Bank have all
rights of set-off and bankers' lien provided by applicable law, and in addition
thereto, the Company agrees that at any time any Event of Default exists, the
Agent and each Bank may apply to the payment of any obligations of the Company
hereunder, whether or not then due, any and all balances, credits, deposits,
accounts or moneys of the Company then or thereafter with the Agent or such
Bank.
7.5 Proration of Payment. If any Bank shall obtain any payment or
other recovery (whether voluntary, involuntary, by application of offset or
otherwise, but excluding any payment pursuant to Section 8.7 or 14.9) on account
of principal of or interest on any Note (or on account of its participation in
any Letter of Credit) in excess of its pro rata share of payments and other
recoveries obtained by all Banks on account of principal of and interest on
Notes (or such participations) then held by them, such Bank shall purchase from
the other Banks such
<PAGE>
participation in the Notes (or sub-participations in Letters of Credit) held by
them as shall be necessary to cause such purchasing Bank to share the excess
payment or other recovery ratably with each of them; provided that if all or any
portion of the excess payment or other recovery is thereafter recovered from
such purchasing Bank, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery.
7.6 Taxes. (a) All payments of principal of, and interest on, the
Loans and all other amounts payable hereunder shall be made free and clear of
and without deduction for any present or future income, excise, stamp or
franchise taxes and other taxes, fees, duties, withholdings or other charges of
any nature whatsoever imposed by any taxing authority, but excluding franchise
taxes and taxes imposed on or measured by any Bank's net income or receipts (all
non-excluded items being called "Taxes"). If any withholding or deduction from
any payment to be made by the Company hereunder is required in respect of any
Taxes pursuant to any applicable law, rule or regulation, then the Company will:
(i) pay directly to the relevant authority the full
amount required to be so withheld or deducted;
(ii) promptly forward to the Agent an official receipt
or other documentation satisfactory to the Agent evidencing such
payment to such authority; and
(iii) (except to the extent such withholding or
deduction would not be required if such Bank's Exemption
Representation were true) pay to the Agent for the account of the
Banks such additional amount or amounts as is necessary to ensure
that the net amount actually received by each Bank will equal the
full amount such Bank would have received had no such withholding or
deduction been required.
Moreover, if any Taxes are directly asserted against the Agent or any Bank with
respect to any payment received by the Agent or such Bank hereunder, the Agent
or such Bank may pay such Taxes and the Company will (except to the extent such
Taxes are payable by a Bank and would not have been payable if such Bank's
Exemption Representation were true) promptly pay such additional amounts
(including any penalty, interest and expense) as is necessary in order that the
net amount received by such Person after the payment of such Taxes (including
any Taxes on such additional amount) shall equal the amount such Person would
have received had such Taxes not been asserted.
(b) If the Company fails to pay any Taxes when due to the
appropriate taxing authority or fails to remit to the Agent, for the account of
the respective Banks, the required receipts or other required documentary
evidence, the Company shall indemnify the Banks for any incremental Taxes,
interest or penalties that may become payable by any Bank as a result of any
such failure. For purposes of this Section 7.6, a distribution hereunder by the
Agent or any Bank to or for the account of any Bank shall be deemed a payment by
the Company.
<PAGE>
(c) Each Bank represents and warrants (such Bank's "Exemption
Representation") to the Company and the Agent that, as of the date of this
Agreement (or, in the case of an Assignee, the date it becomes a party hereto),
it is entitled to receive payments hereunder without any deduction or
withholding for or on account of any Taxes imposed by the United States of
America or any political subdivision or taxing authority thereof.
(d) Upon the request from time to time of the Company or the Agent,
each Bank that is organized under the laws of a jurisdiction other than the
United States of America shall execute and deliver to the Company and the Agent
one or more (as the Company or the Agent may reasonably request) United States
Internal Revenue Service Forms 4224 or Forms 1001 or such other forms or
documents, appropriately completed, as may be applicable to establish the
extent, if any, to which a payment to such Bank is exempt from withholding or
deduction of Taxes.
(e) If, and to the extent that, any Bank shall obtain a credit,
relief or remission for, or repayment of, any Taxes indemnified or paid by the
Company pursuant to this Section 7.6, such Bank agrees to promptly notify the
Company thereof and thereupon enter into negotiations in good faith with the
Company to determine the basis on which an equitable reimbursement of such Taxes
can be made to the Company.
SECTION 8 INCREASED COSTS; SPECIAL PROVISIONS FOR EURODOLLAR LOANS.
8.1 Increased Costs. (a) If, after the date hereof, the adoption of
any applicable law, rule or regulation, or any change therein, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or any Eurodollar Office of
such Bank) with any request or directive (whether or not having the force of
law) of any such authority, central bank or comparable agency
(A) shall subject any Bank (or any Eurodollar Office of such
Bank) to any tax, duty or other charge with respect to its
Eurodollar Loans, its Note or its obligation to make Eurodollar
Loans, or shall change the basis of taxation of payments to any Bank
of the principal of or interest on its Eurodollar Loans or any other
amounts due under this Agreement in respect of its Eurodollar Loans
or its obligation to make Eurodollar Loans (except for changes in
the rate of tax on the overall net income of such Bank or its
Eurodollar Office imposed by the jurisdiction in which such Bank's
principal executive office or Eurodollar Office is located); or
(B) shall impose, modify or deem applicable any reserve
(including any reserve imposed by the FRB, but excluding any reserve
included in the determination of interest rates pursuant to Section
4), special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by any Bank
(or any Eurodollar Office of such Bank); or
<PAGE>
(C) shall impose on any Bank (or its Eurodollar Office) any
other condition affecting its Eurodollar Loans, its Note or its
obligation to make Eurodollar Loans;
and the result of any of the foregoing is to increase the cost to (or in the
case of Regulation D of the FRB, to impose a cost on) such Bank (or any
Eurodollar Office of such Bank) of making or maintaining any Eurodollar Loan, or
to reduce the amount of any sum received or receivable by such Bank (or its
Eurodollar Office) under this Agreement or under its Note with respect thereto,
then within 10 Business Days after demand by such Bank (which demand shall be
accompanied by a statement setting forth the basis for such demand and a
calculation of the amount thereof in reasonable detail, a copy of which shall be
furnished to the Agent), the Company shall pay directly to such Bank such
additional amount as will compensate such Bank for such increased cost or such
reduction.
(b) If any Bank shall reasonably determine that the adoption or
phase-in of any applicable law, rule or regulation regarding capital adequacy,
or any change therein, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by any Bank or
any Person controlling such Bank with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on such Bank's or such controlling Person's capital as a consequence of
such Bank's obligations hereunder or under any Letter of Credit to a level below
that which such Bank or such controlling Person could have achieved but for such
adoption, change or compliance (taking into consideration such Bank's or such
controlling Person's policies with respect to capital adequacy) by an amount
deemed by such Bank or such controlling Person to be material, then from time to
time, within 10 Business Days after demand by such Bank (which demand shall be
accompanied by a statement setting forth the basis for such demand and a
calculation of the amount thereof in reasonable detail, a copy of which shall be
furnished to the Agent), the Company shall pay to such Bank such additional
amount or amounts as will compensate such Bank or such controlling Person for
such reduction.
8.2 Basis for Determining Interest Rate Inadequate or Unfair. If
with respect to any Interest Period:
(a deposits in Dollars (in the applicable amounts) are not
being offered to the Agent in the interbank eurodollar market for
such Interest Period, or the Agent otherwise reasonably determines
(which determination, if made in good faith, shall be binding and
conclusive on the Company) that by reason of circumstances affecting
the interbank eurodollar market adequate and reasonable means do not
exist for ascertaining the applicable Eurodollar Rate; or
<PAGE>
(b Banks having an aggregate Percentage of 40% or more advise
the Agent that the Eurodollar Rate (Reserve Adjusted) as determined
by the Agent will not adequately and fairly reflect the cost to such
Banks of maintaining or funding such Eurodollar Loans for such
Interest Period (taking into account any amount to which such Banks
may be entitled under Section 8.1) or that the making or funding of
Eurodollar Loans has become impracticable as a result of an event
occurring after the date of this Agreement which in the opinion of
such Banks materially affects such Loans;
then the Agent shall promptly notify the other parties thereof and, so long as
such circumstances shall continue, (i) no Bank shall be under any obligation to
make or convert into Eurodollar Loans and (ii) on the last day of the current
Interest Period for each Eurodollar Loan, such Loan shall, unless then repaid in
full, automatically convert to a Base Rate Loan.
8.3 Changes in Law Rendering Eurodollar Loans Unlawful. In the event
that any change in (including the adoption of any new) applicable laws or
regulations, or any change in the interpretation of applicable laws or
regulations by any governmental or other regulatory body charged with the
administration thereof, should make it (or in the good faith judgment of any
Bank cause a substantial question as to whether it is) unlawful for any Bank to
make, maintain or fund Eurodollar Loans, then such Bank shall promptly notify
each of the other parties hereto and, so long as such circumstances shall
continue, (a) such Bank shall have no obligation to make or convert into
Eurodollar Loans (but shall make Base Rate Loans concurrently with the making of
or conversion into Eurodollar Loans by the Banks which are not so affected, in
each case in an amount equal to such Bank's pro rata share of all Eurodollar
Loans which would be made or converted into at such time in the absence of such
circumstances) and (b) on the last day of the current Interest Period for each
Eurodollar Loan of such Bank (or, in any event, on such earlier date as may be
required by the relevant law, regulation or interpretation), such Eurodollar
Loan shall, unless then repaid in full, automatically convert to a Base Rate
Loan. Each Base Rate Loan made by a Bank which, but for the circumstances
described in the foregoing sentence, would be a Eurodollar Loan (an "Affected
Loan") shall remain outstanding for the same period as the Group of Eurodollar
Loans of which such Affected Loan would be a part absent such circumstances.
8.4 Funding Losses. The Company hereby agrees that upon demand by
any Bank (which demand shall be accompanied by a statement setting forth the
basis for the amount being claimed, a copy of which shall be furnished to the
Agent), the Company will indemnify such Bank against any net loss or expense
which such Bank may sustain or incur (including any net loss or expense incurred
by reason of the liquidation or reemployment of deposits or other funds acquired
by such Bank to fund or maintain any Eurodollar Loan), as reasonably determined
by such Bank, as a result of (a) any payment, prepayment or conversion of any
Eurodollar Loan of
<PAGE>
such Bank on a date other than the last day of an Interest Period for such Loan
(including any conversion pursuant to Section 8.3) or (b) any failure of the
Company to borrow or continue, or to convert any Loan into, a Eurodollar Loan on
a date specified therefor in a notice of borrowing, continuation or conversion
pursuant to this Agreement. For this purpose, all notices to the Agent pursuant
to this Agreement shall be deemed to be irrevocable.
8.5 Right of Banks to Fund through Other Offices. Each Bank may, if
it so elects, fulfill its commitment as to any Eurodollar Loan by causing a
foreign branch or affiliate of such Bank to make such Loan, provided that in
such event for the purposes of this Agreement such Loan shall be deemed to have
been made by such Bank and the obligation of the Company to repay such Loan
shall nevertheless be to such Bank and shall be deemed held by it, to the extent
of such Loan, for the account of such branch or affiliate.
8.6 Discretion of Banks as to Manner of Funding. Notwithstanding any
provision of this Agreement to the contrary, each Bank shall be entitled to fund
and maintain its funding of all or any part of its Loans in any manner it sees
fit, it being understood, however, that for the purposes of this Agreement all
determinations hereunder shall be made as if such Bank had actually funded and
maintained each Eurodollar Loan during each Interest Period for such Loan
through the purchase of deposits having a maturity corresponding to such
Interest Period and bearing an interest rate equal to the Eurodollar Rate for
such Interest Period.
8.7 Mitigation of Circumstances; Replacement of Affected Bank. (a)
Each Bank shall promptly notify the Company and the Agent of any event of which
it has knowledge which will result in, and will use reasonable commercial
efforts available to it (and not, in such Bank's good faith judgment, otherwise
disadvantageous to such Bank) to mitigate or avoid, (i) any obligation by the
Company to pay any amount pursuant to Section 7.6 or 8.1 or (ii) the occurrence
of any circumstance of the nature described in Section 8.2 or 8.3 (and, if any
Bank has given notice of any such event described in clause (i) or (ii) above
and thereafter such event ceases to exist, such Bank shall promptly so notify
the Company and the Agent). Without limiting the foregoing, each Bank will
designate a different funding office if such designation will avoid (or reduce
the cost to the Company of) any event described in clause (i) or (ii) of the
preceding sentence and such designation will not, in such Bank's sole good faith
judgment, be otherwise disadvantageous to such Bank.
(b) At any time any Bank is an Affected Bank, the Company may
replace such Affected Bank as a party to this Agreement with one or more other
bank(s) or financial institution(s) reasonably satisfactory to the Agent (and
upon notice from the Company such Affected Bank shall assign pursuant to an
Assignment Agreement, and without recourse or warranty, its Commitment, its
Loans, its Note, its participation in Letters of Credit, and all of its other
rights and obligations hereunder to such replacement bank(s) or other financial
institution(s) for a purchase price equal to the sum of the principal amount of
the Loans so assigned, all accrued and unpaid interest thereon, its ratable
share of all accrued and unpaid non-use fees and Letter of Credit fees, any
amounts payable under Section 8.4 as a result of such Bank receiving payment of
any Eurodollar Loan prior to the end of an Interest Period therefor and all
other obligations owed to such Affected Bank hereunder).
<PAGE>
8.8 Conclusiveness of Statements; Survival of Provisions.
Determinations and statements of any Bank pursuant to Section 8.1, 8.2, 8.3 or
8.4 shall be conclusive absent demonstrable error. Banks may use reasonable
averaging and attribution methods in determining compensation under Sections 8.1
and 8.4, and the provisions of such Sections shall survive repayment of the
Loans, cancellation of the Notes, cancellation or expiration of the Letters of
Credit and any termination of this Agreement.
SECTION 9 WARRANTIES.
To induce the Agent and the Banks to enter into this Agreement and
to induce the Banks to make Loans and issue or participate in Letters of Credit
hereunder, the Company warrants to the Agent and the Banks that:
9.1 Organization, etc. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware;
each Subsidiary is duly organized, validly existing and in good standing under
the laws of the state of its organization; and the Company and each Subsidiary
is duly qualified to do business in each jurisdiction where the nature of its
business makes such qualification necessary (except in those instances in which
the failure to be qualified or in good standing does not have a Material Adverse
Effect) and has full power and authority to own its property and conduct its
business as presently conducted by it.
9.2 Authorization; No Conflict. The execution and delivery by the
Company of this Agreement and each other Loan Document to which it is a party,
the borrowings hereunder, the execution and delivery by each Guarantor of each
Loan Document to which it is a party and the performance by each of the Company
and each Guarantor of its obligations under each Loan Document to which it is a
party are within the organizational powers of the Company and each Guarantor,
have been duly authorized by all necessary organizational action on the part of
the Company and each Guarantor (including any necessary shareholder, partner or
member action), have received all necessary governmental approval (if any shall
be required), and do not and will not (a) violate any provision of law or any
order, decree or judgment of any court or other government agency which is
binding on the Company or any Guarantor, (b) contravene or conflict with, or
result in a breach of, any provision of the certificate of incorporation,
partnership agreement, by-laws or other organizational documents of the Company
or any Guarantor or of any agreement, indenture, instrument or other document
which is binding on the Company, any Guarantor or any other Subsidiary or (c)
result in, or require, the creation or imposition of any Lien on any property of
the Company, any Guarantor or any other Subsidiary (other than Liens arising
under the Loan Documents).
<PAGE>
9.3 Validity and Binding Nature. Each of this Agreement and each
other Loan Document to which the Company is a party is the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, subject to bankruptcy, insolvency and similar laws affecting the
enforceability of creditors' rights generally and to general principles of
equity; and each Loan Document to which any Guarantor is a party is, or upon the
execution and delivery thereof by such Guarantor will be, the legal, valid and
binding obligation of such Guarantor, enforceable against such Guarantor in
accordance with its terms, subject to bankruptcy, insolvency and similar laws
affecting the enforceability of creditors' rights generally and to general
principles of equity.
9.4 Financial Condition. The audited consolidated financial
statements of the Company and its Subsidiaries as at December 31, 1997 and the
unaudited consolidated financial statements of the Company and its Subsidiaries
as at June 30, 1998, copies of each of which have been delivered to each Bank,
were prepared in accordance with GAAP (subject, in the case of such unaudited
statements, to the absence of footnotes and to normal year-end adjustments) and
present fairly the consolidated financial condition of the Company and its
Subsidiaries as at such dates and the results of their operations for the
periods then ended.
9.5 No Material Adverse Change. Since December 31, 1997, there has
been no material adverse change in the financial condition, operations, assets,
business, properties or prospects of the Company and its Subsidiaries taken as a
whole.
9.6 Litigation and Contingent Liabilities. No litigation (including
derivative actions), arbitration proceeding, labor controversy or governmental
investigation or proceeding is pending or, to the Company's knowledge,
threatened against the Company or any Subsidiary which might reasonably be
expected to have a Material Adverse Effect, except as set forth in Schedule 9.6.
Other than any liability incident to such litigation or proceedings, neither the
Company nor any Subsidiary has any material contingent liabilities not listed in
such Schedule 9.6.
9.7 Ownership of Properties; Liens. Each of the Company and each
Subsidiary owns good and, in the case of real property, indefeasible title to
all of its properties and assets, real and personal, tangible and intangible, of
any nature whatsoever (including patents, trademarks, trade names, service marks
and copyrights), free and clear of all Liens, charges and material claims
(including material infringement claims with respect to patents, trademarks,
copyrights and the like) except as permitted pursuant to Section 10.8.
9.8 Subsidiaries. The Company has no Subsidiaries except those
listed in Schedule 9.8.
9.9 Pension Plans. (a) During the twelve-consecutive-month period
prior to the date of the execution and delivery of this Agreement or the making
of any Loan hereunder, (i) no steps have been taken to terminate any Pension
Plan and (ii) no contribution failure has occurred
<PAGE>
with respect to any Pension Plan sufficient to give rise to a lien under Section
302(f) of ERISA. No condition exists or event or transaction has occurred with
respect to any Pension Plan which could result in the incurrence by the Company
of any material liability, fine or penalty.
(b) All contributions (if any) have been made to any Multiemployer
Pension Plan that are required to be made by the Company or any other member of
the Controlled Group under the terms of the plan or of any collective bargaining
agreement or by applicable law; neither the Company nor any member of the
Controlled Group has withdrawn or partially withdrawn from any Multiemployer
Pension Plan, incurred any withdrawal liability with respect to any such plan,
received notice of any claim or demand for withdrawal liability or partial
withdrawal liability from any such plan, and no condition has occurred which, if
continued, might result in a withdrawal or partial withdrawal from any such
plan; and neither the Company nor any member of the Controlled Group has
received any notice that any Multiemployer Pension Plan is in reorganization,
that increased contributions may be required to avoid a reduction in plan
benefits or the imposition of any excise tax, that any such plan is or has been
funded at a rate less than that required under Section 412 of the Code, that any
such plan is or may be terminated, or that any such plan is or may become
insolvent.
9.10 Investment Company Act. Neither the Company nor any Subsidiary
is an "investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940.
9.11 Public Utility Holding Company Act. Neither the Company nor any
Subsidiary is a "holding company", or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935.
9.12 Regulation U. The Company is not engaged principally, or as one
of its important activities, in the business of extending credit for the purpose
of purchasing or carrying Margin Stock.
9.13 Taxes. Each of the Company and each Subsidiary has filed all
Federal tax returns and other material tax returns and reports required by law
to have been filed by it and has paid all taxes and governmental charges thereby
shown to be owing, except any such taxes or charges which are being diligently
contested in good faith by appropriate proceedings and for which adequate
reserves in accordance with GAAP shall have been set aside on its books.
9.14 Solvency, etc. On the Effective Date (or, in the case of any
Person which becomes a Guarantor after the Effective Date, on the date such
Person becomes a Guarantor), and immediately prior to and after giving effect to
the issuance of each Letter of Credit and each borrowing hereunder and the use
of the proceeds thereof (and after giving effect to any right of contribution
and subrogation), (a) each of the Company's and each Guarantor's assets will
exceed its liabilities and (b) each of the Company and each Guarantor will be
solvent, will be able to pay its debts as they mature, will own property with
fair saleable value greater than the amount required to pay its debts and will
have capital sufficient to carry on its business as then constituted.
<PAGE>
9.15 Environmental Matters.
(a) No Violations. Except as set forth on Schedule 9.15, neither
the Company nor any Subsidiary, nor any operator of the Company's or any
Subsidiary's properties, is in violation of any judgment, decree, order, law,
permit, license, rule or regulation pertaining to environmental matters,
including those arising under the Resource Conservation and Recovery Act
("RCRA"), the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986
or any other Environmental Law which (i) in any single case, requires
expenditures in any three-year period of $250,000 or more by the Company and its
Subsidiaries in penalties and/or for investigative, removal or remedial actions
or (ii) individually or in the aggregate otherwise might reasonably be expected
to have a Material Adverse Effect.
(b) Notices. Except as set forth on Schedule 9.15, neither the
Company nor any Subsidiary has received written notice from any third party,
including any Federal, state or local governmental authority: (a) that any one
of them has been identified by the U.S. Environmental Protection Agency as a
potentially responsible party under CERCLA with respect to a site listed on the
National Priorities List, 40 C.F.R. Part 300 Appendix B; (b) that any hazardous
waste, as defined by 42 U.S.C. Section 6903(5), any hazardous substance as
defined by 42 U.S.C. Section 9601(14), any pollutant or contaminant as defined
by 42 U.S.C. Section 9601(33) or any toxic substance, oil or hazardous material
or other chemical or substance regulated by any Environmental Law, excluding
household hazardous waste (all of the foregoing, "Hazardous Substances"), which
any one of them has generated, transported or disposed of has been found at any
site at which a Federal, state or local agency or other third party has
conducted a remedial investigation, removal or other response action pursuant to
any Environmental Law; (c) that the Company or any Subsidiary must conduct
sampling, testing, a remedial investigation, removal, or a response action
pursuant to any Environmental Law; or (d) of any Environmental Claim.
(c) Handling of Hazardous Substances. Except as set forth on
Schedule 9.15, (i) no portion of the real property or other assets of the
Company or any Subsidiary has been used for the handling, processing, storage or
disposal of Hazardous Substances except in accordance in all material respects
with applicable Environmental Laws; and no underground tank or other underground
storage receptacle for Hazardous Substances is located on such properties; (ii)
in the course of any activities conducted by the Company, any Subsidiary or the
operators of any real property of the Company or any Subsidiary, no Hazardous
Substances have been generated or are being used on such properties except in
accordance in all material respects with applicable Environmental Laws; (iii)
there have been no Releases of Hazardous Substances on, upon, into
<PAGE>
or from any real property or other assets of the Company or any Subsidiary,
which Releases singly or in the aggregate might reasonably be expected to have a
material adverse effect on the value of such real property or assets; (iv) to
the Company's actual knowledge, there have been no Releases on, upon, from or
into any real property in the vicinity of the real property or other assets of
the Company or any Subsidiary which, through soil or groundwater contamination,
may have come to be located on, and which might reasonably be expected to have a
material adverse effect on the value of, the real property or other assets of
the Company or any Subsidiary; and (v) any Hazardous Substances generated by the
Company and its Subsidiaries have been transported offsite only by properly
licensed carriers and, to the best of the Company's knowledge, delivered only to
treatment or disposal facilities maintaining valid permits as required under
applicable Environmental Laws, which transporters and facilities have been and
are, to the best of the Company's knowledge, operating in compliance with such
permits and applicable Environmental Laws.
(d) Investigations. Except as set forth on Schedule 9.15, the
Company and its Subsidiaries have taken reasonable steps to investigate the past
and present condition and usage of the real property of the Company and its
Subsidiaries with regard to environmental matters.
9.16 Year 2000 Problem. The Company and its Subsidiaries have
reviewed the areas within their business and operations which could be adversely
affected by, and have developed or are developing a program to address on a
timely basis, the "Year 2000 Problem" (that is, the risk that computer
applications used by the Company and its Subsidiaries may be unable to recognize
and perform properly date-sensitive functions involving certain dates prior to
and any date after December 31, 1999). Based on such review and program, the
Company reasonably believes that the "Year 2000 Problem" will not have a
Material Adverse Effect.
9.17 Information. All information heretofore or contemporaneously
herewith furnished in writing by the Company or any Subsidiary to any Bank for
purposes of or in connection with this Agreement and the transactions
contemplated hereby is, and all written information hereafter furnished by or on
behalf of the Company or any Subsidiary to any Bank pursuant hereto or in
connection herewith will be, true and accurate in every material respect on the
date as of which such information is dated or certified, and none of such
information is or will be incomplete by omitting to state any material fact
necessary to make such information not misleading in light of the circumstances
under which made (it being recognized by the Agent and the Banks that (a) any
projections and forecasts provided by the Company are based on good faith
estimates and assumptions believed by the Company to be reasonable as of the
date of the applicable projections or assumptions and that actual results during
the period or periods covered by any such projections and forecasts will likely
differ from projected or forecasted results and (b) any information provided by
the Company or any Subsidiary with respect to any Person or assets acquired or
to be acquired by the Company or any Subsidiary shall, for all periods prior to
the date of such acquisition, be limited to the knowledge of the Company or the
acquiring Subsidiary after reasonable inquiry).
<PAGE>
SECTION 10 COVENANTS.
Until the expiration or termination of the Commitments and
thereafter until all obligations of the Company hereunder and under the other
Loan Documents are paid in full and all Letters of Credit have been terminated,
the Company agrees that, unless at any time the Required Banks shall otherwise
expressly consent in writing, it will:
10.1 Reports, Certificates and Other Information. Furnish to each
Bank:tes and Other Information
10.1.1 Audit Report. Promptly when available and in any event within
90 days after the close of each Fiscal Year: (a) a copy of the annual audit
report of the Company and its Subsidiaries for such Fiscal Year, including
therein consolidated balance sheets of the Company and its Subsidiaries as of
the end of such Fiscal Year and consolidated statements of earnings and cash
flow of the Company and its Subsidiaries for such Fiscal Year certified without
qualification by Arthur Andersen LLP or other independent auditors of recognized
standing selected by the Company and reasonably acceptable to the Required
Banks, together with a written statement from such accountants to the effect
that in making the examination necessary for the signing of such annual audit
report by such accountants, they have not become aware of any Event of Default
or Unmatured Event of Default that has occurred and is continuing or, if they
have become aware of any such event, describing it in reasonable detail and (b)
consolidating balance sheets of the Company and its Subsidiaries as of the end
of such Fiscal Year and consolidating statements of earnings for the Company and
its Subsidiaries for such Fiscal Year, certified by the chief financial officer
of the Company.
10.1.2 Quarterly Reports. Promptly when available and in any event
within 45 days after the end of each Fiscal Quarter (except the last Fiscal
Quarter) of each Fiscal Year, consolidated and consolidating balance sheets of
the Company and its Subsidiaries as of the end of such Fiscal Quarter, together
with consolidated and consolidating statements of earnings and consolidated
statements of cash flow for such Fiscal Quarter and for the period beginning
with the first day of such Fiscal Year and ending on the last day of such Fiscal
Quarter, certified by the chief financial officer of the Company.
10.1.3 Monthly Reports. Promptly when available and in any event
within 30 days after the end of each of the first two months of each Fiscal
Quarter, consolidated and consolidating balance sheets of the Company and its
Subsidiaries as of the end of such month, together with consolidated and
consolidating statements of earnings for such month and for the period beginning
with the first day of the applicable Fiscal Year and ending on the last day of
such month, certified by the chief financial officer of the Company.
10.1.4 Compliance Certificates. Contemporaneously with the
furnishing of a copy of each annual audit report pursuant to Section 10.1.1 and
of each set of quarterly statements
<PAGE>
pursuant to Section 10.1.2, (a) a duly completed compliance certificate in the
form of Exhibit B, with appropriate insertions, dated the date of such annual
report or such quarterly statements and signed by the chief financial officer of
the Company, containing a computation of each of the financial ratios and
restrictions set forth in Section 10.6 and to the effect that such officer has
not become aware of any Event of Default or Unmatured Event of Default that has
occurred and is continuing or, if there is any such event, describing it and the
steps, if any, being taken to cure it; and (b) an updated organizational chart
listing all Subsidiaries and the locations of their businesses.
10.1.5 Reports to SEC and to Shareholders. Promptly upon the filing
or sending thereof, copies of all regular, periodic or special reports of the
Company or any Subsidiary filed with the SEC (excluding exhibits thereto,
provided that the Company shall promptly deliver any such exhibit to the Agent
or any Bank upon request therefor); copies of all registration statements of the
Company or any Subsidiary filed with the SEC (other than on Form S-8); and
copies of all proxy statements or other communications made to shareholders
generally concerning material developments in the business of the Company or any
Subsidiary.
10.1.6 Notice of Default, Litigation and ERISA Matters. Promptly
upon becoming aware of any of the following, written notice describing the same
and the steps being taken by the Company or the Subsidiary affected thereby with
respect thereto:
(a) the occurrence of an Event of Default or an
Unmatured Event of Default;
(b) any litigation, arbitration or governmental
investigation or proceeding not previously disclosed by the Company
to the Banks which has been instituted or, to the knowledge of the
Company, is threatened against the Company or any Subsidiary or to
which any of the properties of any thereof is subject which, if
adversely determined, might reasonably be expected to have a
Material Adverse Effect;
(c) the institution of any steps by any member of the
Controlled Group or any other Person to terminate any Pension Plan,
or the failure of any member of the Controlled Group to make a
required contribution to any Pension Plan (if such failure is
sufficient to give rise to a lien under Section 302(f) of ERISA) or
to any Multiemployer Pension Plan, or the taking of any action with
respect to a Pension Plan which could result in the requirement that
the Company furnish a bond or other security to the PBGC or such
Pension Plan, or the occurrence of any event with respect to any
Pension Plan or Multiemployer Pension Plan which could result in the
incurrence by any member of the Controlled Group of any material
liability, fine or penalty (including any claim or demand for
withdrawal liability or partial withdrawal from any Multiemployer
Pension Plan), or any notice that any Multiemployer Pension Plan is
in reorganization, that increased contributions may be required to
avoid a reduction in plan benefits or the imposition of an excise
tax, that any such plan is or has been funded at a rate less than
that required under Section 412 of the Code, that any such plan is
or may be terminated, or that any such plan is or may become
insolvent;
<PAGE>
(d) any cancellation (without replacement) or material
change in any insurance maintained by the Company or any Subsidiary;
(e) any event (including any violation of any
Environmental Law or the assertion of any Environmental Claim) which
might reasonably be expected to have a Material Adverse Effect; or
(f) any setoff, claim (including any Environmental
Claim), withholding or other defense to which any of the collateral
granted under any Collateral Document, or the Agent's or the Banks'
rights with respect to any such collateral, are subject.
10.1.7 Subsidiaries. Promptly upon any change in the list of its
Subsidiaries from that set forth on Schedule 9.8 (or in the most recent notice
pursuant to this Section), notification of such change.
10.1.8 Management Reports. Promptly upon the request of the Agent or
any Bank, copies of all detailed financial and management reports submitted to
the Company by independent auditors in connection with each annual or interim
audit made by such auditors of the books of the Company.
10.1.9 Projections. As soon as practicable and in any event within
60 days after the commencement of each Fiscal Year, financial projections for
the Company and its Subsidiaries for such Fiscal Year prepared in a manner
consistent with those projections delivered by the Company to the Agent prior to
the Effective Date.
10.1.10 Other Information. From time to time such other information
concerning the Company and its Subsidiaries as the Agent or any Bank may
reasonably request.
10.2 Books, Records and Inspections. Keep, and cause each Subsidiary
to keep, its books and records in accordance with sound business practices
sufficient to allow the preparation of financial statements in accordance with
GAAP; permit, and cause each Subsidiary to permit, any Bank or the Agent or any
representative thereof upon reasonable prior notice to inspect the properties
and operations of the Company and of such Subsidiary; and permit, and cause each
Subsidiary to permit, at any reasonable time during normal business hours and
with reasonable notice (or at any time without notice if an Event of Default
exists), any Bank or the Agent or any representative thereof to visit any or all
of its offices, to discuss its financial matters with its officers and its
independent auditors (and the Company hereby authorizes such independent
auditors to discuss such financial matters with any Bank or the Agent or any
representative thereof whether or not any representative of the Company or any
Subsidiary is present), and to examine (and, at the expense of the Company or
the applicable Subsidiary, photocopy extracts from) any of its books or other
corporate records.
<PAGE>
10.3 Insurance. Maintain, and cause each Subsidiary to maintain,
with responsible insurance companies, such insurance as may be required by any
law or governmental regulation or court decree or order applicable to it and
such other insurance, to such extent and against such hazards and liabilities,
as is customarily maintained by companies similarly situated; and, upon request
of the Agent or any Bank, furnish to the Agent or such Bank a certificate
setting forth in reasonable detail the nature and extent of all insurance
maintained by the Company and its Subsidiaries.
10.4 Compliance with Laws; Payment of Taxes and Liabilities. (a)
Comply, and cause each Subsidiary to comply, in all material respects with all
material applicable laws (including Environmental Laws), rules, regulations,
decrees, orders, judgments, licenses and permits; and (b) pay, and cause each
Subsidiary to pay, prior to delinquency, all Federal taxes and all other
material taxes and other governmental charges against it or any of its property,
as well as claims of any kind which, if unpaid, might become a Lien on any of
its property; provided that the foregoing shall not require the Company or any
Subsidiary to pay any such tax or charge so long as it shall contest the
validity thereof in good faith by appropriate proceedings and shall set aside on
its books adequate reserves with respect thereto in accordance with GAAP.
10.5 Maintenance of Existence, etc. Maintain and preserve, and
(subject to Section 10.11) cause each Subsidiary to maintain and preserve, (a)
its existence and good standing in the jurisdiction of its incorporation and (b)
its qualification and good standing as a foreign corporation in each
jurisdiction where the nature of its business makes such qualification necessary
(except in those instances in which the failure to be qualified or in good
standing does not have a Material Adverse Effect).
10.6 Financial Covenants
10.6.1 Minimum Net Worth. Not permit its Net Worth at any time to be
less than the sum of (a) $30,700,000 plus (b) 75% of the sum of Consolidated Net
Income for each Fiscal Quarter, beginning with the Fiscal Quarter ending
December 31, 1998 and ending with the most recently-ended Fiscal Quarter for
which the Company has delivered financial statements (provided that, if
Consolidated Net Income is less than zero for any Fiscal Quarter, for purposes
of this Section 10.6.1 Consolidated Net Income will be deemed to be zero for
such quarter) plus (c) 100% of the net proceeds of any equity issued by the
Company or any of its Subsidiaries (on a consolidated basis) after the Effective
Date.
10.6.2 Minimum Interest Coverage. Not permit the Interest Coverage
Ratio for any Computation Period to be less than the applicable ratio set forth
below (provided that if the EWR Acquisition shall have occured, the numerator of
each such ratio shall be increased by 0.10):
<PAGE>
COMPUTATION INTEREST
PERIOD ENDING: COVERAGE RATIO
-------------- --------------
Effective Date through 12/31/98 1.50 to 1.0
1/1/99 through 12/31/99 1.75 to 1.0
1/1/00 and thereafter 2.00 to 1.0.
10.6.3 Funded Debt to EBITDA Ratio. Not permit the Funded Debt to
EBITDA Ratio as of the last day of any Computation Period to exceed the
applicable ratio set forth below (provided that prior to the delivery by the
Company of the financial statements required by Section 10.1.2 and the
compliance certificate required by Section 10.1.4 for the period ending
September 30, 1998, the Company shall not permit Funded Debt to exceed
$24,000,000 or, if the EWR Acquisition shall have occurred, $30,000,000):
COMPUTATION FUNDED DEBT TO
PERIOD ENDING: EBITDA RATIO
-------------- ------------
9/30/98 through 3/31/99 4.00 to 1.0
4/1/99 and thereafter 3.75 to 1.0.
10.6.4 Senior Funded Debt to EBITDA Ratio. Not permit the Senior
Funded Debt to EBITDA Ratio as of the last day of any Computation Period to
exceed the applicable ratio set forth below (provided that prior to the delivery
by the Company of the financial statements required by Section 10.1.2 and the
compliance certificate required by Section 10.1.4 for the period ending
September 30, 1998, the Company shall not permit Senior Funded Debt to exceed
$21,000,000 or, if the EWR Acquisition shall have occurred, $26,250,000):
SENIOR FUNDED
COMPUTATION DEBT TO
PERIOD ENDING: EBITDA RATIO
-------------- ------------
9/30/98 through 3/31/99 3.50 to 1.0
4/1/99 and thereafter 3.25 to 1.0.
10.6.5 Debt to Capitalization Ratio. Not permit the ratio of (a)
Funded Debt to (b) the sum of Funded Debt plus Net Worth at any time to exceed
the applicable percentage set forth below during any period set forth below:
<PAGE>
DEBT TO
CAPITALIZATION
PERIOD: PERCENTAGE
------ --------------
9/30/98 through 12/31/98 60%
1/1/99 through 12/31/99 55%
1/1/00 and thereafter 50%.
10.6.6 Capital Expenditures. The Company will not permit the
aggregate amount of all Capital Expenditures (excluding amounts, if any, paid to
consummate acquisitions permitted by Section 10.11(c) which constitute Capital
Expenditures) made by the Company and its Subsidiaries during any period of 12
consecutive months to exceed the product of 1.5 multiplied by the depreciation
and amortization of the Company and its Subsidiaries during the preceding period
of 12 consecutive months (calculated on a pro forma basis giving effect to
acquisitions and sales and other dispositions made subsequent to such preceding
12 months).
10.7 Limitations on Debt. Not, and not permit any Subsidiary to,
create, incur, assume or suffer to exist any Debt, except:
(a) obligations in respect of the Loans, the L/C Applications and
the Letters of Credit;
(b) Subordinated Debt and unsecured seller Debt (including
contingent payments incurred in connection with a transaction
permitted by Section 10.11(c)) which represents all or part of the
purchase price payable in connection with a transaction permitted by
Section 10.11(c) and the existing Debt listed on Schedule 10.7(b);
provided that the aggregate principal amount of all such Debt shall
not at any time exceed $10,000,000;
(c) Debt arising under Capital Leases, Debt secured by Liens
permitted by subsection 10.8(c) or (d) and other Debt outstanding on
the date hereof and listed in Schedule 10.7(c), and refinancings of
any such Debt so long as the terms applicable to such refinanced
Debt are no less favorable to the Company or the applicable
Subsidiary than the terms in effect immediately prior to such
refinancing, provided that the aggregate amount of all such Debt at
any time outstanding shall not exceed $5,000,000;
(d) Debt of Subsidiaries owed to the Company;
(e) Hedging Obligations of the Company or any Subsidiary to any
Bank incurred in the ordinary course of business for bona fide
hedging purposes and not for speculation;
<PAGE>
(f) unsecured Debt of the Company to Subsidiaries; and
(g) Debt to be Repaid; provided that all such Debt to be Repaid
shall be repaid on or before the Effective Date.
10.8 Liens. Not, and not permit any Subsidiary to, create or permit
to exist any Lien on any of its real or personal properties, assets or rights of
whatsoever nature (whether now owned or hereafter acquired), except:
(a) Liens for taxes or other governmental charges not at the time
delinquent or thereafter payable without penalty or being contested
in good faith by appropriate proceedings and, in each case, for
which it maintains adequate reserves;
(b) Liens arising in the ordinary course of business (such as (i)
Liens of carriers, warehousemen, mechanics and materialmen and other
similar Liens imposed by law and (ii) Liens incurred in connection
with worker's compensation, unemployment compensation and other
types of social security (excluding Liens arising under ERISA) or in
connection with surety bonds, bids, performance bonds and similar
obligations) for sums not overdue or being contested in good faith
by appropriate proceedings and not involving any deposits or
advances or borrowed money or the deferred purchase price of
property or services, and, in each case, for which it maintains
adequate reserves;
(c) Liens identified in Schedule 10.8;
(d) subject to the limitation set forth in Section 10.7(c), (i)
Liens existing on property at the time of the acquisition thereof by
the Company or any Subsidiary (and not created in contemplation of
such acquisition) and (ii) Liens that constitute purchase money
security interests on any property securing debt incurred for the
purpose of financing all or any part of the cost of acquiring such
property, provided that any such Lien attaches to such property
within 60 days of the acquisition thereof and such Lien attaches
solely to the property so acquired;
(e) attachments, appeal bonds, judgments and other similar Liens,
for sums not exceeding $250,000 arising in connection with court
proceedings, provided the execution or other enforcement of such
Liens is effectively stayed and the
<PAGE>
claims secured thereby are being actively contested in good faith
and by appropriate proceedings;
(f) easements, rights of way, restrictions, minor defects or
irregularities in title and other similar Liens not interfering in
any material respect with the ordinary conduct of the business of
the Company or any Subsidiary; and
(g) Liens in favor of the Agent for the benefit of the Banks
arising under the Loan Documents.
10.9 Operating Leases. Not permit the aggregate amount of all
rental payments made (or scheduled to be made) under Operating Leases (excluding
the Operating Leases listed on Schedule 10.9) by the Company and its
Subsidiaries (on a consolidated basis)in any Fiscal Year to exceed $250,000.
10.10 Restricted Payments. Not, and not permit any Subsidiary to,
(a) declare or pay any dividends on any of its capital stock (other than stock
dividends), (b) purchase or redeem any such stock or any warrants, units,
options or other rights in respect of such stock, (c) make any other
distribution to shareholders or (d) set aside funds for any of the foregoing;
provided that any Subsidiary may declare and pay dividends to the Company or to
any other wholly-owned Subsidiary.
10.11 Mergers, Consolidations, Sales. Not, and not permit any
Subsidiary to, be a party to any merger or consolidation, or purchase or
otherwise acquire all or substantially all of the assets or any stock of any
class of, or any partnership or joint venture interest in, any other Person, or
sell, transfer, convey or lease all or any substantial part of its assets, or
sell or assign with or without recourse any receivables, except for (a) any such
merger or consolidation, sale, transfer, conveyance, lease or assignment of or
by any wholly-owned Subsidiary into the Company or into, with or to any other
wholly-owned Subsidiary; (b) any such purchase or other acquisition by the
Company or any wholly-owned Subsidiary of the assets or stock of any
wholly-owned Subsidiary; (c) any such purchase or other acquisition by the
Company or any wholly-owned Subsidiary of the assets or stock of any other
Person where (1) such assets (in the case of an asset purchase) are for use, or
such Person (in the case of a stock purchase) is engaged in the management,
processing, collection, handling and disposal of non-hazardous bio-solid wastes,
animal manures, and green or other organic waste or similar non-hazardous
waste-related business activities; (2)
<PAGE>
immediately before or after giving effect to such purchase or acquisition, no
Event of Default or Unmatured Event of Default shall have occurred and be
continuing; (3) either (i) (x) the aggregate consideration to be paid by the
Company and its Subsidiaries (including any Debt assumed or issued in connection
therewith, the amount thereof to be calculated in accordance with GAAP) in
connection with such purchase or other acquisition (or any series of related
acquisitions) is not greater than $15,000,000 and (y) the aggregate
consideration to be paid in cash or by the assumption or issuance of Debt by the
Company and its Subsidiaries in connection with such purchase or acquisition (or
any series of related acquisitions) is not greater than $7,000,000 or (ii) the
Required Banks have consented to such purchase or acquisition; and (4) the
Company is in pro forma compliance with all the financial ratios and
restrictions set forth in Section 10.6; and (d) sales and dispositions of assets
(including the stock of Subsidiaries) so long as (1) the net book value of all
assets sold or otherwise disposed of in any Fiscal Year (other than assets
referred to in clause (2)) does not exceed $500,000 and (2) such assets are
listed on Schedule 10.11.
10.12 Use of Proceeds. Use the proceeds of the Loans solely to
finance the Company's working capital, for acquisitions permitted by Section
10.11, for capital expenditures and for other general corporate purposes; and
not use or permit any proceeds of any Loan to be used, either directly or
indirectly, for the purpose, whether immediate, incidental or ultimate, of
"purchasing or carrying" any Margin Stock.
10.13 Further Assurances. Take, and cause each Subsidiary to take,
such actions as are necessary, or as the Agent (or the Required Banks acting
through the Agent) may reasonably request, from time to time (including the
execution and delivery of guaranties, security agreements, pledge agreements,
financing statements and other documents, the filing or recording of any of the
foregoing, and the delivery of stock certificates and other collateral with
respect to which perfection is obtained by possession) to ensure that (i) the
obligations of the Company hereunder and under the other Loan Documents are
secured by substantially all of the assets (other than real property and, unless
the Required Banks (acting through the Agent) otherwise request in writing, any
motor vehicle subject to a statute requiring notation on a certificate of title
to perfect a security interest in such vehicle) of the Company and guaranteed by
all of the Subsidiaries (including, promptly upon the acquisition or creation
thereof, any Subsidiary acquired or created after the date hereof) by execution
of a counterpart of
<PAGE>
the Guaranty and (ii) the obligations of each Guarantor under the Guaranty are
secured by substantially all of the assets (other than real property and, unless
the Required Banks (acting through the Agent) otherwise request in writing, any
motor vehicle subject to a statute requiring notation on a certificate of title
to perfect a security interest in such vehicle) of such Guarantor.
10.14 Transactions with Affiliates. Not, and not permit any
Subsidiary to, enter into, or cause, suffer or permit to exist any transaction,
arrangement or contract with any of its other Affiliates (other than the Company
and its Subsidiaries) which is on terms which are less favorable than are
obtainable from any Person which is not one of its Affiliates.
10.15 Employee Benefit Plans. Maintain, and cause each Subsidiary to
maintain, each Pension Plan in substantial compliance with all applicable
requirements of law and regulations.
10.16 Environmental Laws. Conduct, and cause each Subsidiary to
conduct, its operations and keep and maintain its property in material
compliance with all Environmental Laws (other than Immaterial Laws).
10.17 Unconditional Purchase Obligations. Not, and not permit any
Subsidiary to, enter into or be a party to any contract for the purchase of
materials, supplies or other property or services, if such contract requires
that payment be made by it regardless of whether or not delivery is ever made of
such materials, supplies or other property or services; provided that the
foregoing shall not prohibit the Company or any Subsidiary from entering into
options for the purchase of particular assets or businesses.
10.18 Inconsistent Agreements. Not, and not permit any Subsidiary
to, enter into any agreement containing any provision which (a) would be
violated or breached by any borrowing, or the obtaining of any Letter of Credit,
by the Company hereunder or by the performance by the Company or any Subsidiary
of any of its obligations hereunder or under any other Loan Document or (b)
would prohibit the Company or any Subsidiary from granting to the Agent, for the
benefit of the Banks, a Lien on any of its assets.
10.19 Business Activities. Not, and not permit any Subsidiary to,
engage in any line of business other than the management, processing,
collection, handling and disposal of non-
<PAGE>
hazardous bio-solid waste, animal manures, and green or other organic waste or
similar non-hazardous waste-related business activities.
10.20 Advances and Other Investments. Not, and not permit any
Subsidiary to, make, incur, assume or suffer to exist any Investment in any
other Person, except (without duplication) the following:
(a) equity Investments existing on the Effective Date in
wholly-owned Subsidiaries identified in Schedule 9.8;
(b) equity Investments in Subsidiaries acquired after the
Effective Date in transactions permitted as acquisitions of stock or
assets pursuant to Section 10.11;
(c) in the ordinary course of business, contributions by the
Company to the capital of any of its Subsidiaries, or by any such
Subsidiary to the capital of any of its Subsidiaries;
(d) in the ordinary course of business, Investments by the Company
in any Subsidiary or by any of the Subsidiaries in the Company, by
way of intercompany loans, advances or guaranties, all to the extent
permitted by Section 10.7;
(e) Suretyship Liabilities permitted by Section 10.7;
(f) good faith deposits made in connection with prospective
acquisitions of stock or assets permitted by Section 10.11;
(g) loans to officers and employees not exceeding (i) $100,000 in
the aggregate to any single individual or (ii) $250,000 in the
aggregate for all such individuals;
(h) Cash Equivalent Investments; and
(i) bank deposits in the ordinary course of business; provided
that the aggregate amount of all such deposits (excluding (x)
amounts in payroll accounts or for accounts payable, in each case to
the extent that checks have been issued to third parties, and (y)
amounts maintained (in the ordinary course of business consistent
with past practice) in accounts of any Person which is acquired by
the Company or a Subsidiary in accordance with the terms hereof
during the 45 days following the date of such acquisition) which are
maintained with any bank other than a Bank shall not at any time
after January 7, 1999 exceed (x) in the case of
<PAGE>
such deposits with any single bank, $100,000 for three consecutive
Business Days and (y) in the case of all such deposits, $1,000,000
for three consecutive Business Days;
provided that no Investment otherwise permitted by clause (b), (c), (d), (e),
(f) or (g) shall be permitted to be made if, immediately before or after giving
effect thereto, any Event of Default or Unmatured Event of Default shall have
occurred and be continuing.
SECTION 11 EFFECTIVENESS; CONDITIONS OF LENDING, ETC.
The obligation of each Bank to make its Loans and of any Issuing
Bank to issue Letters of Credit is subject to the following conditions
precedent:
11.1 Effectiveness. The obligation of each Bank to make its initial
Loan and of any Issuing Bank to issue any Letter of Credit, whichever first
occurs, is, in addition to the conditions precedent specified in Section 11.2,
subject to the conditions precedent (and the date on which all such conditions
precedent have been satisfied or waived in writing by the Banks is called the
"Effective Date") that the Agent shall have received (a) all amounts which are
then due and payable pursuant to Section 5 and (to the extent billed) Section
14.6; (b) evidence satisfactory to the Agent that all Debt to be Repaid has been
(or concurrently with the initial credit extension hereunder will be) paid in
full and that all Liens securing such Debt have been (or concurrently with the
initial credit extension hereunder will be) terminated; and (c) all of the
following, each duly executed and dated the Effective Date (or such earlier date
as shall be satisfactory to the Agent), in form and substance satisfactory to
the Agent, and each (except for the Notes, of which only the originals shall be
signed) in sufficient number of signed counterparts to provide one for each
Bank:
11.1.1 Notes. The Notes.
11.1.2 Resolutions. Certified copies of resolutions of the Board of
Directors of the Company authorizing or ratifying the execution, delivery and
performance by the Company of this Agreement, the Notes and the other Loan
Documents to which the Company is a party; and certified copies of resolutions
of the Board of Directors of each Subsidiary authorizing or ratifying the
execution, delivery and performance by such Subsidiary of each Loan Document to
which such Subsidiary is a party.
<PAGE>
11.1.3 Consents, etc. Certified copies of all documents evidencing
any necessary corporate action, consents and governmental approvals (if any)
required for the execution, delivery and performance by the Company and each
Subsidiary of the documents referred to in this Section 11.
11.1.4 Incumbency and Signature Certificates. A certificate of the
Secretary or an Assistant Secretary of the Company and each Subsidiary of the
Company as of the Effective Date certifying the names of the officer or officers
of such entity authorized to sign the Loan Documents to which such entity is a
party, together with a sample of the true signature of each such officer (it
being understood that the Agent and each Bank may conclusively rely on each such
certificate until formally advised by a like certificate of any changes
therein).
11.1.5 Guaranty. The Guaranty executed by each Subsidiary as of the
Effective Date.
11.1.6 Security Agreement. The Security Agreement executed by the
Company and each Subsidiary as of the Effective Date, together with evidence,
satisfactory to the Agent, that all filings necessary to perfect the Agent's
Lien on any collateral granted under the Security Agreement have been duly made
and are in full force and effect.
11.1.7 Pledge Agreements. The Company Pledge Agreement and, with
respect to any Subsidiary that as of the Effective Date has one or more
Subsidiaries, a Subsidiary Pledge Agreement, in each case together with all
stock certificates, stock powers and other items required to be delivered in
connection therewith.
11.1.8 Opinion of Counsel for the Company and the Guarantors. The
opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., counsel to the Company
and the Guarantors.
11.1.9 Other. Such other documents as the Agent or any Bank may
reasonably request.
11.2 Conditions. The obligation (a) of each Bank to make each Loan
and (b) of each Issuing Bank to issue each Letter of Credit is subject to the
following further conditions precedent that:
11.2.1 Compliance with Warranties, No Default, etc. Both before and
after giving effect to any borrowing and the issuance
<PAGE>
of any Letter of Credit (but, if any Event of Default of the nature referred to
in Section 12.1.2 shall have occurred with respect to any other Debt, without
giving effect to the application, directly or indirectly, of the proceeds
thereof) the following statements shall be true and correct:
(a) the representations and warranties of the Company and
the Guarantors set forth in this Agreement (excluding Sections 9.6,
9.8 and 9.15) and the other Loan Documents shall be true and correct
in all material respects with the same effect as if then made
(except to the extent stated to relate to an earlier date, in which
case such representations and warranties shall be true and correct
in all material respects as of such earlier date);
(b) except as disclosed by the Company to the Agent and the
Banks pursuant to Section 9.6,
(i) no litigation (including derivative actions),
arbitration proceeding, labor controversy or governmental
investigation or proceeding shall be pending or, to the
knowledge of the Company, threatened against the Company or
any of its Subsidiaries which might reasonably be expected to
have a Material Adverse Effect or which purports to affect the
legality, validity or enforceability of this Agreement, the
Notes or any other Loan Document; and
(ii) no development shall have occurred in any
litigation (including derivative actions), arbitration
proceeding, labor controversy or governmental investigation or
proceeding disclosed pursuant to Section 9.6 which might
reasonably be expected to have a Material Adverse Effect; and
(c) no Event of Default or Unmatured Event of Default shall
have then occurred and be continuing, and neither the Company nor
any of its Subsidiaries shall be in violation of any law or
governmental regulation or court order or decree where such
violation or violations singly or in the aggregate might reasonably
be expected to have a Material Adverse Effect.
11.2.2 Confirmatory Certificate. If requested by the Agent or any
Bank (acting through the Agent), the Agent shall have received (in sufficient
counterparts to provide one to each Bank) a certificate dated the date of such
requested Loan or
<PAGE>
Letter of Credit and signed by a duly authorized representative of the Company
as to the matters set out in Section 11.2.1 (it being understood that each
request by the Company for the making of a Loan or the issuance of a Letter of
Credit shall be deemed to constitute a warranty by the Company that the
conditions precedent set forth in Section 11.2.1 will be satisfied at the time
of the making of such Loan or the issuance of such Letter of Credit), together
with such other documents as the Agent or any Bank (acting through the Agent)
may reasonably request in support thereof.
SECTION 12 EVENTS OF DEFAULT AND THEIR EFFECT
12.1 Events of Default. Each of the following shall constitute an
Event of Default under this Agreement:
12.1.1 Non-Payment of the Loans, etc. Default in the payment when
due of the principal of any Loan or any reimbursement obligation with respect to
any Letter of Credit; or default, and continuance thereof for five days, in the
payment when due of any interest, fee or other amount payable by the Company
hereunder or under any other Loan Document.
12.1.2 Non-Payment of Other Debt. Any default shall occur under the
terms applicable to any Debt of the Company or any Subsidiary in an aggregate
principal amount (for all such Debt so affected) exceeding $250,000 and such
default shall (a) consist of the failure to pay such Debt when due (subject to
any applicable grace period), whether by acceleration or otherwise, or (b)
accelerate the maturity of such Debt or permit the holder or holders thereof, or
any trustee or agent for such holder or holders, to cause such Debt to become
due and payable prior to its expressed maturity.
12.1.3 Other Material Obligations. Default in the payment when due,
or in the performance or observance of, any material obligation of, or condition
agreed to by, the Company or any Subsidiary with respect to any material
purchase or lease of goods or services where such default, singly or in the
aggregate with other such defaults might reasonably be expected to have a
Material Adverse Effect (except only to the extent that the existence of any
such default is being contested by the Company or such Subsidiary in good faith
and by appropriate proceedings and appropriate reserves have been made in
respect of such default).
<PAGE>
12.1.4 Bankruptcy, Insolvency, etc. The Company or any Subsidiary
becomes insolvent or generally fails to pay, or admits in writing its general
inability or refusal to pay, debts as they become due; or the Company or any
Subsidiary applies for, consents to, or acquiesces in the appointment of a
trustee, receiver or other custodian for the Company or such Subsidiary or any
substantial part of the property thereof, or makes a general assignment for the
benefit of creditors; or, in the absence of such application, consent or
acquiescence, a trustee, receiver or other custodian is appointed for the
Company or any Subsidiary or for any substantial part of the property thereof
and is not discharged within 60 days; or any bankruptcy, reorganization, debt
arrangement, or other case or proceeding under any bankruptcy or insolvency law,
or any dissolution or liquidation proceeding (except the voluntary dissolution,
not under any bankruptcy or insolvency law, of a Subsidiary), is commenced in
respect of the Company or any Subsidiary, and if such case or proceeding is not
commenced by the Company or such Subsidiary, it is consented to or acquiesced in
by the Company or such Subsidiary, or remains for 60 days undismissed; or the
Company or any Subsidiary takes any corporate action to authorize, or in
furtherance of, any of the foregoing.
12.1.5 Non-Compliance with Provisions of This Agreement. (a) Failure
by the Company to comply with or to perform any covenant set forth in Sections
10.5 through 10.15; or (b) failure by the Company to comply with or to perform
any other provision of this Agreement (and not constituting an Event of Default
under any of the other provisions of this Section 12) and continuance of such
failure for 30 days after notice thereof to the Company from the Agent or any
Bank.
12.1.6 Warranties. Any warranty made by the Company herein is
breached or is false or misleading in any material respect, or any schedule,
certificate, financial statement, report, notice or other writing furnished by
the Company to the Agent or any Bank in connection herewith is false or
misleading in any material respect on the date as of which the facts therein set
forth are stated or certified.
12.1.7 Pension Plans. (i) Institution of any steps by the Company or
any other Person to terminate a Pension Plan if as a result of such termination
the Company could be required to make a contribution to such Pension Plan, or
could incur a liability or obligation to such Pension Plan, in excess of
$250,000; (ii) a contribution failure occurs with respect to any Pension Plan
sufficient to give rise to a Lien under section 302(f) of ERISA;
<PAGE>
or (iii) there shall occur any withdrawal or partial withdrawal from a
Multiemployer Pension Plan and the withdrawal liability (without unaccrued
interest) to Multiemployer Pension Plans as a result of such withdrawal
(including any outstanding withdrawal liability that the Company and the
Controlled Group have incurred on the date of such withdrawal) exceeds $250,000.
12.1.8 Judgments. Final judgments which exceed an aggregate of
$250,000 shall be rendered against the Company, or any Subsidiary and shall not
have been paid, discharged or vacated or had execution thereof stayed pending
appeal within 30 days after entry or filing of such judgments.
12.1.9 Invalidity of Guaranty, etc. The Guaranty shall cease to be
in full force and effect with respect to any Guarantor, any Guarantor shall fail
(subject to any applicable grace period) to comply with or to perform any
applicable provision of the Guaranty, or any Guarantor (or any Person by,
through or on behalf of such Guarantor) shall contest in any manner the
validity, binding nature or enforceability of the Guaranty with respect to such
Guarantor.
12.1.10 Invalidity of Collateral Documents, etc. Any Collateral
Document shall cease to be in full force and effect with respect to the Company
or any Guarantor, the Company or any Guarantor shall fail (subject to any
applicable grace period) to comply with or to perform any applicable provision
of any Collateral Document to which such entity is a party, or the Company or
any Guarantor (or any Person by, through or on behalf of the Company or such
Guarantor) shall contest in any manner the validity, binding nature or
enforceability of any Collateral Document.
12.1.11 Change in Control. (a) Any Person or group of Persons
(within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934,
but excluding (i) the executive managers of the Company as of the Effective Date
and (ii) the Environmental Opportunity Fund) shall acquire beneficial ownership
(within the meaning of Rule 13d-3 promulgated under such Act) of 25% or more of
the outstanding shares of common stock of the Company; (b) during any 24-month
period, individuals who at the beginning of such period constituted the
Company's Board of Directors (together with any new directors whose election by
the Company's Board of Directors or whose nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds of the
directors who either were directors at beginning of such period or whose
election or nomination was previously so
<PAGE>
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company; or (c) a period of 60 consecutive days shall have
elapsed during which any of the individuals named in Schedule 12.1.11 shall have
ceased to hold executive offices with the Company at least equal in seniority to
such individual's present offices, as set out in such Schedule 12.1.11,
excluding any such individual who has been replaced by another individual or
individuals reasonably satisfactory to the Required Banks (it being understood
that any such replacement individual shall be deemed added to Schedule 12.1.11
on the date of approval thereof by the Required Banks).
12.2 Effect of Event of Default. If any Event of Default described
in Section 12.1.4 shall occur, the Commitments (if they have not theretofore
terminated) shall immediately terminate and the Notes and all other obligations
hereunder shall become immediately due and payable and the Company shall become
immediately obligated to deliver to the Agent cash collateral in an amount equal
to the outstanding face amount of all Letters of Credit, all without
presentment, demand, protest or notice of any kind; and, if any other Event of
Default shall occur and be continuing, the Agent (upon written request of the
Required Banks) shall declare the Commitments (if they have not theretofore
terminated) to be terminated and/or declare all Notes and all other obligations
hereunder to be due and payable and/or demand that the Company immediately
deliver to the Agent cash collateral in amount equal to the outstanding face
amount of all Letters of Credit, whereupon the Commitments (if they have not
theretofore terminated) shall immediately terminate and/or all Notes and all
other obligations hereunder shall become immediately due and payable and/or the
Company shall immediately become obligated to deliver to the Agent cash
collateral in an amount equal to the face amount of all Letters of Credit, all
without presentment, demand, protest or notice of any kind. The Agent shall
promptly advise the Company of any such declaration, but failure to do so shall
not impair the effect of such declaration. Notwithstanding the foregoing, the
effect as an Event of Default of any event described in Section 12.1.1 or
Section 12.1.4 may be waived by the written concurrence of all of the Banks, and
the effect as an Event of Default of any other event described in this Section
12 may be waived by the written concurrence of the Required Banks. Any cash
collateral delivered hereunder shall be held by the Agent (without liability for
interest thereon) and applied to obligations arising in connection with any
drawing under a Letter of Credit. After the expiration or termination of all
Letters of Credit, such cash collateral shall be applied by the Agent to any
remaining
<PAGE>
obligations hereunder and any excess shall be delivered to the Company or as a
court of competent jurisdiction may elect.
SECTION 13 THE AGENT.
13.1 Appointment and Authorization. (a) Each Bank hereby
irrevocably (subject to Section 13.9) appoints, designates and authorizes the
Agent to take such action on its behalf under the provisions of this Agreement
and each other Loan Document and to exercise such powers and perform such duties
as are expressly delegated to it by the terms of this Agreement or any other
Loan Document, together with such powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or in any other Loan Document, the Agent shall not have any duties or
responsibilities except those expressly set forth herein, nor shall the Agent
have or be deemed to have any fiduciary relationship with any Bank, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Agent.
(b) Each Issuing Bank shall act on behalf of the Banks with
respect to any Letters of Credit issued by it and the documents associated
therewith. Each Issuing Bank shall have all of the benefits and immunities (i)
provided to the Agent in this Section 13 with respect to any acts taken or
omissions suffered by such Issuing Bank in connection with Letters of Credit
issued by it or proposed to be issued by it and the applications and agreements
for letters of credit pertaining to such Letters of Credit as fully as if the
term "Agent", as used in this Section 13, included such Issuing Bank with
respect to such acts or omissions and (ii) as additionally provided in this
Agreement with respect to the Issuing Banks.
13.2 Delegation of Duties. The Agent may execute any of its duties
under this Agreement or any other Loan Document by or through agents, employees
or attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.
13.3 Liability of Agent. None of the Agent-Related Persons shall
(i) be liable for any action taken or omitted to be taken by any of them under
or in connection with this Agreement or any other Loan Document or the
transactions contemplated hereby (except for its own gross negligence or willful
misconduct), or
<PAGE>
(ii) be responsible in any manner to any of the Banks for any recital,
statement, representation or warranty made by the Company or any Subsidiary or
Affiliate of the Company, or any officer thereof, contained in this Agreement or
in any other Loan Document, or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent under or in
connection with, this Agreement or any other Loan Document, or the validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Loan Document, or for any failure of the Company or any other party to
any Loan Document to perform its obligations hereunder or thereunder. No
Agent-Related Person shall be under any obligation to any Bank to ascertain or
to inquire as to the observance or performance of any of the agreements
contained in, or conditions of, this Agreement or any other Loan Document, or to
inspect the properties, books or records of the Company or any of the Company's
Subsidiaries or Affiliates.
13.4 Reliance by Agent. The Agent shall be entitled to rely, and
shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, statement or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons, and upon advice and statements of legal counsel (including counsel
to the Company), independent accountants and other experts selected by the
Agent. The Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of the Required Banks as it deems appropriate
and, if it so requests, confirmation from the Banks of their obligation to
indemnify the Agent against any and all liability and expense which may be
incurred by it by reason of taking or continuing to take any such action. The
Agent shall in all cases be fully protected in acting, or in refraining from
acting, under this Agreement or any other Loan Document in accordance with a
request or consent of the Required Banks and such request and any action taken
or failure to act pursuant thereto shall be binding upon all of the Banks.
13.5 Notice of Default. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Event of Default or Unmatured Event
of Default except with respect to defaults in the payment of principal, interest
and fees required to be paid to the Agent for the account of the Banks, unless
the Agent shall have received written notice from a Bank or the
<PAGE>
Company referring to this Agreement, describing such Event of Default or
Unmatured Event of Default and stating that such notice is a "notice of
default". The Agent will notify the Banks of its receipt of any such notice. The
Agent shall take such action with respect to such Event of Default or Unmatured
Event of Default as may be requested by the Required Banks in accordance with
Section 12; provided that unless and until the Agent has received any such
request, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Event of Default or
Unmatured Event of Default as it shall deem advisable or in the best interest of
the Banks.
13.6 Credit Decision. Each Bank acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and that no
act by the Agent hereafter taken, including any review of the affairs of the
Company and its Subsidiaries, shall be deemed to constitute any representation
or warranty by any Agent-Related Person to any Bank. Each Bank represents to the
Agent that it has, independently and without reliance upon any Agent-Related
Person and based on such documents and information as it has deemed appropriate,
made its own appraisal of and investigation into the business, prospects,
operations, property, financial and other condition and creditworthiness of the
Company and its Subsidiaries, and all applicable bank regulatory laws relating
to the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to the Company hereunder. Each Bank also
represents that it will, independently and without reliance upon any
Agent-Related Person and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Loan Documents, and to make such investigations as it deems necessary
to inform itself as to the business, prospects, operations, property, financial
and other condition and creditworthiness of the Company. Except for notices,
reports and other documents expressly herein required to be furnished to the
Banks by the Agent, the Agent shall not have any duty or responsibility to
provide any Bank with any credit or other information concerning the business,
prospects, operations, property, financial or other condition or
creditworthiness of the Company which may come into the possession of any of the
Agent-Related Persons.
13.7 Indemnification. Whether or not the transactions contemplated
hereby are consummated, the Banks shall indemnify upon demand the Agent-Related
Persons (to the extent not
<PAGE>
reimbursed by or on behalf of the Company and without limiting the obligation of
the Company to do so), pro rata, from and against any and all Indemnified
Liabilities; provided that no Bank shall be liable for any payment to the
Agent-Related Person of any portion of the Indemnified Liabilities resulting
solely from such Person's gross negligence or willful misconduct. Without
limitation of the foregoing, each Bank shall reimburse the Agent upon demand for
its ratable share of any costs or out-of-pocket expenses (including reasonable
fees of attorneys for the Agent (including the allocable costs of internal legal
services and all disbursements of internal counsel)) incurred by the Agent in
connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Loan Document, or any document
contemplated by or referred to herein, to the extent that the Agent is not
reimbursed for such expenses by or on behalf of the Company. The undertaking in
this Section shall survive repayment of the Loans, cancellation of the Notes,
any foreclosure under, or any modification, release or discharge of, any or all
of the Collateral Documents, any termination of this Agreement and the
resignation or replacement of the Agent.
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For the purposes of this Section 13.7, "Indemnified Liabilities"
shall mean: any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, charges, expenses and disbursements (including
reasonable fees of attorneys for the Agent (including the allocable costs of
internal legal services and all disbursements of internal counsel)) of any kind
or nature whatsoever which may at any time (including at any time following
repayment of the Loans and the termination, resignation or replacement of the
Agent or the replacement of any Bank) be imposed on, incurred by or asserted
against any Agent-Related Person in any way relating to or arising out of this
Agreement or any document contemplated by or referred to herein, or the
transactions contemplated hereby, or any action taken or omitted by any such
Person under or in connection with any of the foregoing, including with respect
to any investigation, litigation or proceeding (including (a) any case, action
or proceeding before any court or other governmental authority relating to
bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution,
winding-up or relief of debtors, or (b) any general assignment for the benefit
of creditors, composition, marshalling of assets for creditors, or other,
similar arrangement in respect of its creditors generally or any substantial
portion of its creditors; undertaken under U.S. Federal, state or foreign law,
including the Bankruptcy Code, and including any appellate proceeding) related
to or arising out of this Agreement or the Commitments or the use of the
proceeds thereof, whether or not any Agent-Related Person, any Bank or any of
their respective officers, directors, employees, counsel, agents or
attorneys-in-fact is a party thereto.
13.8 Agent in Individual Capacity. BofA and its Affiliates may make
loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory, underwriting or other business with the Company and its
Subsidiaries and Affiliates as though BofA were not the Agent, the Issuing Bank
hereunder and without notice to or consent of the Banks. The Banks acknowledge
that, pursuant to such activities, BofA or its Affiliates may receive
information regarding the Company or its Affiliates (including information that
may be subject to confidentiality obligations in favor of the Company or such
Subsidiary) and acknowledge that the Agent shall be under no obligation to
provide such information to them. With respect to their Loans, BofA and its
Affiliates shall have the same rights and powers under this Agreement as any
other Bank and may exercise the same as though BofA were not the Agent and
<PAGE>
the Issuing Bank, and the terms "Bank" and "Banks" include BofA and its
Affiliates, to the extent applicable, in their individual capacities.
13.9 Successor Agent. The Agent may, and at the request of the
Required Banks shall, resign as Agent upon 30 days' notice to the Banks. If the
Agent resigns under this Agreement, the Required Banks shall, with (so long as
no Event of Default exists) the consent of the Company (which shall not be
unreasonably withheld or delayed), appoint from among the Banks a successor
agent for the Banks. If no successor agent is appointed prior to the effective
date of the resignation of the Agent, the Agent may appoint, after consulting
with the Banks and the Company, a successor agent from among the Banks. Upon the
acceptance of its appointment as successor agent hereunder, such successor agent
shall succeed to all the rights, powers and duties of the retiring Agent and the
term "Agent" shall mean such successor agent, and the retiring Agent's
appointment, powers and duties as Agent shall be terminated. After any retiring
Agent's resignation hereunder as Agent, the provisions of this Section 13 and
Sections 14.6 and 14.13 shall inure to its benefit as to any actions taken or
omitted to be taken by it while it was Agent under this Agreement. If no
successor agent has accepted appointment as Agent by the date which is 30 days
following a retiring Agent's notice of resignation, the retiring Agent's
resignation shall nevertheless thereupon become effective and the Banks shall
perform all of the duties of the Agent hereunder until such time, if any, as the
Required Banks appoint a successor agent as provided for above. Notwithstanding
the foregoing, however, BofA may not be removed as the Agent at the request of
the Required Banks unless BofA shall also simultaneously be replaced as an
"Issuing Bank" hereunder pursuant to documentation in form and substance
reasonably satisfactory to BofA.
13.10 Withholding Tax
(a) If any Bank is a "foreign corporation, partnership
or trust" within the meaning of the Code and such Bank claims
exemption from, or a reduction of, U.S. withholding tax under
Sections 1441 or 1442 of the Code, such Bank agrees to deliver to
the Agent:
(i) if such Bank claims an exemption from, or a
reduction of, withholding tax under a United States tax
treaty, properly completed Internal Revenue Service ("IRS")
Forms 1001 and W-8 before the payment of any
<PAGE>
interest in the first calendar year and before the payment of
any interest in each third succeeding calendar year during
which interest may be paid under this Agreement;
(ii) if such Bank claims that interest paid under
this Agreement is exempt from United States withholding tax
because it is effectively connected with a United States
trade or business of such Bank, two properly completed and
executed copies of IRS Form 4224 before the payment of any
interest is due in the first taxable year of such Bank and in
each succeeding taxable year of such Bank during which
interest may be paid under this Agreement, and IRS Form W-9;
and
(iii) such other form or forms as may be required
under the Code or other laws of the United States as a
condition to exemption from, or reduction of, United States
withholding tax.
Such Bank agrees to promptly notify the Agent of any change
in circumstances which would modify or render invalid any
claimed exemption or reduction.
(b) If any Bank claims exemption from, or reduction of,
withholding tax under a United States tax treaty by providing IRS
Form 1001 and such Bank sells, assigns, grants a participation in,
or otherwise transfers all or part of the obligations of the Company
to such Bank, such Bank agrees to notify the Agent of the percentage
amount in which it is no longer the beneficial owner of such
obligations of the Company hereunder. To the extent of such
percentage amount, the Agent will treat such Bank's IRS Form 1001 as
no longer valid.
(c) If any Bank claiming exemption from United States
withholding tax by filing IRS Form 4224 with the Agent sells,
assigns, grants a participation in, or otherwise transfers all or
part of the obligations of the Company to such Bank hereunder, such
Bank agrees to undertake sole responsibility for complying with the
withholding tax requirements imposed by Sections 1441 and 1442 of
the Code.
(d) If any Bank is entitled to a reduction in the
applicable withholding tax, the Agent may withhold from
<PAGE>
any interest payment to such Bank an amount equivalent to the
applicable withholding tax after taking into account such reduction.
If the forms or other documentation required by subsection (a) of
this Section are not delivered to the Agent, then the Agent may
withhold from any interest payment to such Bank not providing such
forms or other documentation an amount equivalent to the applicable
withholding tax.
(e) If the IRS or any other governmental authority of the
United States or any other jurisdiction asserts a claim that the
Agent did not properly withhold tax from amounts paid to or for the
account of any Bank (because the appropriate form was not delivered
or was not properly executed, or because such Bank failed to notify
the Agent of a change in circumstances which rendered the exemption
from, or reduction of, withholding tax ineffective, or for any other
reason) such Bank shall indemnify the Agent fully for all amounts
paid, directly or indirectly, by the Agent as tax or otherwise,
including penalties and interest, and including any taxes imposed by
any jurisdiction on the amounts payable to the Agent under this
Section, together with all costs and expenses (including reasonable
fees of attorneys for the Agent (including the allocable costs of
internal legal services and all disbursements of internal counsel)).
The obligation of the Banks under this subsection shall survive the
repayment of the Loans, cancellation of the Notes, any termination
of this Agreement and the resignation or replacement of the Agent.
13.11 Collateral Matters. The Banks irrevocably authorize the Agent,
at its option and in its discretion, to release any Lien granted to or held by
the Agent under any Collateral Document (i) upon termination of the Commitments
and payment in full of all Loans and all other obligations of the Company
hereunder and the expiration or termination of all Letters of Credit; (ii)
constituting property sold or to be sold or disposed of as part of or in
connection with any disposition permitted hereunder; or (iii) subject to Section
14.1, if approved, authorized or ratified in writing by the Required Banks. Upon
request by the Agent at any time, the Banks will confirm in writing the Agent's
authority to release particular types or items of collateral pursuant to this
Section 13.11.
<PAGE>
SECTION 14 GENERAL
14.1 Waiver; Amendments. No delay on the part of the Agent or any
Bank in the exercise of any right, power or remedy shall operate as a waiver
thereof, nor shall any single or partial exercise by any of them of any right,
power or remedy preclude other or further exercise thereof, or the exercise of
any other right, power or remedy. No amendment, modification or waiver of, or
consent with respect to, any provision of this Agreement or the Notes shall in
any event be effective unless the same shall be in writing and signed and
delivered by Banks having an aggregate Percentage of not less than the aggregate
Percentage expressly designated herein with respect thereto or, in the absence
of such designation as to any provision of this Agreement or the Notes, by the
Required Banks, and then any such amendment, modification, waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given. No amendment, modification, waiver or consent shall change the
Percentage of any Bank without the consent of such Bank. No amendment,
modification, waiver or consent shall (i) extend or increase the amount of the
Commitments, (ii) extend the date for payment of any principal of or interest on
the Loans or any fees payable hereunder, (iii) reduce the principal amount of
any Loan, the rate of interest thereon or any fees payable hereunder, (iv)
release the Guaranty (other than with respect to a Guarantor which ceases to be
a Subsidiary as a result of a transaction permitted hereunder) or all or
substantially all of the collateral granted under the Collateral Document or (v)
reduce the aggregate Percentage required to effect an amendment, modification,
waiver or consent without, in each case, the consent of all Banks. No provisions
of Section 13 or other provision of this Agreement affecting the Agent in its
capacity as such shall be amended, modified or waived without the consent of the
Agent. No provision of this Agreement relating to the rights or duties of an
Issuing Bank in its capacity as such shall be amended, modified or waived
without the consent of such Issuing Bank.
14.2 Confirmations. The Company and each holder of a Note agree from
time to time, upon written request received by it from the other, to confirm to
the other in writing (with a copy of each such confirmation to the Agent) the
aggregate unpaid principal amount of the Loans then outstanding under such Note.
14.3 Notices. Except as otherwise provided in Sections 2.2 and 2.3,
all notices hereunder shall be in writing (including facsimile transmission) and
shall be sent to the applicable party at its address shown on Schedule 14.3 or
at such other address as such party may, by written notice received by the other
parties, have designated as its address for such purpose. Notices sent by
<PAGE>
facsimile transmission shall be deemed to have been given when sent and receipt
of such facsimile is confirmed; notices sent by mail shall be deemed to have
been given three Business Days after the date when sent by registered or
certified mail, postage prepaid; and notices sent by hand delivery or overnight
courier service shall be deemed to have been given when received. For purposes
of Sections 2.2 and 2.3, the Agent shall be entitled to rely on telephonic
instructions from any person that the Agent in good faith believes is an
authorized officer or employee of the Company, and the Company shall hold the
Agent and each other Bank harmless from any loss, cost or expense resulting from
any such reliance.
14.4 Computations. Where the character or amount of any asset or
liability or item of income or expense is required to be determined, or any
consolidation or other accounting computation is required to be made, for the
purpose of this Agreement, such determination or calculation shall, to the
extent applicable and except as otherwise specified in this Agreement, be made
in accordance with GAAP, consistently applied; provided that if the Company
notifies the Agent that the Company wishes to amend any covenant in Section 10
to eliminate or to take into account the effect of any change in GAAP on the
operation of such covenant (or if the Agent notifies the Company that the
Required Banks wish to amend Section 10 for such purpose), then the Company's
compliance with such covenant shall be determined on the basis of GAAP in effect
immediately before the relevant change in GAAP became effective, until either
such notice is withdrawn or such covenant is amended in a manner satisfactory to
the Company and the Required Banks.
14.5 Regulation U. Each Bank represents that it in good faith is not
relying, either directly or indirectly, upon any Margin Stock as collateral
security for the extension or maintenance by it of any credit provided for in
this Agreement.
14.6 Costs, Expenses and Taxes. The Company agrees to pay on demand
all reasonable out-of-pocket costs and expenses of the Agent (including the
reasonable fees and charges of counsel for the Agent and of local counsel, if
any, who may be retained by said counsel) in connection with the preparation,
execution, delivery and administration of this Agreement, the other Loan
Documents and all other documents provided for herein or delivered or to be
delivered hereunder or in connection herewith (including any amendments,
supplements or waivers to any Loan Documents), and all reasonable out-of-pocket
costs and expenses (including reasonable attorneys' fees, court costs and other
legal expenses and allocated costs of staff counsel) incurred by
<PAGE>
the Agent and each Bank after an Event of Default in connection with the
enforcement of this Agreement, the other Loan Documents or any such other
documents. Each Bank agrees to reimburse the Agent for such Bank's pro rata
share (based on its respective Percentage) of any such costs and expenses of the
Agent not paid by the Company. In addition, the Company agrees to pay, and to
save the Agent and the Banks harmless from all liability for, (a) any stamp or
other taxes (excluding income taxes and franchise taxes based on net income)
which may be payable in connection with the execution and delivery of this
Agreement, the borrowings hereunder, the issuance of the Notes or the execution
and delivery of any other Loan Document or any other document provided for
herein or delivered or to be delivered hereunder or in connection herewith and
(b) any fees of the Company's auditors in connection with any reasonable
exercise by the Agent and the Banks of their rights pursuant to Section 10.2.
All obligations provided for in this Section 14.6 shall survive repayment of the
Loans, cancellation of the Notes and any termination of this Agreement.
14.7 Subsidiary References. The provisions of this Agreement
relating to Subsidiaries shall apply only during such times as the Company has
one or more Subsidiaries.
14.8 Captions. Section captions used in this Agreement are for
convenience only and shall not affect the construction of this Agreement.
<PAGE>
14.9 Assignments; Participations.
14.9.1 Assignments. Any Bank may, with the prior written consents of
the Company and the Agent (which consents shall not be unreasonably delayed or
withheld), at any time assign and delegate to one or more commercial banks or
other Persons (any Person to whom such an assignment and delegation is to be
made being herein called an "Assignee"), all or any fraction of such Bank's
Loans and Commitment (which assignment and delegation shall be of a constant,
and not a varying, percentage of all the assigning Bank's Loans and Commitment)
in a minimum aggregate amount equal to the lesser of (i) the amount of the
assigning Bank's remaining Commitment and (ii) $5,000,000; provided that (a) no
assignment and delegation may be made to any Person if, at the time of such
assignment and delegation, the Company would be obligated to pay any greater
amount under Section 7.6 or Section 8 to the Assignee than the Company is then
obligated to pay to the assigning Bank under such Sections (and if any
assignment is made in violation of the foregoing, the Company will not be
required to pay the incremental amounts) and (b) the Company and the Agent shall
be entitled to continue to deal solely and directly with such Bank in connection
with the interests so assigned and delegated to an Assignee until the date when
all of the following conditions shall have been met:
(x) five Business Days (or such lesser period of time as
the Agent and the assigning Bank shall agree) shall have passed
after written notice of such assignment and delegation, together
with payment instructions, addresses and related information with
respect to such Assignee, shall have been given to the Company and
the Agent by such assigning Bank and the Assignee,
(y) the assigning Bank and the Assignee shall have
executed and delivered to the Company and the Agent an assignment
agreement substantially in the form of Exhibit G (an "Assignment
Agreement"), together with any documents required to be delivered
thereunder, which Assignment Agreement shall have been accepted by
the Agent, and
(z) the assigning Bank or the Assignee shall have paid
the Agent a processing fee of $3,500.
>From and after the date on which the conditions described above have been met,
(x) such Assignee shall be deemed automatically to have become a party hereto
and, to the extent that rights and obligations hereunder have been assigned and
delegated to such Assignee pursuant to such Assignment Agreement, shall have the
<PAGE>
rights and obligations of a Bank hereunder, and (y) the assigning Bank, to the
extent that rights and obligations hereunder have been assigned and delegated by
it pursuant to such Assignment Agreement, shall be released from its obligations
hereunder. Within five Business Days after effectiveness of any assignment and
delegation, the Company shall execute and deliver to the Agent (for delivery to
the Assignee and the Assignor, as applicable) a new Note in the principal amount
of the Assignee's Percentage of the Commitment Amount and, if the assigning Bank
has retained a Commitment hereunder, a replacement Note in the principal amount
of the Percentage of the Commitment Amount retained by the assigning Bank (such
Note to be in exchange for, but not in payment of, the predecessor Note held by
such assigning Bank). Each such Note shall be dated the effective date of such
assignment. The assigning Bank shall mark the predecessor Note "exchanged" and
deliver it to the Company. Accrued interest on that part of the predecessor Note
being assigned shall be paid as provided in the Assignment Agreement. Accrued
interest and fees on that part of the predecessor Note not being assigned shall
be paid to the assigning Bank. Accrued interest and accrued fees shall be paid
at the same time or times provided in the predecessor Note and in this
Agreement. Any attempted assignment and delegation not made in accordance with
this Section 14.9.1 shall be null and void.
Notwithstanding the foregoing provisions of this Section 14.9.1 or
any other provision of this Agreement, any Bank may at any time assign all or
any portion of its Loans and its Note to a Federal Reserve Bank (but no such
assignment shall release any Bank from any of its obligations hereunder).
14.9.2 Participations. Any Bank may at any time sell to one or more
commercial banks or other Persons participating interests in any Loan owing to
such Bank, the Note held by such Bank, the Commitment of such Bank, the direct
or participation interest of such Bank in any Letter of Credit or any other
interest of such Bank hereunder (any Person purchasing any such participating
interest being herein called a "Participant"); provided that any Bank selling
any such participating interest shall give notice thereof to the Company. In the
event of a sale by a Bank of a participating interest to a Participant, (x) such
Bank shall remain the holder of its Note for all purposes of this Agreement, (y)
the Company and the Agent shall continue to deal solely and directly with such
Bank in connection with such Bank's rights and obligations hereunder and (z) all
amounts payable by the Company shall be determined as if such Bank had not sold
such participation and shall be paid directly to such Bank. No Participant shall
have any direct or indirect voting rights
<PAGE>
hereunder except with respect to any of the events (excluding the events
described in clause (v) thereof) described in the fourth sentence of Section
14.1. Each Bank agrees to incorporate the requirements of the preceding sentence
into each participation agreement which such Bank enters into with any
Participant. The Company agrees that if amounts outstanding under this Agreement
and the Notes are due and payable (as a result of acceleration or otherwise),
each Participant shall be deemed to have the right of setoff in respect of its
participating interest in amounts owing under this Agreement, any Note and with
respect to any Letter of Credit to the same extent as if the amount of its
participating interest were owing directly to it as a Bank under this Agreement
or such Note; provided that such right of setoff shall be subject to the
obligation of each Participant to share with the Banks, and the Banks agree to
share with each Participant, as provided in Section 7.5. The Company also agrees
that each Participant shall be entitled to the benefits of Section 7.6 and
Section 8 as if it were a Bank (provided that no Participant shall receive any
greater compensation pursuant to Section 7.6 or Section 8 than would have been
paid to the participating Bank if no participation had been sold).
14.10 Governing Law. This Agreement and each Note shall be a
contract made under and governed by the internal laws of the State of Illinois.
Whenever 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. All obligations of the Company and rights of the Agent and
the Banks expressed herein or in any other Loan Document shall be in addition to
and not in limitation of those provided by applicable law.
14.11 Counterparts. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts and
each such counterpart shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same Agreement.
14.12 Successors and Assigns. This Agreement shall be binding upon
the Company, the Banks and the Agent and their respective successors and
assigns, and shall inure to the benefit of the Company, the Banks and the Agent
and the successors and assigns of the Banks and the Agent.
<PAGE>
14.13 Indemnification by the Company.
(a) In consideration of the execution and delivery of this Agreement
by the Agent and the Banks and the agreement to extend the Commitments provided
hereunder, the Company hereby agrees to indemnify, exonerate and hold the Agent,
each Bank and each of the officers, directors, employees, Affiliates and agents
of the Agent and each Bank (each a "Bank Party") free and harmless from and
against any and all actions, causes of action, suits, losses, liabilities,
damages and expenses, including reasonable attorneys' fees and charges and,
without duplication, allocated costs of staff counsel (collectively, for
purposes of this Section 14.13, called the "Indemnified Liabilities"), incurred
by the Bank Parties or any of them as a result of, or arising out of, or
relating to (i) any tender offer, merger, purchase of stock, purchase of assets
or other similar transaction financed or proposed to be financed in whole or in
part, directly or indirectly, with the proceeds of any of the Loans, (ii) the
use, handling, release, emission, discharge, transportation, storage, treatment
or disposal of any Hazardous Substance at any property owned or leased by the
Company or any Subsidiary, (iii) any violation of any Environmental Laws with
respect to conditions at any property owned or leased by the Company or any
Subsidiary or the operations conducted thereon, (iv) the investigation, cleanup
or remediation of offsite locations at which the Company or any Subsidiary or
their respective predecessors are alleged to have directly or indirectly
disposed of hazardous substances or (v) the execution, delivery, performance or
enforcement of this Agreement or any other Loan Document by any of the Bank
Parties, except for any such Indemnified Liabilities arising on account of any
such Bank Party's gross negligence or willful misconduct. If and to the extent
that the foregoing undertaking may be unenforceable for any reason, the Company
hereby agrees to make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities which is permissible under applicable
law. Nothing set forth above shall be construed to relieve any Bank Party from
any obligation it may have under this Agreement.
(b) All obligations provided for in this Section 14.13 shall survive
repayment of the Loans, cancellation of the Notes, any foreclosure under, or any
modification, release or discharge of any or all of the Collateral Documents and
any termination of this Agreement.
14.14 Interest. (a) It is the intention of the parties hereto that
each Bank shall conform strictly to usury laws applicable to it. Accordingly,
the parties hereto stipulate and agree that none of the terms and provisions
contained in this
<PAGE>
Agreement or any Note shall ever be construed to create a contract to pay any
Bank for the use, forbearance or detention of money a rate in excess of the
Highest Lawful Rate applicable to such Bank, and that for purposes hereof,
"interest" shall include the aggregate of all charges or other consideration
which constitute interest under applicable laws and are contracted for, taken,
reserved, charged or received under this Agreement, the applicable Note or
otherwise in connection with the transactions contemplated by this Agreement.
Further, if the transactions contemplated hereby would be usurious as to any
Bank under the laws applicable to it, then notwithstanding anything to the
contrary in this Agreement or the applicable Note, or any agreement or document
entered into in connection herewith or therewith, it is agreed as follows: the
aggregate of all consideration which constitutes interest under the laws
applicable to such Bank that is contracted for, taken, reserved, charged or
received by such Bank under this Agreement or the applicable Note, or otherwise
in connection herewith or therewith, shall under no circumstances exceed the
maximum amount allowed by the laws applicable to such Bank, and any excess shall
be credited by such Bank on the principal amount of the indebtedness of the
Company owed to such Bank (or, if the principal amount of all such indebtedness
shall have been paid in full, to the extent such interest has been received by
such Bank it shall be refunded by such Bank to the Company). The provisions of
this Section 14.14(a) shall control over all other provisions of this Agreement,
the Notes and any other agreement or document which may be in apparent conflict
herewith. The parties further stipulate and agree that, without limitation of
the foregoing, all calculations of the rate or amount of interest contracted
for, taken, reserved, charged or received under this Agreement, each Note and
any other applicable agreement or document which are made for the purpose of
determining whether such rate or amount exceeds the Highest Lawful Rate shall be
made, to the extent permitted by applicable law, by amortizing, prorating,
allocating and spreading during the period of the full stated term of the
indebtedness of the Company to the applicable Bank, and if longer and if
permitted by applicable law, until payment in full, all interest at any time so
contracted for, taken, reserved, charged or received.
<PAGE>
(b) If at any time the effective rate of interest which would
otherwise apply to any indebtedness evidenced by any Note issued to any Bank
would exceed the Highest Lawful Rate applicable to such Bank (taking into
account the interest rate applicable to such indebtedness pursuant to the other
provisions of this Agreement, plus all additional charges and consideration
which have been contracted for, taken, reserved, charged or received under this
Agreement or such Note (the "Additional Charges") which constitute interest with
respect to such indebtedness), the effective interest rate to apply to such
indebtedness shall be limited to the Highest Lawful Rate, but any subsequent
reductions in the interest rate applicable to such indebtedness shall not reduce
the effective interest rate to apply to such indebtedness below the Highest
Lawful Rate applicable to such Bank until the total amount of interest accrued
on such indebtedness equals the amount of interest which would have accrued if
the interest rate from time to time applicable to such indebtedness had at all
times been in effect with respect to such indebtedness pursuant to the other
provisions of this Agreement and if such Bank had collected all Additional
Charges called for under this Agreement and its Note. If at maturity or final
payment of any Note issued to any Bank the total amount of interest accrued on
such Note (including amounts designated as "interest" plus any Additional
Charges which constitute interest, and taking into account the limitations of
the first sentence of this Section 14.14(b)) is less than the total amount of
interest which would have accrued if the interest rate or interest rates
applicable to the indebtedness from time to time outstanding under such Note had
at all times been in effect pursuant to the other provisions of this Agreement,
then the Company agrees, to the fullest extent permitted by the laws applicable
to such Bank, to pay to such Bank an amount equal to the difference between (i)
the lesser of (1) the amount of interest which would have accrued on such Note
if the Highest Lawful Rate had at all times been in effect (but excluding, for
purposes of calculating such amount of interest, any Additional Charges which
constitute interest with respect to such Note), or (2) the amount of interest
which would have accrued on such Note if the interest rate or interest rates
applicable to the indebtedness from time to time outstanding under such Note had
at all times been in effect pursuant to the other provisions of this Agreement
(including amounts designated as "interest" plus any Additional Charges which
constitute interest with respect to such Note) less (ii) the amount of interest
actually accrued on such Note (including amounts designated as "interest" plus
any Additional Charges which constitute interest with respect to such Note).
<PAGE>
14.15 FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE
COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT ANY SUIT SEEKING ENFORCEMENT
AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION,
IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE
FOUND. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION
OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS
SET FORTH ABOVE. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF
PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR
WITHOUT THE STATE OF ILLINOIS. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY
SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE COMPANY HAS OR
HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY
LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT,
ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS
PROPERTY, THE COMPANY HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS
OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
14.16 WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE AGENT AND EACH
BANK HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO
ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN
DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH
MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING
FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING,
AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND
NOT BEFORE A JURY.
<PAGE>
Delivered at Chicago, Illinois, as of the day and year first above written.
SYNAGRO TECHNOLOGIES, INC.
By
--------------------------------------------------
Title
---------------------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent
By
---------------------------------------------------
Title
----------------------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVING ASSOCIATION, as Issuing Bank and as a Bank
By
--------------------------------------------------
Title
---------------------------------------------
S-1
<PAGE>
SCHEDULE 1.1
PRICING SCHEDULE
The Base Rate Margin, the Eurodollar Margin, the Non-Use Fee Rate
and the LC Fee Rate for Financial Letters of Credit and Non-Financial Letters of
Credit, respectively, shall be determined in accordance with the table below and
the other provisions of this Schedule 1.1.
<TABLE>
<CAPTION>
LEVEL LEVEL LEVEL LEVEL LEVEL
I II III IV V
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Rate for
Non-Use Fee 0.350% 0.350% 0.400% 0.450% 0.500%
---------- ---------- ---------- ---------- ----------
Eurodollar Margin 1.500% 1.750% 2.000% 2.250% 2.500%
---------- ---------- ---------- ---------- ----------
Base Rate Margin
0 0.125% 0.125% 0.250% 0.375%
---------- ---------- ---------- ---------- ----------
LC Rate for
Non-Financial Letters of Credit
0.750% 0.875% 1.000% 1.125% 1.250%
---------- ---------- ---------- ---------- ----------
LC Rate for
Financial Letters of Credit
1.500% 1.750% 2.000% 2.250% 2.500%
---------- ---------- ---------- ---------- ----------
</TABLE>
Level I applies when the Funded Debt to EBITDA Ratio is less than
2.0 to 1.
Level II applies when the Funded Debt to EBITDA Ratio is equal to or
greater than 2.0 to 1 but less than 2.5 to 1.
Level III applies when the Funded Debt to EBITDA Ratio is equal to
or greater than 2.5 to 1 but less than 3.0 to 1.
Level IV applies when the Funded Debt to EBITDA Ratio is equal to or
greater than 3.0 to 1 but less than 3.5 to 1.
Level V applies when the Funded Debt to EBITDA Ratio is equal to or
greater than 3.5 to 1.
Initially, the applicable Level shall be Level IV. The applicable
Level shall be adjusted, to the extent applicable, 45 days (or, in the case of
the last Fiscal Quarter of any Fiscal Year, 90 days) after the end of each
Fiscal Quarter based on the Funded Debt to EBITDA Ratio as of the last day of
such Fiscal Quarter; provided that
1
<PAGE>
if the Company fails to deliver the financial statements required by Section
10.1.1 or 10.1.2, as applicable, and the related certificate required by Section
10.1.3 by the 45th day (or, if applicable, the 90th day) after any Fiscal
Quarter, Level V shall apply until such financial statements are delivered.
2
<PAGE>
SCHEDULE 2.1
BANKS AND PERCENTAGES
<TABLE>
<CAPTION>
Amount of
Bank Commitment Percentage
- ---- ---------- ----------
<S> <C> <C>
Bank of America National $40,000,000 100%
Trust and Savings Association
TOTALS $40,000,000 100%
</TABLE>
1
<PAGE>
SCHEDULE 14.3
ADDRESSES FOR NOTICES
SYNAGRO TECHNOLOGIES, INC.
- --------------------------
5850 San Felipe, Ste. 500
Houston, Texas 77057
Attention: Mark Rome
Telephone: (713) 706-6185
Facsimile: (713) 706-6181
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Agent
- ---------------------------------
Agency Management Services
231 South LaSalle Street
Chicago, Illinois 60697
Attention: Jay McKeown
Telephone: (312) 828-7299
Facsimile: (312) 974-9102
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a Bank
- ----------------------------------
231 South LaSalle Street
Chicago, Illinois 60697
Attention: Robert Rospierski
Telephone: (312) 828-8363
Facsimile: (312) 828-1974
1
<PAGE>
November 2, 1998
Synagro Technologies, Inc.
5850 San Felipe, Ste. 600
Houston, Texas 77057
Attention: Mark Rome
Re: First Amendment
Ladies/Gentlemen:
Please refer to the Credit Agreement (the "Credit Agreement") dated as
of October 5, 1998 among Synagro Technologies, Inc., various financial
institutions and Bank of America National Trust and Savings Association, as
Agent. Capitalized terms used and not otherwise defined in this letter have the
respective meanings given to them in the Credit Agreement.
The Company, the Banks and the Agent hereby agree that the Credit
Agreement is amended as set forth below:
(1) Section 10.7 is amended by (i) deleting the word "and" after clause
(f); (ii) replacing the period at the end of clause (g) with a
semi-colon followed by the word "and"; and (iii) inserting the
following clause (h) at the end thereof:
(h) Debt to finance the payment of insurance premiums, provided
that (i) the amount of such Debt incurred with respect to any
insurance policy shall not exceed the aggregate amount of
premiums payable under such policy in the 12-month period
following the incurrence of such Debt and (ii) the interest
rate payable in respect of such Debt shall not exceed the
interest rate applicable to Base Rate Loans hereunder at the
time of such incurrence.
(2) Section 10.8 is amended by (i) deleting the word "and" after clause
(f); (ii) replacing the period at the end of clause (g) with a
semi-colon followed by the word "and"; and (iii) inserting the
following clause (h) at the end thereof:
(g) Liens securing Debt described in Section 10.7(h), provided
that any such Lien attaches only to the insurance policy
(including unearned premiums thereunder and proceeds thereof)
financed with the proceeds of such Debt.
<PAGE>
Synagro Technologies, Inc.
November 2, 1998
Page 2
This letter amendment shall be governed by the laws of the State of
Illinois applicable to contracts made and to be performed entirely within such
State. Except as amended hereby, the Credit Agreement shall remain in full force
and effect and is ratified and confirmed in all respects.
Please evidence your agreement to the foregoing by signing and
returning a counterpart of this letter.
Very truly yours,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
-----------------------------
Title:
--------------------------
ACCEPTED AND AGREED
as of the date first
written above
SYNAGRO TECHNOLOGIES, INC.
By:
-----------------------------
Title:
--------------------------
<PAGE>
<PAGE>
SECOND AMENDMENT
THIS SECOND AMENDMENT dated as of November 13, 1998 (this "Amendment")
amends the Credit Agreement dated as of October 7, 1998 (as previously amended,
the "Credit Agreement") among Synagro Technologies, Inc. (the "Company"),
various financial institutions (the "Banks") and Bank of America National Trust
and Savings Association, as Agent (in such capacity, the "Agent"). Terms defined
in the Credit Agreement are, unless otherwise defined herein or the context
otherwise requires, used herein as defined therein.
WHEREAS, the Company, the Banks and the Agent have entered into the
Credit Agreement; and
WHEREAS, the parties hereto desire to amend the Credit Agreement in
certain respects as more fully set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1 Amendments. Effective on (and subject to the occurrence of)
the Amendment Effective Date (as defined below), the Credit Agreement shall be
amended in accordance with Sections 1.1 through 1.6:
1.1 Amendment to Definition. The definition of "Interest Coverage
Computation Period" in Section 1.1 is amended in its entirety to read as
follows:
"Interest Coverage Computation Period means each of the
following periods: (a) the month ending October 31, 1998; (b) the
period of two consecutive months ending November 30, 1998; (c) the
period of three consecutive months ending December 31, 1998; (d) the
period of four consecutive months ending January 31, 1999; (e) the
period of five consecutive months ending February 28, 1999; (f) the
period of six consecutive months ending March 31, 1999; (g) the period
of seven consecutive months ending April 30, 1999; (h) the period of
eight consecutive months ending May 31, 1999; (i) the period of three
consecutive Fiscal Quarters ending June 30, 1999; and (j) each period
of four consecutive Fiscal Quarters ending on the last day of a Fiscal
Quarter on or after September 30, 1999."
1.2 Amendment of Section 10.1.4. Section 10.1.4 is amended in its
entirety to read as follows:
"10.1.4 Compliance Certificates. (a) Contemporaneously with
the furnishing of each monthly financial report
<PAGE>
pursuant to Section 10.1.3 at any time prior to July 1, 1999, a duly
completed compliance certificate in the form of Exhibit B-1, with
appropriate insertions, dated the date of such financial report and
signed by the chief financial officer of the Company, containing a
computation of the Interest Coverage Ratio and to the effect that such
officer has not become aware of any Event of Default or Unmatured Event
of Default that has occurred and is continuing or, if there is any such
event, describing it and the steps, if any, being taken to cure it.
(b) Contemporaneously with the furnishing of a copy of each annual
audit report pursuant to Section 10.1.1 and of each set of quarterly
statements pursuant to Section 10.1.2, (i) a duly completed compliance
certificate in the form of Exhibit B-2, with appropriate insertions,
dated the date of such annual report or such quarterly statements and
signed by the chief financial officer of the Company, containing a
computation of each of the financial ratios and restrictions set forth
forth in Section 10.6 and to the effect that such officer has not
become aware of any Event of Default or Unmatured Event of Default that
has occurred and is continuing or, if there is any such event,
describing it and the steps, if any, being taken to cure it; and (ii)
an updated organizational chart listing all Subsidiaries and the
locations of their businesses."
1.3 Amendment of Section 10.6.1. Section 10.6.1 is amended by deleting
the amount "$30,700,000" and substituting "$30,450,000" therefor.
1.4 Amendment of Section 10.6.2. Section 10.6.2 is amended in its
entirety to read as follows:
"10.6.2 Minimum Interest Coverage. Not permit the Interest
Coverage Ratio to be less than the applicable ratio set forth below:
<TABLE>
<CAPTION>
COMPUTATION INTEREST
PERIOD ENDING: COVERAGE RATIO
-------------- --------------
<S> <C>
Effective Date through 10/31/98 1.50 to 1.0
11/30/98 through 5/31/99 1.60 to 1.0
6/30/99 through 12/31/99 1.85 to 1.0
3/31/00 and thereafter 2.10 to 1.0."
</TABLE>
1.5 Amendment of Section 10.6.3. Section 10.6.3 is amended by deleting
the parenthetical clause therein.
<PAGE>
1.6 Amendment of Section 10.6.4. Section 10.6.4 is amended by deleting
the parenthetical clause therein.
1.7 Amendment of Compliance Certificate. Exhibit B to the Credit
Agreement is amended to read in its entirety as set forth on Exhibit B to this
Amendment.
SECTION 2 Representations and Warranties. The Company represents and
warrants to the Agent and the Banks that, after giving effect to the
effectiveness hereof, (a) each warranty set forth in Section 9 (excluding
Sections 9.6 and 9.8) of the Credit Agreement is true and correct as of the date
of the execution and delivery of this Amendment by the Company, with the same
effect as if made on such date, and (b) no Event of Default or Unmatured Event
of Default exists.
SECTION 3 Effectiveness. The amendments set forth in Section 1 above
shall become effective on such date (the "Amendment Effective Date") when the
Agent shall have received counterparts of this Amendment executed by the Company
and the Required Banks.
SECTION 4 Miscellaneous.
4.1 Continuing Effectiveness, etc. As herein amended, the Credit
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects. After the effectiveness of this Amendment, all
references in the Credit Agreement and the other Loan Documents to "Credit
Agreement" or similar terms shall refer to the Credit Agreement as amended
hereby.
4.2 Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart shall be deemed to be an original but all such counterparts
shall together constitute one and the same Amendment.
4.3 Governing Law. This Amendment shall be a contract made under and
governed by the laws of the State of Illinois applicable to contracts made and
to be performed entirely within such state.
4.4 Successors and Assigns. This Amendment shall be binding upon the
Company, the Banks and the Agent and their respective successors and assigns,
and shall inure to the benefit of the Company, the Banks and the Agent and the
respective successors and assigns of the Banks and the Agent.
<PAGE>
Delivered at Chicago, Illinois, as of the day and year first above
written.
SYNAGRO TECHNOLOGIES, INC.
By
------------------------------------------
Title
-------------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent
By
------------------------------------------
Title
-------------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVING ASSOCIATION, as Issuing Bank
and as a Bank
By
------------------------------------------
Title
-------------------------------------
<PAGE>
EXHIBIT B-1
SYNAGRO TECHNOLOGIES, INC.
FINANCIAL COMPLIANCE CERTIFICATE
FOR PERIOD ENDED _____________ (the "Computation Date")
To: Bank of America National Trust
and Savings Association, as Agent
Reference is made to Section 10.1.4(a) of the Credit Agreement dated as
of October 7, 1998 (as amended or otherwise modified from time to time, the
"Credit Agreement") among Synagro Technologies, Inc. (the "Company"), various
financial institutions and Bank of America National Trust and Savings
Association, as Agent for the Banks. Capitalized terms used but not otherwise
defined herein are used as defined in the Credit Agreement.
The Company hereby certifies and warrants to you that the following is
a true and correct computations of the Minimum Interest Coverage ratio set forth
in Section 10.6.2 of the Credit Agreement:
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
10.6.2 Minimum Interest Coverage
- ---------------------------------------------------------------------------------------------------------
Consolidated Net Income $____________
Plus: Interest Expense $____________
taxes $____________
amortization $____________
- ---------------------------------------------------------------------------------------------------------
Earnings before interest and taxes $_________(x)
- ---------------------------------------------------------------------------------------------------------
Interest Expense __________(y)
- ---------------------------------------------------------------------------------------------------------
Ratio of (x) to (y) ____ to ____
- ---------------------------------------------------------------------------------------------------------
Minimum Required
10/31/98 1.50 to 1.0
11/30/98 thru 5/31/99 1.60 to 1.0
6/30/99 thru 12/31/99 1.85 to 1.0
3/31/00 and thereafter: 2.10 to 1.0
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The Company further certifies to you that no Event of Default or
Unmatured Event of Default has occurred and is continuing.
IN WITNESS WHEREOF, the Company has caused this Certificate to be
executed and delivered by its duly authorized officer this ____ day of
_________, ____.
SYNAGRO TECHNOLOGIES, INC.
By
------------------------------------------
Title
---------------------------------------
<PAGE>
EXHIBIT B-2
SYNAGRO TECHNOLOGIES, INC.
FINANCIAL COMPLIANCE CERTIFICATE
FOR PERIOD ENDED _____________ (the "Computation Date")
To: Bank of America National Trust
and Savings Association, as Agent
Reference is made to Section 10.1.4(b) of the Credit Agreement dated as
of October 7, 1998 (as amended or otherwise modified from time to time, the
"Credit Agreement") among Synagro Technologies, Inc. (the "Company"), various
financial institutions and Bank of America National Trust and Savings
Association, as Agent for the Banks. Capitalized terms used but not otherwise
defined herein are used as defined in the Credit Agreement.
The Company hereby certifies and warrants to you that the following are
true and correct computations of the financial ratios and restrictions set forth
in Section 10.6 of the Credit Agreement:
<TABLE>
<S> <C> <C>
=========================================================================================================
10.6.1 Minimum Net Worth
- ---------------------------------------------------------------------------------------------------------
Initial minimum: $30,450,000
Plus: 75% of the sum of Consolidated Net
Income for each Fiscal Quarter (excluding
any Fiscal Quarter in which there is a
loss) from and after October 30, 1998 to
the Computation Date $___________
Plus: 100% of net proceeds of any equity issued
by the Company or any of its Subsidiaries
after October 7, 1998 $___________
- ---------------------------------------------------------------------------------------------------------
Total (Minimum Required) $___________
- ---------------------------------------------------------------------------------------------------------
Actual Net Worth $___________
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
10.6.2 Minimum Interest Coverage
- ---------------------------------------------------------------------------------------------------------
Consolidated Net Income $___________
Plus: Interest Expense $___________
taxes $___________
amortization $___________
- ---------------------------------------------------------------------------------------------------------
Earnings before interest and taxes $_________(x)
- ---------------------------------------------------------------------------------------------------------
Interest Expense __________(y)
- ---------------------------------------------------------------------------------------------------------
Ratio of (x) to (y) ____ to ____
- ---------------------------------------------------------------------------------------------------------
Minimum Required
10/31/98 1.50 to 1.0
11/30/98 thru 5/31/99 1.60 to 1.0
6/30/99 thru 12/31/99 1.85 to 1.0
3/31/00 and thereafter: 2.10 to 1.0
- ---------------------------------------------------------------------------------------------------------
10.6.3 Funded Debt to EBITDA Ratio
- ---------------------------------------------------------------------------------------------------------
Funded Debt $_________(x)
- ---------------------------------------------------------------------------------------------------------
Consolidated(1)/ Net Income $___________
Plus: Interest Expense $___________
Income tax expense $___________
Depreciation and amortization $___________
Plus: Add-back(2)/ $___________
- ---------------------------------------------------------------------------------------------------------
Total(3)/ $_________(a)
- ---------------------------------------------------------------------------------------------------------
Recyc Net Income $___________
Plus(4)/: Interest Expense $___________
Income tax expense $___________
Depreciation and
amortization $___________
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(1)/ Excluding Recyc, Inc.
(2)/ For the Computation Periods ending 9/30/98 and 12/31/98, $900,000; for the
Computation Period ending 3/31/99, $600,000; and for the Computation
Period ending 6/30/99, $300,000.
(3)/ For the Computation Period ending 9/30/98, multiply the total by 1.33.
(4)/ To the extent deducted in determining Recyc Net Income.
<PAGE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Total (Recyc EBITDA)(5)/ $_________ (b)
- ---------------------------------------------------------------------------------------------------------
Lesser of (b) and $1,983,000 $_________ (c)
- ---------------------------------------------------------------------------------------------------------
EBITDA(6)/ $_________ (y)
- ---------------------------------------------------------------------------------------------------------
Ratio of (x) to (y) ____ to ____
- ---------------------------------------------------------------------------------------------------------
Maximum allowed
9/30/98 thru 3/31/99: 4.00 to 1.0
4/1/99 and thereafter: 3.75 to 1.0
- ---------------------------------------------------------------------------------------------------------
10.6.4 Senior Funded Debt to EBITDA Ratio
- ---------------------------------------------------------------------------------------------------------
Funded Debt Minus: Debt described in $___________
Section 10.7(b) $___________
- ---------------------------------------------------------------------------------------------------------
Total $_________(x)
- ---------------------------------------------------------------------------------------------------------
Consolidated(7)/ Net Income $___________
Plus: Interest Expense $___________
Income tax expense $___________
Depreciation and
amortization $___________
Plus: Add-back(8)/ $___________
- ---------------------------------------------------------------------------------------------------------
Total(9)/ $_________(a)
- ---------------------------------------------------------------------------------------------------------
Recyc Net Income $___________
Plus(10)/: Interest Expense $___________
Income tax expense $___________
Depreciation and amortization $___________
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(5)/ For the two months ending 9/30/98, the five months ending 12/31/98, the
eight months ending 3/31/99, and the eleven months ending 6/30/99,
multiply the total by 6, 2.4, 1.5, and 1.09, respectively.
(6)/ For the Computation Periods ending 9/30/98 and 12/31/98, the sum of (a)
plus (c); for Computation Periods ending thereafter, the sum of (a) plus
(b).
(7)/ Excluding Recyc, Inc.
(8)/ For the Computation Periods ending 9/30/98 and 12/31/98, $900,000; for the
Computation Period ending 3/31/99, $600,000; and for the Computation
Period ending 6/30/99, $300,000.
(9)/ For the Computation Period ending 9/30/98, multiply the total by 1.33.
(10)/ To the extent deducted in determining Recyc Net Income.
<PAGE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Total (Recyc EBITDA)(11)/ $_________ (b)
- ---------------------------------------------------------------------------------------------------------
Lesser of (b) and $1,983,000 $_________ (c)
- ---------------------------------------------------------------------------------------------------------
EBITDA(12)/ $_________ (y)
- ---------------------------------------------------------------------------------------------------------
Ratio of (x) to (y) ____ to ____
- ---------------------------------------------------------------------------------------------------------
Maximum allowed
9/30/98 thru 3/31/99: 3.50 to 1.0
4/1/99 and thereafter: 3.25 to 1.0
- ---------------------------------------------------------------------------------------------------------
10.6.5 Debt to Capitalization Ratio
Funded Debt $_________(x)
Sum of (x) plus Net Worth $_________(y)
Ratio of (x) to (y) ____ to ____
Maximum allowed
9/30/98 thru 12/31/98: 60%
3/31/99 thru 12/31/99: 55%
3/31/00 and thereafter: 50%
- ---------------------------------------------------------------------------------------------------------
10.6.6 Capital Expenditures
- ---------------------------------------------------------------------------------------------------------
Aggregate amount of all Capital Expenditures
made by the Company and its Subsidiaries in
the preceding Fiscal Year $__________(x)
Depreciation and amortization of the Company
and its Subsidiaries in the preceding Fiscal Year $_________(a)
Product of (a) times 1.5 $__________(y)
Sum of (y) minus (x) (must be equal to or
greater than zero) $__________
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(11)/ For the two months ending 9/30/98, the five months ending 12/31/98, the
eight months ending 3/31/99, and the eleven months ending 6/30/99,
multiply the total by 6, 2.4, 1.5, and 1.09, respectively.
(12)/ For the Computation Periods ending 9/30/98 and 12/31/98, the sum of (a)
plus (c); for Computation Periods ending thereafter, the sum of (a) plus
(b).
<PAGE>
The Company further certifies to you that no Event of Default or
Unmatured Event of Default has occurred and is continuing.
IN WITNESS WHEREOF, the Company has caused this Certificate to be
executed and delivered by its duly authorized officer this ____ day of
___________, ____.
SYNAGRO TECHNOLOGIES, INC.
By
------------------------------------------
Title
---------------------------------------
<PAGE>
ASSIGNMENT AGREEMENT
Reference is made to Section 14.9.1 of the Credit Agreement dated as of
October 7, 1998 (as amended, the "CREDIT AGREEMENT") among Synagro Technologies,
Inc., various financial institutions and Bank of America National Trust and
Savings Association, as agent (the "AGENT"). Unless otherwise defined herein or
the context otherwise requires, terms used herein have the meanings provided in
the Credit Agreement.
Bank of America National Trust and Savings Association (the "ASSIGNOR")
and Union Bank of California, N.A. (the "ASSIGNEE") hereby agree as follows:
The Assignor hereby sells and assigns to the Assignee, and the Assignee
hereby purchases and assumes from the Assignor, that interest in and to the
Assignor's rights and obligations under the Credit Agreement as of the date
hereof equal to 25% of all of the Loans, the Letters of Credit and the
Commitments, such purchase and assignment to be effective as of the effective
date set forth herein. After giving effect to such assignment and delegation,
the Assignor's and Assignee's Percentages and portions of Commitment Amount for
the purposes of the Credit Agreement will be as set forth opposite each such
Person's name on the signature pages hereof.
The effective date of this Agreement shall be December 4, 1998. The
Assignor hereby instructs the Agent to make all payments after the effective
date hereof in respect of the interest assigned hereby directly to the Assignee.
The Assignor and the Assignee agree that all interest and fees accrued up to,
but not including, the effective date of the assignment and delegation being
made hereby are the property of the Assignor, and not the Assignee. The Assignee
agrees that, upon receipt of any such interest or fees, the Assignee will
promptly remit the same to the Assignor.
The Assignee hereby confirms that it has received a copy of the Credit
Agreement and the exhibits related thereto, together with copies of the
documents which were required to be delivered under the Credit Agreement as a
condition to the making of the Loans thereunder. The Assignee acknowledges and
agrees that it (i) has made and will continue to make such inquiries and has
taken and will take such care on its own behalf as would have been the case had
its Commitment been granted, the Letters of Credit been issued and its Loans
been made directly by the Assignee to or for the benefit of the Company without
the intervention of the Agent, the Assignor or any other Bank and (ii) has made
and will continue to make, independently and without reliance upon the Agent,
the Assignor or any other Bank and based on such documents and information as it
deems appropriate, its own credit analysis and decisions relating to the Credit
Agreement. The Assignee further acknowledges and agrees that the Agent makes no
representations or warranties about the creditworthiness of the Company or any
other party to the Credit Agreement or any other Loan Document or with respect
to the legality, validity, sufficiency or enforceability of the Credit Agreement
or any other Loan Document or the value of any security therefor.
The Assignor represents and warrants that it is the legal and beneficial
owner of the interest being assigned by it hereunder and that such interest is
free and clear of any adverse claim.
The Assignee represents and warrants to the Agent and the Company that, as
of the date hereof, the Company will not be obligated to pay any greater amount
under Section 7.6 or Section 8 of the Credit Agreement than the Company is
obligated to pay to the Assignor under such Sections.
Except as otherwise provided in the Credit Agreement, effective as of the
date of acceptance hereof by the Agent:
(a) the Assignee (i) shall be deemed automatically to have become a
party to the Credit Agreement and have all the rights and
obligations of a "Bank" under the Credit Agreement as if it were an
original signatory thereto to the extent specified in the second
paragraph hereof; and (ii) agrees to be bound by the terms and
conditions set forth in the Credit Agreement as if it were an
original signatory thereto; and
(b) the Assignor shall be released from its obligations under the Credit
Agreement to the extent specified in the second paragraph hereof.
The Agent hereby waives the processing fee referred to in Section 14.9.1
of the Credit Agreement.
The Assignee hereby advises each of you of the following administrative
details with respect to the assigned Loans and Commitments:
(A) Address for Notices:
Institution Name: Union Bank of California, N.A.
Address: Energy Capital Services
445 S. Figueroa Street, 15th Floor
Los Angeles, California 90071
Attention: Julie Beckley
Telephone: 213-236-5779
Facsimile: 213-236-4096
(B) Payment Instructions:
Union Bank of California, N.A.
1980 Saturn St.
Monterey Park, California 91754
ABA# 122-000-496
Acct# 070-196431
Attention: Commercial Loan Operations
Ref: Synagro Technologies
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of December 4, 1998.
PERCENTAGE = 25% UNION BANK OF CALIFORNIA, N.A.
- ----------
AMOUNT OF
COMMITMENT = $10,000,000
By:
Name Printed:
Title:
ADJUSTED PERCENTAGE = 75% BANK OF AMERICA NATIONAL TRUST
- -------------------
AMOUNT OF AND SAVINGS ASSOCIATION
- ---------
COMMITMENT = $30,000,000
By:
Name Printed:
Title:
ACCEPTED AND CONSENTED TO
as of December 4, 1998
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
as Agent
By:
Name Printed:___________________
Title:
CONSENTED TO
as of December 4, 1998
SYNAGRO TECHNOLOGIES, INC.
By:
Name Printed:___________________
Title:
EXHIBIT 21.1
SUBSIDIARIES OF SYNAGRO TECHNOLOGIES, INC.
The following is a list of all of the subsidiaries of the Company at December
31, 1998. Each of the subsidiaries is wholly-owned by the Company.
CORPORATE NAME OF SUBSIDIARY STATE OF INCORPORATION
---------------------------- ----------------------
CDR Environmental, Inc. Texas
Composting Corporation of America Arkansas
Organi-Gro, Inc. Arkansas
Pima Gro Systems, Inc. Arizona
ST Interco, Inc. Delaware
A&J Cartage, Inc. Wisconsin
Michigan Organic Resources, Inc. Michigan
A&J Cartage Southeast, Inc. Florida
Recyc, Inc. California
Environmental Waste Recycling,
Inc. North Carolina
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 26, 1999, included in this Form 10-K, into the Company's
previously filed Registration Statement File No. 333-180-29 on Form S-8 and
Registration Statement File No. 333-20825 on Form S-3.
ARTHUR ANDERSEN LLP
Houston, Texas
April 15, 1999
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<PERIOD-END> DEC-31-1998
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