SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1997
or
___ Transition Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
Commission File No. 0-28322
Asahi/America, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2621836
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
35 Green Street 02148-0005
Malden, Massachusetts (Zip Code)
(Address of principal executive offices)
(781) 321-5409
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (without par value)
--------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports 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 requirement for
the past 90 days. Yes X No ___
---
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated in Part III of this Form 10K or any amendments to this
Form 10K. X
---
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of March 2, 1998 , was $9,725,981. As of
March 2, 1998, there were issued and outstanding 3,370,169 shares of the
Registrant's Common Stock, without par value.
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DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III, Items 10, 11, 12 and 13, hereof is
incorporated by reference to the specified portions of the Registrant's Proxy
statement, to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934 with respect to the 1998 annual meeting of stockholders, which will
be filed with the Commission on or before April 30, 1998; and certain exhibits
to the Registrant's Form S-1 Registration Statement (File No. 333-2314), the
Registrant's Form 10K for the year ended December 31, 1996 and the Registrant's
Form 10Q for the quarter ended September 30, 1997 are incorporated by reference
in response to Part IV, Item 14.
<PAGE>
Asahi/America, Inc. and Subsidiary
TABLE OF CONTENTS
Securities and Exchange Commission
Item Numbers and Description PART I Page
Item 1. Business 2
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 19
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 20
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners
and Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 21
<PAGE>
Statements made or incorporated in this Form 10-K include a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-
looking statements include, without limitation, statements containing the
words "anticipates," "believes," "expects," "intends," "future," and words of
similar import which express management's belief, expectations or intentions
regarding the Company's future performance. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Factors that could cause results to differ from those set forth include, without
limitation, those set forth in "Risk Factors" in the Company's Registration
Statement on Form S-1 (File No. 333-2314) filed with the Securities and Exchange
Commission.
PART I
Item 1. BUSINESS
Introduction
Asahi/America, Inc. ("the Company") markets and sells thermoplastic valves,
piping systems, flow meter devices, filtration equipment and components
manufactured by the Company and others for use in a variety of environmentally
sensitive and industrial applications, including semiconductor manufacturing,
chemical processing, waste and water treatment processing and pharmaceutical
manufacturing, as well as for use in mining, aquarium and other industries. The
Company, an ISO 9001 quality control certified manufacturer, produces electric
and pneumatic valve actuators and controls, proprietary double containment
thermoplastic piping systems, custom fabricated fittings and other specialty
products including thermoplastic flow meter devices and filtration equipment.
The Company offers a broad selection of industrial thermoplastic valves in, and,
based on a 1995 market study prepared by the unaffiliated firm of Sommers
Marketing, Inc., in conjunction with data supplied by the Valve Manufacturer's
Association, continues to believe it has one of the largest shares of, the
United States industrial thermoplastic valve market.
In July, 1997, the Company established a wholly owned subsidiary, Quail
Piping Products, Inc. ("Quail") to manufacture and market corrugated
polyethylene piping systems for use in water, sewer and drain applications. The
facility and manufacturing equipment, which are located in Magnolia, Arkansas
are being financed by an Arkansas State Industrial Revenue Bond, through GE
Capital Public Finance, Inc. ("GECPF"). Production of the piping systems
commenced according to plan in March 1998. This new product line increases the
manufacturing component of the Company's business, further diversifies the
Company's product offerings and distribution base and positions the Company to
penetrate new markets providing additional opportunity to increase sales of the
Company's distributed products.
The Company is the exclusive master distributor in the United States, Latin
America and the Caribbean for Asahi Yukizai Kogyo Co., LTD, official English
translation Asahi Organic Chemicals Industry Co., LTD ("AOC"), a Japanese
company that the Company believes to be one of the largest manufacturers of
thermoplastic valves in the world. The Company is also the exclusive master
distributor in the United States for Alois-Gruber GmbH (together with its United
States subsidiary, "Agru"), an Austrian manufacturer of thermoplastic pipe and
fittings. The Company distributes its products under the brand names Asahi,
DuoPro and PolyFlo, among others.
AOC, Nichimen Corporation and its affiliate, Nichimen America Inc.
("Nichimen America"), are principal stockholders of the Company. Nichimen
Corporation, one of the largest Japanese trading companies, and Nichimen
America, provide credit and import services to the Company in connection with
its purchases from AOC.
As a master distributor for AOC since 1974 and for Agru since 1985, the
Company has developed a network of more than 400 United States and approximately
22 foreign distributors, with 11 additional foreign non-employee sales
representatives. Initially developed as the distribution channel for the
products purchased by the Company from AOC and Agru, this extensive distribution
network also supports increasing sales of the higher margin products
manufactured by the Company.
End users of the Company's products often specify thermoplastic valves and
piping systems instead of metal because thermoplastics resist corrosion and do
not contaminate transported fluids or gases. The Company's products combine the
benefits associated with all plastic valve and piping products, such as light
weight, ease of installation, long life and low installed cost, with the
additional benefits of thermoplastic products, such as resistance to damage from
certain temperatures and corrosion. The Company seeks to identify industrial
applications where the end users' requirements justify the use of industrial
thermoplastics. Examples include double containment corrosion-resistant piping
systems that meet EPA regulations, piping systems for compressed air and gases,
and high purity pipe and valves to assure contaminant free processing of
liquids. The Company sells its products to distributors which sell to end users.
Representative end users include Motorola, WMX Technologies, Micron Technology,
the Corps of Engineers, Browning Ferris Industries, IBM, Schering-Plough, Estee
Lauder, Rhone Poulenc and DuPont, none of which individually represents a
material portion of the Company's sales.
The Company was originally founded to be the exclusive master distributor
in the United States, Latin America and the Caribbean for AOC. Since the early
1980s, the Company has pursued a program to broaden its product lines and
customer base in order to sell higher margin products that are complementary to
the valves supplied by AOC. Highlights in the implementation of this program
include the following:
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The addition of thermoplastic pipe. In 1985, the Company became the exclusive
master distributor in the United States of thermoplastic pipe manufactured by
Agru, which enabled the Company to supply all of the components for complete
thermoplastic piping systems. With the development of its own engineering and
manufacturing capabilities, the Company is able to provide custom designed
piping systems.
The development of new products. The Company has developed a number of new
higher margin products, including the introduction in 1980 of the Company's
first valve actuator and in 1986 of the Company's patented double containment
piping system, called DuoPro. The Company now manufactures several different
types of actuators in a variety of sizes, which permit a valve to be operated
from a remote site or controlled according to a programmed set of instructions.
The Company's DuoPro piping systems are designed to detect and contain an
accidental discharge of hazardous or toxic material, meet EPA requirements for
underground transport of hazardous liquids, and address customer concerns for
worker safety and protection of the environment.
The acquisition of complementary product lines. The Company has sought to expand
its product offerings by acquiring product lines that are not available from its
principal suppliers.
o In 1994, the Company acquired its PolyFlo product line of double
containment pipe and fittings that are extruded or molded in a
proprietary, patented one-step process. The PolyFlo product line is
available in internal diameters up to 6 inches and complements the
Company's DuoPro line, which is available in larger diameters.
o The Company added a line of pressure relief valves in October 1995, when
it acquired an exclusive perpetual license of the technology to
manufacture the valves in thermoplastic.
o In February 1996, the Company added a line of industrial filters, which
alleviate environmental concerns relating to cartridge disposal.
o On May 1, 1997, the Company acquired the thermoplastic flow meter
division and related assets of Universal Flow Monitors, Inc. and The
Rosaen Company. The acquired product lines include the design,
development, manufacture, marketing and servicing of a line of
thermoplastic vortex flow sensor products known as the "Vortex Shedding
Product Line" and a new line of vortex products using ultrasonic sensing
technology. The production process for the 3/4 inch ultrasonic shedding
flow meter has been completed and ultrasonic meters in other sizes are
currently in the development stage. The new division was integrated into
the Company's existing facility. The new product lines complement the
Company's existing business and diversify its total product offerings.
The formation of new companies. In July, 1997 the Company established a
wholly owned subsidiary, Quail Piping Products, Inc. to manufacture and
market corrugated polyethylene piping systems for use in water, sewer and
drain applications. Production of the piping systems commenced according to
plan in March 1998. This new product line increases the manufacturing
component of the Company's business, further diversifies the Company's
product offerings and distribution base and positions the Company to
penetrate new markets providing additional opportunity to increase sales of
the Company's distributed products.
The expansion of its distribution network. The expansion of the Company's
product lines enable the Company to increase sales to existing distributors
and to add distributors serving new markets. In addition, the Company has
initiated a number of programs to support its distributors, including the
addition of an in-house engineering department to provide technical
support, a variety of advertising and promotional programs, and product
education seminars. See "Business--Distribution and Marketing."
In February 1996, the Company was awarded ISO 9001 status by the
International Organization for Standardization based in Geneva, Switzerland,
which is the principal international body for establishing guidelines for and
certifying adherence to a stringent set of quality control and assurance
standards. The award is significant in validating the Company's manufacturing
standards and the Company believes that this standard, which is recognized in at
least 80 countries, is of increasing importance in the selection of vendors of
industrial products. The Company's two principal suppliers, AOC and Agru, are
also ISO 9001 certified.
Industry Overview
According to industry sources, the estimated United States market in 1997
for industrial valves will approximate $3.1 billion, unchanged from 1996.
Industry sources estimate that, in 1998, the market for metal valves will grow
by 3.2%, while the Company estimates its market for thermoplastic industrial
valves is expected to grow by approximately 6% to 8%.
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Traditionally, industrial companies have used metal pipe and valves for the
transportation of fluids and gases. As industrial manufacturing processes have
grown more sophisticated and environmental concerns have increased, the
disadvantages of metal valves and piping systems, including weight,
susceptibility to corrosion, and labor intensive fabrication and installation,
have become more apparent. In many applications, metal pipe and valves will
interact with the surrounding environment or the transported liquid or gas,
which may result in corrosion of the piping system, leakage, or contamination of
the transported liquid or gas.
Advances in thermoplastic technology have made possible the manufacture of
thermoplastic valves and piping systems with the strength and temperature
resistance required for many industrial applications. Thermoplastic piping
systems can be used in applications involving pressures up to 230 pounds per
square inch and temperatures up to 300 degrees F and can provide superior
performance to metal systems in many applications. These applications include:
Where the environment is corrosive or corrosive materials are being
transported. The chemical processing industry was an early adopter of
thermoplastic valves and pipe because chemical companies frequently
transport corrosive fluids and gases which can degrade metal systems. In
certain of these applications, thermoplastic systems require less frequent
replacement than metal systems, which can result in a lower lifetime cost
for a thermoplastic system.
Where the potential for damage to the environment is a consideration.
Federal, state and local environmental authorities are mandating that
companies which handle toxic fluids take steps to prevent leakage into the
environment. All owners of underground storage tanks are required to be in
compliance with the EPA's requirements regarding leak containment and
detection by the end of 1998. Owners may comply with these requirements by
using piping systems which are either made of corrosion resistant material,
such as plastic, or are treated with corrosion resistant coating.
Furthermore, the EPA is mandating the use of double containment systems,
such as a "pipe-within-a-pipe" architecture, to reduce the likelihood of
leakage and to detect leaks.
Where the purity of the transported liquid or gas is a concern. In the
semiconductor industry, manufacturers require thermoplastic piping systems
for the transport of ultrapure water for washing computer chips. Likewise,
pharmaceutical and biotechnology manufacturers employ high purity plastic
piping systems to reduce the risk of contamination.
Where installation costs are a significant factor in the total system cost.
Because of the lighter weight of the components and the relatively easier
installation, thermoplastic piping systems often can be installed more
quickly than metal systems and without the use of heavy equipment that is
often required to install comparable metal piping systems. Eliminating the
need for heavy equipment and extensive labor can result in a lower
installed cost for plastic systems than for comparable metal systems.
Management believes that thermoplastic products will continue to increase
their share of the total market for industrial valves and piping systems. In
management's view, a number of factors drive this increase, including continued
improvement in thermoplastics technology, enforcement of environmental
regulations, more widespread recognition of the benefits of thermoplastic, and
increased familiarity with the skills required to install thermoplastic piping
systems.
Company Strategy
Through its alliances with AOC and Agru and through its additions of high
quality manufactured product offerings, the Company believes it has established
itself as a market leader in thermoplastic industrial valves and piping systems,
as evidenced by the breadth of its product line, industry recognition of its
brand names, and the scope of its distribution network. The Company's strategy
is to:
Provide a thermoplastic alternative to metal valves and piping systems. The
Company considers its primary competitors to be the suppliers of
traditional metal products. The Company believes that a substantial
opportunity exists for suppliers of thermoplastic products to gain a larger
share of the total industrial market for valves, pipe and related system
components.
Develop and market products manufactured by the Company. As a master
distributor for AOC and Agru, the Company believes it offers a broader line
of thermoplastic valves and pipe than any of its competitors. The Company
seeks to leverage its valve and pipe sales by offering complementary higher
margin products manufactured by the Company. These products include valve
actuators and controls, double containment piping systems, custom fittings
and other
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specialty products including thermoplastic flow meter devices and
filtration equipment. Additionally, with the start up of the Company's new
wholly owned subsidiary, Quail Piping Products, Inc., the Company has
positioned itself to enter new markets with its manufactured corrugated
polyethylene piping systems while providing additional opportunity to
increase sales of the Company's distributed products. Quail commenced
production of its corrugated piping systems according to schedule in March,
1998. Although sales of products manufactured by the Company increased by
6.7% from 1996 to 1997, sales of manufactured products have increased by
60% from 1993 to 1997, from approximately $7.6 million (29.7% of total
sales) to $12.1 million (32.0% of total sales). Total sales for 1997 were
adversely affected by both the decrease in and the deferral of the
construction of new plants within the semi-conductor industry, one of the
Company's largest vertical markets, resulting in lower demand for the
Company's high purity and manufactured dual containment piping systems.
While sales of certain of the Company's manufactured products declined in
1997 as a result of the general downturn in the semiconductor market, the
Company has repositioned itself to achieve growth in other key vertical
markets and has worked aggressively to expand into new markets and into new
areas of opportunity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Identify and serve markets in diverse industries. The Company seeks to
continue to expand the market for its products and diversify its end user
base by identifying new applications where the benefits of thermoplastics
are superior to metal piping systems. In the early 1980s, virtually all of
the Company's products were sold through distributors to end users in the
chemical processing industry. The Company estimates that in 1997 sales to
the semiconductor and chemical processing industries accounted for 16% and
28% of total sales, respectively, in comparison to 31% and 20%,
respectively, in 1996; sales to federal and local governmental agencies (in
connection with environmental clean up of government-owned sites and water
treatment facilities) accounted for 15% and 12% in 1997 and 1996,
respectively; sales to the waste management industry accounted for 9% and
8% in 1997 and 1996, respectively; while sales to the mining and aquarium
industries, two targeted and growing industries for the Company, accounted
for 16% and 7% in 1997 and 1996, respectively. The Company's estimates of
sales to the respective industries are based on the Company's survey of its
distributors and on the Company's records of shipments made directly to end
users at the request of distributors. By expanding the applications for its
products, the Company seeks to increase revenues, to reduce its
vulnerability to economic downturns specific to the industries in which its
customers operate, and to benefit from diverse market developments,
including the anticipated returned growth of the semiconductor
manufacturing industry, the approaching deadline for compliance with the
EPA's underground storage tank regulations, and continued business concern
for the protection of the environment.
Acquire complementary product lines. The thermoplastic valve and pipe
industry is fragmented, and the Company believes there are opportunities to
expand its product base through acquisitions of complementary businesses
and product lines. The Company believes that its current network of more
than 400 United States and approximately 20 foreign distributors can serve
as a marketing channel for complementary products. In the last four years,
the Company expanded its product offerings with the acquisition of the
PolyFlo product line, the acquisition of a line of industrial filtration
equipment, a license of the technology for the manufacture of pressure
relief valves and the May 1997 acquisition of the vortex flow meter
division. Additionally, in July, 1997, the Company established the wholly
owned subsidiary, Quail Piping Products, Inc. to manufacture and market
corrugated polyethylene piping systems. Management continues to actively
seek potential opportunities, including mergers and acquisitions, joint
ventures, licensing, and start-up ventures that would benefit from exposure
to the Company's broad and established distribution network or widen the
Company's existing distribution channels.
Products
The Company manufactures and sells thermoplastic valve actuators and
controls, custom fabricated valves, proprietary double containment piping
systems, industrial filtration equipment and thermoplastic flow meter devices.
Products marketed and sold by the Company include thermoplastic valves and pipe
supplied by AOC and Agru, respectively. In addition, the Company rents and sells
specialized welding equipment for use in the installation of its piping systems.
With its broad product base, the Company is able to offer its end users "one
stop shopping" to meet substantially all of their requirements for thermoplastic
industrial valves, pipe and piping systems.
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The following table sets forth information concerning the contribution to
total sales from the Company's principal classes of products (excluding sale and
rental of welding equipment):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1996 1997
----- ---- -----
($ in thousands)
<S> <C> <C> <C> <C> <C>
Distributed products, including valves, pipe
and fittings.................................. $ 21,212 60.6% $24,579 64.9% $24,518 64.6%
Manufactured products, including actuators and
controls, fabricated valves and piping systems,
filtration equipment and plastic flow meters.. $ 12,414 35.5% $11,374 30.0% $12,141 32.0%
</TABLE>
Valves. The valves supplied by the Company are injection molded from one of
four primary resins: Polyvinyl Chloride (PVC); Chlorinated Polyvinyl Chloride
(CPVC); Polypropylene (PP); and Polyvinylidene Flouride (PVDF). Product
selection is based on such criteria as chemical and temperature resistance,
pressure tolerance levels, purity, abrasion resistance and cost. Valves made
from PVC are the lowest in cost. They typically have good chemical resistance,
can withstand temperatures up to 140 degrees F, and are used extensively in
applications for chlorinated water, salt water, and relatively mild chemicals.
CPVC and PP valves can withstand more severe chemicals and tolerate temperatures
up to 200 degrees F and 180 degrees F, respectively. PVDF can be used in
applications with temperatures up to 250 degrees F. It is ideally suited for
halogens, strong acids, mild caustics and is the most commonly specified
material for the transport of distilled water and high purity chemicals in the
semiconductor industry.
The Company markets seven basic valve designs: ball, butterfly, swing
check, gate, globe, ball check and diaphragm. Most valves are available in all
four of the primary resins with a variety of elastomeric sealing materials as
options. With the size range of each valve style and the various seat, seal and
stem materials available, there are a tremendous number of variations for each
valve style. For example, the Company offers over 2,000 butterfly valve
configurations. Each valve style addresses specific fluid flow requirements.
Criteria for selecting one model over another include time to open, the presence
of suspended solids in the transported fluid, the potential for bacterial
growth, and line size.
Manual valves range in price from $5.50 for a sampling valve to over
$25,000 for a 24 inch PVDF butterfly valve. A typical valve will sell for $50 to
$100. The Company processes approximately 3,000 invoices per month, indicating a
broad-based demand.
Actuators and controls. To meet the growing demands of industry for plant
automation, reduced labor costs and increased productivity, the Company has
developed electric and pneumatic actuators and controls for remote and
programmable operation and control of valves. The Company's actuators and
controls enable the end user to program or remotely adjust valves in response
to, or in order to achieve, specified temperature, pressure, and flow rate of
the transported substance, whether a liquid or gas. These products enable the
end user to actuate and control precisely the valves in a system in response to
process variables. Additionally, valve modifications are custom designed and
fabricated by the Company to meet customer requirements, including special
stems, locking devices, stem extensions, lugs, etc. The Company currently offers
six basic types of actuators and controls in a variety of sizes that are
adaptable to a broad spectrum of the valves that it distributes for AOC.
Actuation and special valve modifications can add from $150 to $1,000 to the
price of a manual valve, with a positive effect on the Company's gross margins.
Pipe and piping systems. As the exclusive United States distributor for
Agru, the Company supplies a line of thermoplastic pipe and fittings. In
addition, the Company fabricates two types of double containment piping systems,
which are sold under the brand names DuoPro and PolyFlo. These double
containment "pipe-within-a-pipe" systems are designed to contain accidental
ruptures and leaks and may be equipped with detection systems that signal and
locate a leak in the system. These systems are designed to meet environmental
regulatory requirements for the transport of certain toxic and corrosive
materials.
The Company supplies thermoplastic piping systems made of PP, PVDF, HDPE
(high density Polyethylene) and Halar. PP systems are offered in sizes from 3/8
inch to 24 inches, with PVDF and Halar offered in sizes from 1/2 inch through 12
inches. HDPE pipe and fittings are specifically used for compressed air lines,
and are sold under the Company's trade name "Air-Pro". Typically, piping is sold
as a system with the end user purchasing all the pipe, fittings and valves from
one
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source. Piping system orders average $10,000 to $15,000, with several each year
exceeding $100,000.
In 1986, the Company developed and patented its DuoPro double containment
piping system to meet requirements set forth by the EPA's Underground Storage
Tank Regulations. Pipe and fittings primarily supplied by Agru are fabricated
into systems as large as 18 inch diameter inner pipe by 24 inch diameter
containment pipe. An average DuoPro system sells for $25,000 to $50,000.
With the acquisition of the PolyFlo product line in 1994, the Company's
double containment pipe line was expanded to include inner pipe sizes from 1
inch to 6 inches. The PolyFlo line is extruded using a patented manufacturing
process.
Filters. Many fluid flow processes include the need for filtration of the
transported liquids, including chemical solutions, electroplating fluids and
water, both in process and waste. The Company's AF Series Filters include a
patented back-washing system that reduces waste and improves filtering
efficiency. The AF Series Filters are back-washed directly to waste or recycling
tanks, without operator contact, reducing the often costly waste disposal
process and the potential for dangerous contamination.
Flow meters. With increased concern from the semiconductor industry over
fluid contamination in the transport of both high purity chemicals and
ultra-pure deionized water for the cleaning of computer chips, in May, 1997, the
Company expanded its product offerings with two new thermoplastic flow meter
devices. Traditional flow meters use moving paddle wheels to measure fluid flow.
These wheels are located in the fluid flow path and are a potential source of
contamination. Their replacement also means that the entire line must be shut
down, an expensive process for semiconductor chip manufacturers. The Company's
flow meter line uses vortex shedding technology. As fluid moves past fixed
structures within the flow path, vortices are formed and measured by
peizoelectric crystals located within those fixed structures. The deletion of
any moving parts within the flow path reduces the risk for contamination. The
Company's FloSonex vortex flow meter uses ultrasonic technology for measurement,
removing all electronics from the pipe's interior. This is an important feature
as it removes the electronics from influence of the heat of the measured fluids
and because flow meter sensor replacement can be accomplished without shutting
down the line.
Other sources of sales. The Company also rents and sells specialized
welding equipment for use in the installation of its piping systems. In 1997,
revenues from the rental and sale of such equipment totaled approximately $1.3
million.
During the past three years, the Company has invested in additional
manufacturing equipment and plant expansion for its operations in Malden,
Massachusetts and in Magnolia, Arkansas, and in new product development, with
the goal of increasing its production capability and building a broader base of
manufactured products. Products that will enhance the sale of existing pipe and
valve items are targeted for development. Recent products have included two
electric actuators, a mini pneumatic actuator, printed circuit boards for more
precise control of actuators, a fail safe battery pack, and a patented stem
support assembly for landfill applications. While the Company will continue to
develop new products and accessories and introduce new product lines, the
Company has not incurred a material amount of expense for research and
development during the past three fiscal years. In May 1997, the Company
acquired the vortex division of Universal Flow Monitors, Inc. The acquired
product lines include the design, development, manufacture, marketing and
servicing of a line of thermoplastic vortex flow sensor products known as the
"Vortex Shedding Product Line" and a new line of vortex products using
ultrasonic sensing technology. The production process for the 3/4 inch
ultrasonic shedding flow meter has been completed and ultrasonic meters in other
sizes are currently in the development stage. In connection with this
acquisition, the Company established a dedicated Research and Development
department. This department is initially focusing its efforts on finalizing the
development of a full range of sizes for ultrasonic flow meter, developing
continued product and purity enhancements of the vortex shedding product line
and working to develop digital communications between the Company's flow meters
and actuators with the customers computer systems.
Distribution and Marketing
Domestic. Substantially all of the Company's sales in the United States are
made through an established network of more than 400 independent distributors,
many of whom have been distributors of the Company's products for 20 years.
Approximately 125 are stocking distributors, which carry an inventory of the
Company's products. One distributor accounted for 26%, 23% and 32% of the
Company's sales in 1995, 1996 and 1997, respectively, and 40 distributors
accounted for 82%, 82% and 78%, respectively, of sales during the same period.
The Company's principal distributor estimates that it sold the Company's
products to not fewer than 5,000 end users in both 1996 and 1997.
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The Company supports its distributors with thirteen Company-employed sales
representatives, one national sales manager of specialty products and one
director of Latin American sales. The Company also has an internal group of nine
employees who provide customer service and support to the Company's customer
base. The Company sales force works jointly with the Company's distributors and
independently to develop sales leads, which are referred to the distributors.
Additional sales and marketing support is provided by the Company's staff of
seven engineers and two field technicians, who are available to provide
technical information on the Company's products, suggest solutions to customers'
requirements and assist in the design and installation of full piping systems.
The Company also promotes its products through trade shows, customer product
seminars, and the use of promotional materials, including full color product
brochures, advertising in trade journals, and other public relations activities.
The Company has developed an extensive educational program for its
distributors to train them in the use and benefits of its products. This program
includes a series of in-house and regional multi-day seminars, as well as
one-on-one presentations by the Company's sales representatives to individual
distributors and their sales forces. The Company provides its distributors with
extensive written materials relating to its products and their applications.
The Company does not have contracts with its distributors. None of the
Company's distributors carries the Company's products exclusively. The Company
believes that the use of distributors, which generally specialize in pipe and
valve products and focus on specific industry or geographic markets and,
accordingly, have specific knowledge of and contacts in particular markets,
enhances the scope of the Company's marketing efforts and permits the Company to
penetrate a broader market without the significant costs associated with a large
direct sales force that would otherwise be required.
Foreign. The Company has an established network of approximately 22 foreign
distributors, with 11 additional foreign non-employee sales representatives. For
fiscal years 1995, 1996 and 1997, the Company had export sales of approximately
$1.8 million, $1.6 million and $2.7million, respectively, primarily to Latin
America. All of the Company's export sales are denominated in United States
dollars.
End Users
The Company sells substantially all of its products through distributors to
a diversified end user base. A common characteristic of end users is the need
for pipe, valves and related components to control, transport and contain
corrosive fluids, ultrapure liquids, environmentally harmful fluids or gases. No
single end user is responsible for a material portion of the Company's sales.
Principal industries, representative applications and representative end users
for the Company's products include:
<TABLE>
<CAPTION>
Representative
Industry Applications Representative End Users
-------- ------------ ------------------------
<S> <C> <C>
Chemical processing Transfer of corrosive and Dow Chemical, DuPont, Rohm
environmentally hazardous & Haas, P.P.G., Clorox, B.F. Goodrich,
chemicals and Kerr McGee
Semiconductor Transfer of deionized water, IBM, Motorola, Texas Instruments,
manufacturing ultra pure chemicals and Micron Technology, Advanced Micro
chemical waste Devices, National Semiconductor, IBM,
Samsung Semiconductor, and Matsushita
Landfill Collection of methane gas WMX Technologies, Laidlaw Waste
and leachate Systems, Inc. and Browning Ferris Industries
Aquariums Automated circulation of salt New Orleans, Monterey Bay, Tampa Bay,
water and life support systems Albuquerque BioPark, Omaha, Long Beach
National Aquarium, China Aquarium and
Colorado Ocean Journey
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C>
Federal Facilities Soil remediation and transfer of Aberdeen Proving Grounds, Tinker
hazardous waste Air Force Base, Hill Air Force
Base, Tooele Army Base, Fort
Belvoir Defense Laboratory, Nevada
Test Site and China Lake
Mining Transfer of sulfuric acid and Kennecott Utah Copper, Corporacion
cyanide Nacional de Cobre de Chile
(Codelco), Sociedad Contractual
Minera El Abra, and Cypress Mines
Pharmaceutical Transfer of chemical waste Schering-Plough, Eli Lilly, Abbott
Labs, Merck and Bristol-Myers
Squibb
</TABLE>
Suppliers
The Company has exclusive distribution agreements in defined territories
for substantially all of the valves and fittings and certain of the pipe sold by
the Company. The Company has been the exclusive master distributor of a broad
line of valves and related accessories for AOC in the United States, Latin
America and the Caribbean since 1977, and is currently in the ninth year of a
ten year agreement with AOC, Nichimen Corporation and Nichimen America which
runs through December 31, 1999. While the agreement is in force, the Company may
not purchase competing products from any other manufacturer. Under the
agreement, the Company must use its best efforts to market AOC's valves in its
territory and has agreed to purchase at least $140 million of products from AOC
over the term of the agreement. There are no minimum annual purchase
requirements, but there are annual guidelines attached to the contract. Through
December 31, 1997, the Company had purchased approximately $71.4 million of
product from AOC, with the purchases in the years ended December 31, 1995, 1996
and 1997 totaling approximately $10.0 million, $10.4 million and $9.7million
respectively. Total purchases through December 31, 1997, were approximately
$29.0 million behind the annual guidelines on a cumulative basis. The Company's
prior contracts with AOC included similar cumulative and annual purchase
provisions, and AOC has always agreed to extend or enter into a new contract
with the Company regardless of its compliance with such terms. However, no
assurances can be given that AOC will agree to renew its contract with the
Company at the end of the current term. The Company is currently negotiating an
extension of its distribution agreement beyond the year 1999. AOC is a principal
stockholder of the Company.
AOC, which manufactures the valves it supplies to the Company at its plant
in Japan, warrants that its products are merchantable and free from defects in
material and workmanship, and indemnifies the Company against losses or claims
arising from the sale of the products. In the case of defective products, AOC
agrees to repair or replace the products. In addition, AOC must maintain a
minimum of $3.0 million of product liability insurance that includes the Company
as a named insured. The Company may not distribute products produced by third
parties that compete with the products it purchases from AOC. Purchases by the
Company are made under written purchase orders. Once an order is accepted, it
may not be canceled except by agreement of the parties; AOC may not reject an
order unreasonably or in bad faith. Either party may terminate the agreement if
the other party defaults and the default continues for 30 days after notice or
if the other party becomes subject to a bankruptcy or insolvency proceeding.
A large percentage of the pipe and fittings sold by the Company is supplied
by Agru under a five-year distribution agreement, which was amended and restated
effective as of January 1, 1995. Under the agreement, the Company has exclusive
distribution rights in the United States for certain products (PP, PVDF, and
Halar fittings and pipe, and PVDF welding equipment) and non-exclusive rights
for other products. The Company may not purchase products that compete with the
exclusive products unless Agru is unable to deliver products within four weeks
of order. Agru is obligated to repair or replace any defective product it
supplies. The Company is obligated to make minimum purchases from Agru each
year, using 1994 total purchases of $3.1 million as a base. If purchases in any
year decline by 20% or more from the base, Agru may terminate the contract at
the end of the following year unless purchases in that year equal or exceed $3.1
million in which case the contract continues in force. During the year ended
December 31, 1997, the Company's purchases from Agru totaled approximately $4.4
million. The agreement is terminable in the event of serious breach which is not
cured within three months of notice, and in the event of the bankruptcy or
insolvency of either party. Unless either party gives notice of termination not
less than 12 months prior to the end of the terms, the contract automatically
extends for five years.
9
<PAGE>
While there are other sources of supply for the products which the Company
purchases from AOC and Agru, the Company is not aware of other single sources of
supply that offer the variety and quality of products they produce. In addition,
several sources of supply have existing exclusive arrangements with other
companies that would preclude dealing with the Company. The Company's supply
arrangements with AOC and Agru are also subject to all of the usual risks of
foreign trade. The loss of either AOC or Agru as a supplier or the imposition of
restrictions on foreign trade could have a material adverse effect on the
Company. The Company believes its relationships with these two suppliers are
excellent.
Manufacturing and Distribution
The Company has a technical support and engineering department of seven
professionals with an additional two professionals serving as field technicians,
who support the Company's sales and marketing activities and provide solutions
to special end user customer requirements, such as modifications of valves and
special piping system designs. The department has designed a number of actuators
and accessories that are sold in conjunction with the Company's valves. In
addition, the department assists end user customers in the design, engineering
and installation of complete piping systems.
At its Malden, Massachusetts facility, the Company manufactures and
assembles a variety of valve actuators, valve/actuator assemblies and
accessories, including, among others, industrial filtration equipment and
thermoplastic flow meter devices. The Company also operates a "clean room" for
the fabrication and cleaning of ultrapure water piping systems for the
semiconductor industry. In addition, the Company fabricates double containment
piping systems and assists the end user customer (or its mechanical contractor)
with on-site installation and testing. The Company rents and sells specialized
welding equipment to customers and contractors for this purpose. Additionally,
in conjunction with the Company's May 1, 1997 acquisition of the plastic flow
meter division of Universal Flow Monitors, Inc., the Company has expanded its
manufacturing capabilities to include the full manufacturing, machining and
testing of both the flow sensing and ultrasonic flow meters. The Company's newly
established wholly owned subsidiary, Quail Piping Products, Inc. commenced
production of corrugated polyethylene piping systems according to schedule in
March 1998. The full extrusion and corrugating process takes place at Quail's
Magnolia, Arkansas facility.
On February 24, 1996, the Company was awarded ISO 9001 certification
following a fourteen month review process. The certification indicates that the
Company's operations meet the stringent standards for quality control and
assurance established by the International Organization for Standardization. ISO
9001 has been adopted to date in more than 80 countries. It is anticipated that
ISO certification will increasingly become a prerequisite for doing business
with many customers and in many markets.
The Company purchases and maintains an inventory of valves, pipe, fittings
and related fluid flow components and products, in anticipation of customer
orders. The Company has warehouse facilities at its principal offices in Malden,
Massachusetts. Because lead times for delivery from its principal suppliers are
long, the Company carries significant inventory in relation to sales in order to
be able to meet delivery requirements of its distributors and end user
customers. Approximately 125 of the Company's distributors also stock inventory,
principally valves and valve accessories. Quail, which will maintain inventory
of pipe, also has adequate warehousing capacity at its Magnolia, Arkansas
facility.
Competition
The industrial valve, pipe and fittings market is very fragmented, with
many manufacturers and suppliers. The Company estimates that there are more than
100 suppliers of metal valves and at least a dozen suppliers of thermoplastic
valves. There are also many suppliers of both metal and plastic pipe and
fittings. There is no single company that dominates the market for either
thermoplastic industrial valves or pipe. The Company believes that there are two
companies which have significant shares of both markets, and one additional
significant competitor in the valve market and three additional significant
competitors in the pipe market. Of its competitors, the Company is aware of only
one competitor that offers a comparable variety of thermoplastic valve and pipe
products as the Company. Many of the Company's competitors, especially
manufacturers of metal valves and pipe, have substantially greater financial,
marketing, personnel and other resources than the Company. A 1995 market study,
commissioned by the Company, indicated that the Company had one of the largest
shares of the United States market for industrial thermoplastic valves. With its
ability to provide complete fluid flow solutions to customers, the Company
believes that it continues to hold this market share.
Suppliers of industrial valves, pipe and piping systems, whether metal or
plastic, compete primarily on the basis of price, performance and service to the
customer or end user. In applications requiring high performance of the valves
and pipe in
10
<PAGE>
terms of temperature, pressure and durability, the Company believes that its
products compete favorably in terms of performance, price and lifetime cost with
metal products available for the same applications. In certain applications,
alternative plastic products may be available at lower prices than the Company's
products. The Company believes, however, that many end users are willing to pay
higher prices for the Company's products in exchange for the higher quality and
service that the Company offers. The Company believes that its competitive
advantages include the breadth of its valve, actuator and pipe product lines and
its ability to supply complete piping systems, including custom fabricated
components, flow meter devices and industrial filtration equipment. The Company
believes that it has an advantage over other manufacturers of valve actuation
and piping products because of its ability to offer "one stop shopping" to the
end user.
Joint Venture
In February 1990, the Company established a joint venture with Watts
Industries, Inc. ("Watts"), a United States manufacturer of metal valves, for
the development of an electric actuator to supply the partners' respective
needs. The two companies co-funded the tooling of the product, and the Company
manufactures the product for sale by the Company through its regular
distribution network and for sale to Watts, as OEM products, at a discounted
price. The employees of both companies executed confidentiality agreements to
protect the confidential and proprietary information possessed by each company
and utilized in the development of the actuator. All technology, information,
material and data developed pursuant to the joint venture as well as any
trademarks, patents, copyrights or other property interest that may result from
the joint venture, is the joint and several property of the Company and Watts.
Development of the product was completed in August 1992, and all manufacturing
of the product line is done in the Company's plant.
Patents and Trademarks
The Company exclusively owns six United States patents relating to its
double containment pipe assemblies, seven United States patents relating to
actuators and accessories used in conjunction with plastic valves, as well as
two corresponding Canadian patents and two corresponding Canadian patent
applications, and one United States patent relating to the filter backwashing
system. Additionally, in conjunction with the May 1997 acquisition of the vortex
flow meter division of Universal Flow Monitors, Inc., the Company acquired a
United States patent and two United States patent applications relating to
ultrasonic vortex flow meters. Subsequently, the Company filed eleven patent
applications, in Europe, Japan, China, Taiwan and Korea. All of the United
States patents have been issued since December 1985, and extend at least until
2002. In addition, the Company owns 29 United States trademark registrations and
five pending trademark registrations. The trademark registrations, which are
renewable by their terms in the ordinary course of business, cover various
products offered for sale by the Company. The Company also owns copyright
registration for its catalogs and design guides, as well as for the printed
circuit boards it has developed for use in its valve actuators.
All of the Company's intellectual property is owned or is held under a
perpetual license, is free and clear of restrictions of any nature and is not
subject to any license, sublicense, agreement or commitment with any third
party, other than a security interest to the Company's bank lender. The
Company's intellectual property rights are important to its business, and the
Company intends to enforce its intellectual property rights. However, the
Company believes that product quality and service are more important to the
success of the Company. Except as discussed below, the Company has not been
engaged in any litigation during the last six years in regard to its
intellectual property rights.
In July 1997, the United States Patent and Trademark Office reconfirmed the
validity of a patent owned by the Company (the "544 Patent"). In August 1997,
the Company instituted a patent infringement suit in the United States District
Court in New York (the "District Court") against MFRI, Inc. of Niles, Illinois,
and its associated companies, Perma-Pipe, Inc., Midwesco, Simtech, Inc. and Mr.
I. Wayne James, President of Simtech (and former employee of the Company). At
the September 10, 1997 Hearing, the District Court ordered an expedited trial to
commence December 8, 1997. The trial was conducted during the period December
8-11, 1997, and the final post-trial briefs were filed on January 13, 1998. The
Court has yet to render a decision with respect to this trial. In the fourth
quarter of 1997, the Company incurred approximately $400,000 in legal expenses
related to this patent issue. These expenses reduced net income by approximately
$226,000 or $.07 diluted earnings per share. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Financial
Statements and Schedules".
Employees
As of December 31, 1997, the Company had a work force of 138 people, of
which 22 are executive and administrative personnel, 30 are engaged in sales and
marketing, 10 are engineering staff, 2 are research and development personnel
and 74
11
<PAGE>
are engaged in manufacturing, fabricating and warehouse operations. At December
31, 1997, the Company's wholly owned subsidiary, Quail Piping Products, Inc.,
had a work force of 6 people, of which 4 are engaged in the construction and
build out of the company's Arkansas facility and 2 are administrative personnel.
None of the Company's, or its subsidiary's, employees are covered by a
collective bargaining agreement. The Company believes its labor relations to be
good.
Item 2. PROPERTIES
The Company's executive offices and manufacturing/warehouse facility,
comprised of approximately 94,000 square feet, is located in a modern facility
in Malden, Massachusetts. The Company considers its facility to be in good
operating condition and suitable for the purposes for which it is used.
The Company's wholly owned subsidiary Quail Piping Products, Inc. conducts
its manufacturing at a 18,400 square foot, 7.6 acre facility in Magnolia,
Arkansas. The facility was purchased in October, 1997 and required certain
improvements to accommodate Quail's manufacturing process. The facility is now
in good operating condition and suitable for the purpose for which it is to be
used. Quail commenced manufacturing activities in March, 1998.
Item 3. LEGAL PROCEEDINGS
The Company is a plaintiff in a patent infringement lawsuit. See "Business
- -Patents and Trademarks".
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted no matter to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 1997.
12
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of Asahi/America, Inc. is traded on the Nasdaq National Market
System under the symbol ASAM. The following table sets forth the range of high
and low selling prices for the Common Stock of the Company for the fiscal
periods indicated, as reported on the Nasdaq National Market System. This
information reflects inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily reflect actual transactions.
Fiscal 1997 High Low
- ----------- ---- ---
First Quarter 9.00 6.00
Second Quarter 8.25 5.75
Third Quarter 8.00 5.50
Fourth Quarter 7.50 5.25
On March 2, 1998, there were 150 record holders of the Company's Common Stock.
The Company believes the actual number of beneficial owners of the Common Stock
is greater than the stated number of holders of record because a large number of
shares of the Company's Common Stock is held in custodial or nominee accounts
for the benefit of persons other than the record holder.
The Company has never paid a dividend on its Common Stock and currently intends
to retain immediate future earnings to fund the growth of the business. In
subsequent periods, if the Company has funds legally available for the payment
of dividends, the Board of Directors intends to consider the payment of
dividends. The payment of dividends is within the discretion of the Board of
Directors and will depend upon the Company's earnings, its capital requirements
and financial condition, and other relevant factors.
13
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below has been derived
from the consolidated financial statements of the Company audited by Arthur
Andersen LLP, independent public accountants, and their report is included
elsewhere herein. The selected consolidated financial data set forth below
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales..................................... $25,514 $ 28,518 $ 34,998 $ 37,894 $ 37,934
Cost of goods sold............................. 17,021 18,608 23,409 24,346 24,173
Foreign currency (gains) losses................ 48 47 (391) (378) (345)
------- ------- ------- ------ ------
Gross profit............................... 8,445 9,863 11,980 13,926 14,106
Operating Expenses:
Research and development.................... - - - - 186
Selling, general and administrative
expenses.................................. 7,201 7,613 8,682 9,751 10,647(A)
------- ------- ------- ------ ---------
Total operating expenses...................... 7,201 7,613 8,682 9,751 10,833
Income from operations......................... 1,244 2,250 3,298 4,175 3,273
Interest expense, net.......................... 391 536 713 196 201
------- ------- ------- ------ ------
Income before minority interest and provision
for income taxes............................. 853 1,714 2,585 3,979 3,072
Minority interest in income of
consolidated joint venture................... (66) -- -- -- --
------- ------- -------- ------ --------
Income before provision for income taxes....... 787 1,714 2,585 3,979 3,072
Provision for income taxes.................... 168 596 1,000 1,541 1,290
------- ------- ------- ------ ------
Net income ................................ $ 619 $ 1,118 $ 1,585 $ 2,438 $ 1,782(A)
======= ======= ======= ======== =======
Basic earnings per share................... $ .30 $ .48 $ .68 $.82 $ .53(A)
======= ======= ======== ======== =========
Diluted earnings per share................. $ .30 $ .48 $ .68 $ .82 $ .53(A)
======= ======= ======== ======= =======
Weighted average number of common
shares outstanding ........................ 2,048 2,340 2,340 2,973 3,349
Weighted average number of shares
outstanding, assuming dilution ......... 2,048 2,340 2,340 2,988 3,349
</TABLE>
(A) Amounts include approximately $400 of legal expenses incurred by the Company
related to a patent infringement lawsuit whereby the Company is enforcing
its US patent rights against a major competitor. The final decision from the
December 8, 1997 bench trial has yet to be rendered. The above mentioned
expenses reduced net income and both basic and diluted earnings per share by
approximately $226 or $.07, respectively, for the year ended December 31,
1997.
14
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital....................... $ 2,902 $2,116 $ 3,850 $ 9,976 $ 7,503
Total assets.......................... 13,023 21,308 22,452 28,443 32,049
Long-term liabilities................. 490 4,583 5,313 4,992 5,875
Total liabilities..................... 8,312 15,479 15,018 12,239 13,448
Retained earnings (deficit)........... (2,278) (1,160) 426 2,864 4,646
Stockholders' equity.................. 4,711 5,829 7,434 16,204 18,601
</TABLE>
15
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a manufacturer and master distributor of thermoplastic valves,
piping systems, flow meter devices, filtration equipment and components
manufactured by the Company and others for use in a variety of environmentally
sensitive and industrial applications including semiconductor manufacturing,
chemical processing, waste and water treatment processing and pharmaceutical
manufacturing, as well as for use in mining, aquarium and other industries.
Manufactured products include valve actuators and controls, specialized valve
assemblies, double containment piping systems, thermoplastic flow meter devices
and filtration equipment. Distributed products consist principally of
thermoplastic valves, pipe and fittings which are purchased from two major
foreign suppliers under long term supply agreements. The Company also realizes
revenue for the rental and sale to contractors and end user customers of
specialized welding equipment that is used in connection with the installation
of the Company's piping systems.
The Company distributes its products through an extensive network of domestic
and foreign distributors which are supported by Company sales, marketing and
engineering personnel. Substantially all of the Company's purchases of valves
are made from its Japanese supplier and are transacted in Japanese yen. As a
result, the Company is exposed to fluctuations in foreign currency exchange
rates. The Company may use hedging procedures including foreign exchange forward
contracts and currency options in managing the fluctuations in foreign currency
exchange rates. The Company also purchases pipe and fittings from an Austrian
supplier. Since August 1995, purchases from the Company's Austrian supplier have
been denominated in United States dollars.
The Company completed its initial public offering on May 15, 1996.
Results of Operations
The following table sets forth, for the periods indicated, the Company's net
sales as well as certain income and expense items, expressed as a percentage of
sales:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 65.8 63.3 62.8
------ ------ -------
Gross Profit 34.2 36.7 37.2
Research and development expenses - - 0.5
Selling, general and administrative expenses 24.8 25.7 28.1(A)
------ ----- -----
Income from operations 9.4 11.0 8.6
Interest expense, net 2.0 0.5 0.5
------- ------- -----
Income before provision for income taxes 7.4 10.5 8.1
Provision for income taxes 2.9 4.1 3.4
------- ------- -----
Net income 4.5 6.4 4.7(A)
</TABLE>
(A) Amounts include approximately $400, or 1.0% of sales, of legal expenses
incurred by the Company related to a patent infringement lawsuit whereby
the Company is enforcing its US patent rights against a major competitor.
The final decision from the December 8, 1997 bench trial has yet to be
rendered. The above mentioned expenses reduced net income and both basic
and diluted earnings per share by approximately $226, (.60% of sales), or
$.07, respectively, for the year ended December 31, 1997.
16
<PAGE>
Years Ended December 31, 1997 and December 31, 1996
Net sales for the year ended December 31, 1997 were $37.9 million, relatively
unchanged from 1996. The Company experienced increases in sales from its
distributed valve and manufactured actuation products primarily as a result of
increased demand from and direct sales efforts to the chemical processing and
mining industries. Sales of distributed valves benefited from the favorable
movement of the US dollar against the Japanese yen. As a result of the favorable
movement of the US dollar, the Company has been able to be competitive with its
pricing of distributed valves, achieving growth in certain of its key vertical
markets and expanding into new markets as well. Sales for 1997 also benefited
from the May 1997 acquisition of the flow meter division of Universal Flow
Monitors, Inc. The Company integrated the new manufacturing process into its
Malden, Massachusetts facility according to plan and was able to achieve
positive results from its operation. Sales in 1997 were adversely affected by
decreased demand for the Company's high purity and manufactured dual containment
piping systems and the related decline in the sale and rental of welding
equipment, for which sales decreased significantly in 1997 as compared to 1996.
This decrease is directly attributable to the deferral of and the decrease in
the construction of new plants within the semiconductor industry, the Company's
largest vertical market in 1996. Sales to the semiconductor industry represented
approximately 31% of the Company's total sales in 1996 as compared to
approximately 16% in 1997.
Gross profit as a percentage of sales (gross margin) for the year ended December
31, 1997 improved 0.5 percentage points, or 1.4%, to 37.2% from 36.7% in 1996,
due to the overall increase in the Company's sales of manufactured products
coupled with the lower average product costs for certain of the Company's
distributed products, associated with the continued favorable movement of the US
dollar against the Japanese yen and the related impact due to the Company's LIFO
method of costing inventory. Sales generated from the newly acquired flow meter
division coupled with an increase in sales of actuation products and filtration
equipment offset the decline in sales of the Company's dual containment piping
systems, leading to the overall increase in sales of manufactured product and
contributing to the increase in gross margin. Although the Company instituted a
price increase on certain of its distributed products in 1997, aggressive
pricing to promote the sales of these items offset the gross margin effects of
the price increase. The 1997 gross profit included foreign currency gains
aggregating $345,000.
Selling, general and administrative expenses were $10.6 million for the year
ended December 31, 1997 as compared to $9.8 million in 1996. Selling, general
and administrative expenses as a percentage of net sales were 28.1% in 1997 as
compared to 25.7% in 1996. Included in selling, general and administrative
expenses for 1997 are approximately $400,000, or 1.0% of sales, of legal
expenses incurred by the Company related to a patent infringement lawsuit
whereby the Company is enforcing its US patent rights against a major
competitor. The final decision from the December 8, 1997 bench trial has yet to
be rendered. The above mentioned expenses reduced net income and both basic and
diluted earnings per share by approximately $226,000 or $.07, respectively, for
the year ended December 31, 1997. Additionally, selling, general and
administrative expenses increased in 1997 over 1996 due to increased
amortization expense as a result of the Company's May, 1997 acquisition, higher
operating costs to support the approximate 38,000 square foot expansion in
office, plant and warehouse capacity, increased payroll in support of
anticipated 1997 sales volumes and an increase in promotion and advertising
expenses to facilitate sales opportunities in new and existing markets.
In connection with the Company's May, 1997 acquisition of the flow meter
division of Universal Flow Monitors, Inc., the Company established a dedicated
Research and Development department. This department is initially focusing its
efforts on finalizing the development of a full range of sizes for ultrasonic
flow meter, developing continued product and purity enhancements of the vortex
shedding product line and working to develop digital communications between the
Company's flow meters and actuators with the customers computer systems.
Interest expense decreased $39,000, to $300,000, for the year ended December 31,
1997 due to lower average interest rates on borrowings on the Company's line of
credit in 1997 as compared to 1996 and due to decreases in interest on the
Company's Industrial Revenue Bonds and capital lease obligations.
Years Ended December 31, 1996 and December 31, 1995
Net sales for the year ended December 31, 1996 increased by $2.9 million or 8.3%
to $37.9 million from $35.0 million in 1995. The increase was attributed to
higher sales volume of distributed product of $3.4 million and increased
equipment revenues of $500,000 which more than offset decreased sales of
manufactured product of $1.0 million. Sales of distributed product benefited
from strong demand in domestic markets coupled with the Company's ability to be
price competitive due to lower product costs associated with the strengthening
of the United States dollar. The lower product costs enabled the
17
<PAGE>
Company to further penetrate certain markets, strengthening market share, while
deferring general price increases in 1996. After a significant increase in
manufactured product sales in 1995, the Company experienced a decrease in such
sales during 1996. The decrease was attributable to decreased export sales of
manufactured product coupled with a decrease in major piping projects in 1996 as
compared to 1995. While recent market conditions and currency trends have
favored the distributed product sector, the Company is repositioning selected
manufactured products, in key domestic and export markets and is aggressively
pursuing other short and long term marketing strategies to resume growth of its
manufactured product line.
Export sales were 5%, 4% and 7% of net sales for the years ended December 31,
1995, 1996 and 1997, respectively. Sales to the Company's major customer
represented 26%, 23% and 32% of net sales during the same three year period.
Gross profit as a percentage of sales (gross margin) for the year ended December
31, 1996 improved 2.5 percentage points to 36.7% from 34.2% in 1995. The
principal factor impacting gross margin was the Company's lower product costs
associated with distributed product as a result of the favorable movement of the
US dollar against the Japanese yen. Reversing a five year trend, the US dollar
strengthened 15.6% on average against the Japanese yen during 1996. The stronger
US dollar favorably impacted cost of goods sold during 1996 due to the Company's
LIFO method of costing inventory. Goods purchased from Japan represented
approximately 47% of all Company purchases during the year and the lower product
costs enabled the Company to increase gross profit without a general increase to
its selling prices. Although gross margin on manufactured product sales remained
strong in 1996, a less favorable sales mix adversely impacted 1996 gross margin
as compared to 1995 as manufactured product comprised a smaller percentage of
total 1996 sales. The 1996 gross profit included foreign currency gains
aggregating $378,000.
Selling, general and administrative expenses were $9.8 million for the year
ended December 31, 1996 as compared to $8.7 million in 1995. Selling, general
and administrative expenses as a percentage of net sales were 25.7% in 1996 as
compared to 24.8% in 1995. The higher expense level was due to non-capitalizable
costs related to the purchase and continued renovation of an adjacent facility
and the construction of a warehouse connecting the Company's two facilities,
which permitted an over 38,000 square foot expansion in office, plant and
warehouse capacity. General and administrative costs associated with
transitioning a privately held company to a publicly traded company and
additional selling costs as a result of increased advertising, marketing and
consulting, also contributed to the increase in 1996 as compared to a year ago.
Interest expense for the year ended December 31, 1996, consisting principally of
interest on its Industrial Revenue Bonds and capital lease obligations, was
$339,000 as compared to $714,000 in 1995. The decrease is due to the Company
paying down the entire balance of its bank line of credit following the initial
public offering in May 1996. Lower average borrowings and lower interest rates
prior to the initial public offering also contributed to lower expense in 1996
as compared to 1995
The provision for income taxes was $1.3 million for the year ended December 31,
1997, as compared to $1.5 million in 1996 and $1.0 million in 1995. The
Company's effective income tax rate was 42.0% in 1997 versus 38.7% in 1996 and
1995.
Liquidity and Capital Resources
The Company has financed its operations through cash generated from operations,
the sale of equity securities, borrowings under lines of credit and Industrial
Revenue Bond financings. In addition, the Company has benefited from favorable
payment terms under a $6 million open account arrangement for the purchase of
Japanese valve products, as to which the majority of its purchases are at
payment terms of 180 days after the bill of lading date.
In January, 1997, the Company and its bank executed a loan agreement providing
for up to $10 million of borrowing. The loan agreement consists of two
facilities including a $5 million committed revolving credit line (the Committed
Line) and a $5 million discretionary revolving credit line (the Discretionary
Line). Interest under both facilities is payable monthly and is based on either
LIBOR plus 1.65% or Prime, as elected by the Company at each borrowing date. The
Committed Line includes a 1/4% facility fee on unused borrowings and requires
principal repayment not later than September 30, 1998. Borrowings under the
Discretionary Line are payable upon demand. The Discretionary Line expired
September 30, 1997. As of December 31, 1997, the Company had $1,000,000
outstanding under the Committed Line.
In January, 1998, the Company and its bank agreed on a term sheet for an $11
million secured, committed revolving line of credit, and are currently in the
process of finalizing the loan agreement. The lines of credit are secured by
substantially all
18
<PAGE>
assets of the Company and the $11 million line extends through January 31, 2000.
Interest of this credit line is based on the prime rate or LIBOR plus 1.55% to
2.40%. There is an unused line fee ranging from .15% to .25%. The credit line is
for working capital and merger and acquisition purposes.
On May 1, 1997, the Company acquired the plastic flow meter division and related
assets of Universal Flow Monitors, Inc. and The Rosaen Company including, two
product lines with related inventory, equipment, patents and patent application
rights. The total purchase price of $3.0 million was paid with cash and through
borrowings on the Company's revolving credit line. The Company accounted for the
acquisition as a purchase.
In July, 1997, the Company established a wholly-owned subsidiary, Quail Piping
Products, Inc. to manufacture and market corrugated polyethylene piping systems
for use in water, sewer and drain applications. The facility and manufacturing
equipment, which are located in Magnolia, Arkansas, are being financed by
Arkansas Industrial Revenue Bonds totaling $4.3 million. As of December 31,
1997, the Company had expended approximately $1.5 in connection with the
purchase of the facility and equipment for use in Quail's operations. Quail
commenced production according to schedule in March 1998. Payments on the bonds
begin in January 1998, with equal monthly principal payments and extend until
December 2007. The bonds bear interest at 5.89%.
At December 31, 1997 cash and cash equivalents were $916,000.
The Company generated $2.1 million of cash flow from operations during the year
ended December 31, 1997 as compared to $3.5 million for the same period of 1996.
This decrease is primarily due to a lower net income level coupled with the
operating cash flow impact associated with changes in asset and liability
accounts from December 31, 1997 to December 31, 1996 as compared to December 31,
1996 to December 31, 1995. Receivables at December 31, 1997 decreased $1.1
million, or 20%, from December 31, 1996 due mainly to improved collections
processes with certain of the Company's larger customers.. Inventories were $9.3
million at December 31, 1997, up $663,000 from 1996, reflecting the Company's
increased inventory investment for newer product lines and shortfall from
anticipated sales levels. Accounts payable and accrued expenses were $5.8
million at December 31, 1997 as compared to $7.0 million at December 31, 1996,
reflective in the timing of payments to the Company's principal supplier of
inventory and the reduction of certain of the Company's performance related
accrued expenses.
The Company's industrial revenue bonds funded through the Massachusetts
Industrial Finance Agency (MIFA) are secured by a letter of credit issued by a
bank which is secured by substantially all the assets of the Company. The bonds
consist of six separate series each with differing interest rates and
maturities. Interest rates range from 4.2% to 5.1% and are subject to adjustment
in 1999, 2004 and 2009. The maximum principal payable in any one year is
$320,000, payable in 2014.
The Company believes that its current funds, together with cash generated by
operations will be sufficient to fund the Company's operations, debt service and
capital requirements at least through the next 12 months.
Year 2000 Issues. The Year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year. As the
century date change occurs, many date sensitive systems will recognize the year
2000 as 1900, or not at all. This inability to recognize or properly treat the
Year 2000 may cause systems to process critical financial and operational
information incorrectly. The Company utilizes software and related technologies
throughout its business that will be affected by the date change in the Year
2000. An internal study is currently under way to determine the full scope and
related costs to insure that the Company's systems continue to meet its internal
needs and those of its customers. The Company began incurring expenses in 1997
to resolve this issue. All expenditures will be expensed as incurred and they
are not expected to have a significant impact on the Company's ongoing results
of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Report on
page .
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Information required by Part III (Items 10 through 13) is incorporated by
reference to the Company's definitive proxy statement, for its annual meeting of
stockholders to be held on May 27, 1998, which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities Exchange
Act of 1934, on or before April 30, 1998. If for any reason such a statement is
not filed within such a period, this Report will be appropriately amended.
20
<PAGE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) and (2): The response to this portion of Item 14 is submitted as
a separate section of this report on page .
(a) (3) Exhibits:
Exhibit
Number Description
- ------ -----------
3.1* Restated Articles of Organization of the Registrant.
3.2* Bylaws of the Registrant, as amended to date.
4.1* 1996 Equity Incentive Plan.
4.2* Independent (Non-Employee and Non-Five Percent Stockholder)
Directors' Stock Option Plan.
4.3** Employee Stock Purchase Plan
4.4.1* Loan Agreement between Registrant and Massachusetts Industrial
Finance Agency dated as of March 1, 1994 pertaining to
$4,150,000 Massachusetts Industrial Finance Agency Industrial
Revenue Bonds, Asahi/America Issue, Series 1994.
4.4.2* Bond Purchase Agreement by and among Tucker Anthony Incorporated
and Massachusetts Industrial Finance Agency and the Registrant.
4.4.3* Reimbursement Agreement between the Registrant and Citizens
Trust Company dated as of March 1, 1994.
9.1* Asahi/America, Inc. Voting Trust Agreement dated January 11,
1993.
10.1* Distribution Agreement dated April 1, 1993, among Asahi Yukizai
Kogyo Co., Ltd., Nichimen Corporation, Nichimen America
Inc. and Registrant.
10.1.1*** Equipment Purchase Agreement, dated August 13, 1997 by and
between Unicor Plastic Machinery, Inc. and Asahi/America, Inc.
10.2 Employment Agreement (Restated) dated as of January 1, 1996 by
and between Registrant and Leslie B. Lewis.
10.2.1* Life insurance policy covering Leslie B. Lewis.
10.2.2* Employment Agreement dated as of April 22, 1996 by and between
Registrant and Kozo Terada.
10.3* Master Equipment Lease No. 9000118 between Registrant (Lessee)
and Citizens Leasing Corporation (Lessor) dated September 23,
1993.
10.3.1* First Amendment to Lease Schedule by and between Citizens
Leasing Corporation and Registrant dated March 11, 1994.
21
<PAGE>
10.4.1** Credit Agreement between Registrant and Citizens Bank of
Massachusetts dated as of January 23, 1997.
10.4.2** Revolving Credit Note in favor of Citizens Bank of Massachusetts
dated as of January 23, 1997.
10.4.3** Discretionary Credit Line Note in favor of Citizens Bank of
Massachusetts dated as of January 23, 1997.
10.5* Restated Contract dated as of January 1, 1995 between Registrant
and Agru-Alois Gruber GmbH.
10.6* Agreement entered into as of July 26, 1995 by and between
Registrant and Watts Industries, Inc.
10.8* Consulting Agreement dated January 8, 1995 by and between
Registrant and Bloomberg Associates, Inc.
10.9* Purchase and Sale Agreement dated as of February 2, 1996 by and
between Manganaro Realty Associates and Registrant.
10.10* Purchase and Sale Agreement dated as of March 11, 1996 by and
between Asahi/America Co., Inc. and Creative Filtration Systems,
Inc.
10.11 Letter Agreement regarding security interest dated December 30,
1997 by the Registrant and Asahi Engineered Products, Inc. in
favor of Citizens Bank of Massachusetts, Inc.
10.12 Loan Agreement (Equipment) among GE Capital Public Finance,
Inc., Lender, Arkansas Development Finance Authority, Issuer,
and Quail Piping Products, Inc., Borrower, dated as of November
1, 1997.
10.13 Loan Agreement (Real Estate) among GE Capital Public Finance,
Inc., Lender, Arkansas Development Finance Authority, Issuer,
and Quail Piping Products, Inc., Borrower, dated as of November
1, 1997.
10.14 Guaranty and Negative Pledge Agreement in favor of Registrant
and GE Capital Public Finance, Inc.
21.1 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule (Restated)
- --------------------------------------------------
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1 as amended (File No. 333-2314)
** Incorporated by reference to the Registrant's 1996 Form 10K (File No.
0-28322)
*** Incorporated by reference to the Registrant's September 30, 1997 Form 10Q
(File No. 0-28322)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
last quarter of the period covered by this report.
22
<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 the 24th day of
March 1998.
ASAHI/AMERICA, INC.
By: /s/ Leslie B. Lewis
-------------------
Leslie B. Lewis
Principal Executive
Officer and
President
Pursuant to the requirements of Sections 13 or 15(d) of the Securities and
Exchange Act of 1934, this report has been signed below by the following persons
in their capacities and on the dates indicated.
/s/ Leslie B. Lewis Principal Executive Officer, March 24, 1998
- ------------------- President and
Leslie B. Lewis Director
/s/ Nannette S. Lewis Director March 24, 1998
- ---------------------
Nannette S. Lewis
/s/ Masashi Uesugi Director March 24, 1998
- ------------------
Masashi Uesugi
Director
- ------------------
Masahiro Inoue
/s/ Kozo Terada Vice President, March 24, 1998
- --------------- Treasurer and
Kozo Terada Principal Financial
and Accounting Officer
/s/ Samuel J. Gerson Director March 24, 1998
- --------------------
Samuel J. Gerson
/s/ Jeffrey C. Bloomberg Director March 24, 1998
- ------------------------
Jeffrey C. Bloomberg
23
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARY
FORM 10-K
ITEMS 8 AND 14 (a) (1) AND (2)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements of the registrant and its subsidiary required
to be included in Items 8 and 14 (a) (1) are listed below:
Page
Report of Independent Public Accountants F-2
Consolidated balance sheets as of December 31, 1996 and 1997 F-3
For the years ended December 31, 1995, 1996 and 1997:
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-6
Notes to Consolidated financial statements F-7
The following financial statement schedule of the Registrant and its subsidiary
is included in Item 14(a) (2):
Consolidated financial statement schedules for the years ended December 31,
1995, 1996 and 1997:
Not applicable.
24
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1997 F-3
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 1995, 1996 AND 1997 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1996 AND 1997 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Asahi/America, Inc.:
We have audited the accompanying consolidated balance sheets of Asahi/America,
Inc. (a Massachusetts corporation) and subsidiaries as of December 31, 1996 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Asahi/America, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 20, 1998
F-2
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
ASSETS
1996 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,027,824 $ 915,601
Accounts receivable, less allowance for doubtful accounts of approximately 5,291,324 4,212,867
$283,000 in 1996 and $263,000 in 1997
Inventories 8,672,969 9,335,982
Prepaid expenses and other current assets 230,366 611,389
--------------- ---------------
Total current assets 17,222,483 15,075,839
--------------- ---------------
PROPERTY AND EQUIPMENT, NET 9,868,483 11,754,268
--------------- ---------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $1,379,647 in 1996 and $1,653,868 778,281 2,470,335
in 1997
Other, net 574,041 2,748,438
--------------- ---------------
Total other assets 1,352,322 5,218,773
--------------- ---------------
$ 28,443,288 $ 32,048,880
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Demand note payable to a bank $ - $ 1,000,000
Current portion of MIFA obligations 135,000 145,000
Current portion of GECPF obligations - 430,000
Current portion of capital lease obligations 107,860 149,326
Accounts payable 5,390,198 4,857,107
Accrued expenses 1,613,539 991,786
Deferred income taxes 933,000 734,000
--------------- ---------------
Total current liabilities 8,179,597 8,307,219
--------------- ---------------
MIFA OBLIGATIONS, LESS CURRENT PORTION 3,760,000 3,615,000
--------------- ---------------
GECPF OBLIGATIONS, LESS CURRENT PORTION - 1,047,292
--------------- ---------------
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 206,223 301,873
--------------- ---------------
DEFERRED INCOME TAXES 93,000 177,000
--------------- ---------------
COMMITMENTS (Notes 8, 9, 12, 13 and 17)
STOCKHOLDERS' EQUITY:
Preferred stock, $10.00 par value-
Authorized--1,000,000 shares
Issued and outstanding--none - -
Common stock, no par value-
Authorized--10,000,000 shares
Issued and outstanding--3,340,000 and 3,358,669 shares at December 31, 1996 13,504,154 13,603,333
and 1997, respectively
Additional paid-in capital 134,130 579,130
Retained earnings 2,863,684 4,645,533
--------------- ---------------
16,501,968 18,827,996
Less--Note receivable from stockholder/officer 297,500 227,500
--------------- ---------------
Total stockholders' equity 16,204,468 18,600,496
--------------- ---------------
$ 28,443,288 $ 32,048,880
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
NET SALES $ 34,997,567 $ 37,894,238 $ 37,934,003
COST OF GOODS SOLD 23,018,043 23,968,230 23,827,618
--------------- --------------- ---------------
Gross profit 11,979,524 13,926,008 14,106,385
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (NOTE 17) 8,681,252 9,751,265 10,647,716
RESEARCH AND DEVELOPMENT - - 185,830
--------------- --------------- ---------------
Income from operations 3,298,272 4,174,743 3,272,839
INTEREST INCOME 1,140 143,606 98,705
INTEREST EXPENSE (714,346) (339,197) (299,695)
--------------- --------------- ---------------
Income before provision for income taxes 2,585,066 3,979,152 3,071,849
PROVISION FOR INCOME TAXES 1,000,000 1,541,000 1,290,000
--------------- --------------- ---------------
Net income $ 1,585,066 $ 2,438,152 $ 1,781,849
=============== =============== ===============
BASIC EARNINGS PER SHARE (Note 2(i)) $ .68 $ .82 $ .53
====== ====== ======
DILUTED EARNINGS PER SHARE (Note 2(i)) $ .68 $ .82 $ .53
====== ====== ======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,340,000 2,972,877 3,349,335
============= ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, ASSUMING DILUTION 2,340,000 2,987,932 3,349,335
============= ========= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional
Number of Shares No Par Value Paid-in Capital
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 2,340,000 $ 7,338,283 $ -
Compensation expense related to stockholder's stock repurchase - - 20,163
rights
Net income - - -
-------------- -------------- --------------
BALANCE, DECEMBER 31, 1995 2,340,000 7,338,283 20,163
Initial public offering of common stock, net of issuance costs of 1,000,000 6,165,871 -
$1,334,129
Proceeds from note receivable from stockholder/officer - - -
Exercise of stockholder's stock repurchase rights - - 113,967
Net income - - -
-------------- -------------- --------------
BALANCE, DECEMBER 31, 1996 3,340,000 13,504,154 134,130
Issuance of stock under Employee Stock Purchase Plan 18,669 99,179 -
Proceeds from note receivable from stockholder/officer - - -
Proceeds from contingent shares (Note 12(d)) - - 445,000
Net income - - -
-------------- -------------- --------------
BALANCE, DECEMBER 31, 1997 3,358,669 $ 13,603,333 $ 579,130
============== ============== ==============
Retained Note Total
Receivable
from
Earnings Stockholder/ Stockholders'
(Deficit) Officer Equity
BALANCE, DECEMBER 31, 1994 $ (1,159,534) $ (350,000) $ 5,828,749
Compensation expense related to stockholder's stock repurchase - - 20,163
rights
Net income 1,585,066 - 1,585,066
-------------- -------------- --------------
BALANCE, DECEMBER 31, 1995 425,532 (350,000) 7,433,978
Initial public offering of common stock, net of issuance costs of - - 6,165,871
$1,334,129
Proceeds from note receivable from stockholder/officer - 52,500 52,500
Exercise of stockholder's stock repurchase rights - - 113,967
Net income 2,438,152 - 2,438,152
-------------- -------------- --------------
BALANCE, DECEMBER 31, 1996 2,863,684 (297,500) 16,204,468
Issuance of stock under Employee Stock Purchase Plan - - 99,179
Proceeds from note receivable from stockholder/officer - 70,000 70,000
Proceeds from contingent shares (Note 12(d)) - - 445,000
Net income 1,781,849 - 1,781,849
-------------- -------------- --------------
BALANCE, DECEMBER 31, 1997 $ 4,645,533 $ (227,500) $ 18,600,496
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,585,066 $ 2,438,152 $ 1,781,849
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 1,115,964 1,284,827 1,461,015
Compensation expense related to stockholder's stock 20,163 - -
repurchase rights
Provision (benefit) for deferred (prepaid) income taxes 524,000 (152,000) (115,000)
Changes in assets and liabilities, net of acquisition-
Accounts receivable 440,121 (845,290) 1,078,457
Inventories (570,274) (466,272) (507,748)
Prepaid expenses and other current assets (372,421) 447,708 (381,023)
Accounts payable 761,631 180,921 (533,091)
Accrued expenses (140,014) 614,627 (621,753)
--------------- --------------- ---------------
Net cash provided by operating activities 3,364,236 3,502,673 2,162,706
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,058,422) (3,388,476) (2,472,977)
Acquisition of certain assets of Universal Flow Monitors, Inc. - - (3,000,000)
(Increase) decrease in other assets (224,955) 20,927 (1,187,013)
--------------- --------------- ---------------
Net cash used in investing activities (1,283,377) (3,367,549) (6,659,990)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds on demand note payable to a bank (1,897,856) (3,377,000) 1,000,000
Payments on capital lease obligations (60,844) (104,524) (126,410)
Proceeds from issuance of GECPF obligations - - 1,477,292
Payments on MIFA obligations (82,492) (68,336) (135,000)
Proceeds from initial public offering, net of issuance costs - 6,165,871 -
Proceeds from note receivable from stockholder/officer - 52,500 70,000
Proceeds from stock issued under ESPP - - 99,179
--------------- --------------- ---------------
Net cash (used in) provided by financing activities (2,041,192) 2,668,511 2,385,061
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 39,667 2,803,635 (2,112,223)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 184,522 224,189 3,027,824
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 224,189 $ 3,027,824 $ 915,601
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 713,207 $ 290,363 $ 230,278
=============== =============== ===============
Income taxes $ 1,032,651 $ 1,106,196 $ 1,731,351
=============== =============== ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of equipment under capital lease obligations $ 434,340 $ 13,063 $ 263,526
=============== =============== ===============
Exercise of stockholder's stock repurchase right $ - $ 113,967 $ -
=============== =============== ===============
Purchase of certain assets with contingent restricted stock $ - $ - $ 445,000
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) ORGANIZATION
(a) Historical Background
Asahi/America, Inc. (the Company) was established on August 18,
1977 as a Massachusetts corporation and is involved in the
manufacturing and distribution of thermoplastic valves, actuators
and controls, piping systems, flow meters, filtration systems and
related components for environmentally sensitive and industrial
applications. These include chemical processing, semiconductor and
pharmaceutical manufacturing, wastewater treatment, aquarium and
mining. The Company has exclusive distribution agreements with two
international manufacturers.
(b) Quail Piping Products, Inc.
In July 1997, the Company established a wholly owned subsidiary,
Quail Piping Products, Inc. (Quail), to manufacture and market
polyethylene piping systems for use in water, sewer and drain
applications. The facility and manufacturing equipment, which is
under construction at December 31, 1997 and located in Magnolia,
Arkansas, are being financed principally by Arkansas State
Industrial Revenue Bonds through GE Capital Public Finance, Inc.
(GECPF). Production of the piping systems is scheduled to begin in
March 1998 (see Note 10(c) and Note 12(d)). The Company is
capitalizing as start-up costs, the costs incurred related to
commencing operations of Quail until manufacturing begins. These
costs are included in other assets and are to be amortized over 5
years.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain accounting policies as described below and
elsewhere in the notes to consolidated financial statements. The
preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Asahi
Engineered Products, Inc. and Quail Piping Products, Inc. All
significant intercompany balances and transactions have been
eliminated in consolidation.
F-7
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(b) Revenue Recognition
The Company recognizes revenue on product sales at the time the
products are shipped. Rental revenues, which are less than 10% of
total revenues for all periods presented, are recognized over the
related rental period.
(c) Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents. Cash
equivalents at December 31, 1997 consist mainly of treasury notes.
(d) Inventories
The Company accounts for inventories using the lower of last-in,
first-out (LIFO) cost or market value.
(e) Depreciation
The Company provides for depreciation using the straight-line
method and charges to operations amounts estimated to allocate the
cost of the assets over their estimated useful lives as follows:
Asset Classification Estimated
Useful Life
Machinery and equipment 5-7 years
Molds and dies 7 years
Furniture and fixtures 7 years
Building and improvements 7.5-40 years
(f) Goodwill
Goodwill was recorded as a result of a change in ownership control
in 1989, from the acquisition of Poly-Flowlines Company in 1994
and from the acquisition of the vortex flow meter division of
Universal Flow Monitors, Inc. in 1997 (see Note 16). Goodwill for
Poly-Flowlines and the change in ownership is being amortized on a
straight-line basis over 10 years. Goodwill related to the vortex
flow meter acquisition is being amortized on a straight-line basis
over 20 years.
F-8
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(g) Other Assets
Other assets primarily consist of costs of obtaining patents and
costs related to internal use software and start-up costs. The
Company provides for amortization using the straight-line method
and charges to operations amounts estimated to allocate the cost
of the assets over their estimated useful lives as follows:
Asset Classification Estimated Useful
Life
Software costs 5 years
Patents 5-20 years
Start-up costs 5 years
The Company assesses the realizability of intangible assets
including goodwill in accordance with 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, among other things, that an entity review
its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. As a
result of its review, the Company does not believe that any
impairment currently exists related to its long-lived assets.
(h) Research and Development Center
The Company charges research and development costs to operations
as incurred.
(i) Earnings per Share
In March 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, Earnings Per Share. This statement
established standards for computing and presenting earnings per
share and applies to all entities with publicly traded common
stock or potential common stock. This statement is effective for
fiscal years ending after December 15, 1997. This statement has
been adopted as of December 31, 1997. Accordingly, the prior
year's earnings per share have been retroactively restated to
reflect the adoption of SFAS No. 128.
Basic net income per share and basic pro forma net income per
share were computed by dividing net income or pro forma net income
by the weighted average number of common shares outstanding during
the period. Diluted net income per share and diluted pro forma net
income per share were computed by dividing net income or pro forma
net income by diluted weighted
F-9
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
average number of common and common equivalent shares outstanding
during the period. The weighted average number of common
equivalent shares outstanding has been determined in accordance
with the treasury-stock method. Common stock equivalents consist
of common stock issuable on the exercise of outstanding options.
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Basic-
Net income $ 1,585,066 $ 2,438,152 $ 1,781,849
============== ============== ==============
Weighted average common shares 2,340,000 2,972,877 3,349,335
outstanding
Diluted-
Effect of dilutive securities - -
Stock options 15,055
-------------- -------------- --------------
Weighted average common shares 2,340,000 2,987,932 3,349,335
-------------- -------------- --------------
outstanding, assuming dilution
Basic earnings per share $ .68 $ .82 $ .53
======== ======== ========
Diluted earnings per share $ .68 $ .82 $ .53
======== ======== ========
</TABLE>
As of December 31, 1995, 1996 and 1997, 0, 334,945 and 313,167
options, respectively, were outstanding but not included in the
diluted weighted average common share
calculation as the effect would have been antidilutive.
(j) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Statement
with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, requires disclosure of any
significant off-balance-sheet and credit risk concentrations. The
financial instrument that potentially subjects the Company to
concentrations of credit risk is accounts receivable. As of
December 31, 1995, 1996 and 1997, one customer accounted for 25%,
20% and 36% of total accounts receivable, respectively.
F-10
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(k) New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
In July 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131
requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable
segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable,
companies would be required to restate prior information upon
adoption.
(l) Financial Instruments
The estimated fair value of the Company's financial instruments,
which include cash and cash equivalents, accounts receivable and
debt, approximates their carrying value.
(3) ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary for the allowance for doubtful accounts activity is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Balance, beginning of year $ 310,862 $ 244,893 $ 283,067
Amounts charged to expense 38,610 67,382 -
Amounts written off (104,579) (29,208) (19,598)
-------------- -------------- --------------
Balance, end of year $ 244,893 $ 283,067 $ 263,469
============= ============= =============
</TABLE>
(4) INVENTORIES
Inventories at December 31, 1996 and 1997 consist of the following:
1996 1997
Raw materials $ 606,091 $ 514,157
Finished goods 8,103,834 8,643,781
LIFO (reserve) surplus (36,956) 178,044
--------------- ---------------
$ 8,672,969 $ 9,335,982
=============== ===============
F-11
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
Had the first-in, first-out (FIFO) method of inventory costing been used
by the Company, inventories at December 31, 1996 and 1997 would have been
$8,709,925 and $9,157,938, respectively.
(5) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Interest costs, during the
construction period, on borrowings used to finance construction of
facilities are included in the cost of the construction facilities.
Property and equipment and accumulated depreciation consist of the
following at December 31, 1996 and 1997:
1996 1997
Machinery and equipment $ 5,214,979 $ 5,816,478
Molds and dies 926,199 933,549
Furniture and fixtures 451,997 525,887
Building and improvements 5,339,662 5,654,030
Land 1,220,615 1,255,134
Construction-in-process - 1,831,388
-------------- --------------
13,153,452 16,016,466
Less--Accumulated depreciation 3,284,969 4,262,198
--------------- ---------------
$ 9,868,483 $ 11,754,268
============== ==============
(6) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1996 and 1997:
1996 1997
Accrued payroll/payroll-related $ 821,348 $ 416,811
Other accruals 792,191 574,975
-------------- --------------
$ 1,613,539 $ 991,786
============== =============
F-12
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(7) INCOME TAXES
The Company accounts for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No.
109, deferred tax assets or liabilities are computed based on the
differences between the financial statement and income tax bases of
assets and liabilities as measured by the enacted tax rates. The
provision for deferred (prepaid) taxes is based on changes in the asset
or liability from period to period. The provision (benefit) for income
taxes consists of the following for the years ended December 31, 1995,
1996 and 1997:
1995 1996 1997
Current-
Federal $ 364,000 $ 1,436,000 $ 1,192,000
State 112,000 257,000 213,000
----------- ------------- -------------
476,000 1,693,000 1,405,000
----------- ------------- -------------
Deferred (prepaid)-
Federal 495,000 (111,000) (66,000)
State 29,000 (41,000) (49,000)
----------- ------------- -------------
524,000 (152,000) (115,000)
----------- ------------- -------------
$ 1,000,000 $ 1,541,000 $ 1,290,000
=========== ============= =============
The components of the net deferred tax liability recognized in the
accompanying consolidated balance sheets with the approximate income tax
effect of each type of temporary difference are as follows:
1996 1997
Temporary differences $ 462,000 $ 490,000
Net operating loss carryforwards 50,000 -
Depreciation (143,000) (177,000)
LIFO reserve (1,295,000) (1,179,000)
------------ -------------
(926,000) (866,000)
Valuation allowance (100,000) (45,000)
------------ -------------
Net deferred tax liability $ (1,026,000) $ (911,000)
============ =============
The Company's policy is to provide for a valuation allowance on deferred
tax assets for which realization is uncertain. A deferred tax asset is
recorded when realizability is more likely than not.
F-13
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate as follows:
1995 1996 1997
Provision at federal statutory rate 34.0% 34.0% 34.0%
State income tax, net of federal benefit 5.5 4.2 6.3
Change in valuation allowance (3.5) - (1.8)
Amortization of goodwill 2.7 1.8 2.1
Other, net - (1.3) 1.4
------- -------- --------
Effective tax rate 38.7% 38.7% 42.0%
======== ======== =======
(8) RELATED PARTY ARRANGEMENTS
(a) Distributorship Agreement and Inventory Arrangements
The Company has a 10-year exclusive distributorship agreement with
a Japanese value manufacturer, Asahi Yukizai Kogyo Co., LTD.,
(official English translation, Asahi Organic Chemical Industry
Company LTD) (AOC) and Nichimen Corporation, a Japanese trading
company, and Nichimen America, Inc., the Japanese trading
company's U.S. affiliate (together, Nichimen). Both AOC and
Nichimen are greater than 10% stockholders of the Company. Under
the terms of the agreement, the Company is expected to purchase a
total of $140,000,000 of merchandise over a 10-year period, which
began January 2, 1990. The agreement provides for annual purchase
guidelines but does not assess penalties if either the annual
purchase guidelines or other cumulative totals are not met. The
Company has made cumulative purchases of approximately $71,447,000
under this agreement through December 31, 1997. For their
services, Nichimen is paid by AOC a combined markup of
approximately 8% of the invoiced price of the Company's purchases
from AOC.
The Company purchased approximately $9,971,000, $10,351,000 and
$9,664,000 of valves from AOC during the years ended December 31,
1995, 1996 and 1997, respectively. The accompanying consolidated
balance sheets include accounts payable to Nichimen America, Inc.
of approximately $3,329,000 and $2,909,000 at December 31, 1996
and 1997, respectively.
To facilitate purchases from AOC, the Company has from time to
time made arrangements with a bank whereby irrevocable letters of
credit for 180 days are drawn upon shipment. Currently, Nichimen
America, Inc. allows the Company to purchase on open account and
to maintain a payable balance of up to $6 million, above which
letters of credit are required. During 1996, Nichimen America
charged the Company a fee of approximately $10,000 for this
arrangement. No such fee was charged in 1997. At December 31, 1996
and 1997, there were no letters of credit issued by the bank that
have been drawn under these arrangements.
F-14
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(b) Related Party Transactions
The Company sells products to an entity controlled by the chief
executive officer's father. Sales to this customer were $260,513,
$306,751 and $312,331 in 1995, 1996 and 1997, respectively.
Management believes that all transactions were made at terms no
less favorable than would have been obtained from nonrelated
parties.
(9) FOREIGN CURRENCY TRANSACTIONS
The Company charges foreign currency gains or losses to operations in
accordance with SFAS No. 52, Foreign Currency Translation. The foreign
currency gain recorded in cost of goods sold in the accompanying
consolidated statements of income for the years ended December 31, 1995,
1996 and 1997 was approximately $391,000, $378,000 and $345,000,
respectively.
During 1995, the Company began purchasing products through Nichimen
America, Inc. denominated in Japanese yen. The Company may enter into
foreign exchange forward and option contracts to reduce the exposure to
changes in foreign currencies related to the purchase of inventories.
Gains and losses on the contracts that are hedges of firm commitments are
deferred and recognized in the accompanying consolidated statement of
income in the same period as the related transaction.
In accordance with SFAS No. 119, Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments, at December 31, 1996
and 1997, the Company had foreign exchange forward contracts, all having
maturities of less than one year, to buy Japanese yen in the amount equal
to $697,824 and $962,106, respectively. The deferred gain related to
these contracts as of December 31, 1996 and 1997 was $45,852 and $64,793,
respectively.
(10) DEBT
(a) MIFA Obligations
In connection with the purchase of its Malden facility, the
Company issued bonds with the Massachusetts Industrial Finance
Agency (MIFA) for a total of $4,150,000. The bonds bear interest
at rates that range from 4.2% to 5.1%. Interest is payable
semiannually and is subject to adjustment in 1999, 2004 and 2009.
The bonds are payable in annual installments, which commenced on
March 1, 1995, of $125,000; the installments increase $5,000 per
year through 1999. The bonds require payments of $160,000
(increasing $5,000 to $15,000 each year) to $320,000 per year from
2000 to 2014. The bonds are secured by an irrevocable letter of
credit issued by a bank, which expires in March 1999. This letter
of credit is secured by substantially all assets of the Company
and does not affect the availability under the Company's revolving
credit lines (Note 10 (b)). As of December 31, 1997, the Company
had $3,760,000 outstanding related to the MIFA obligations.
F-15
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(b) Revolving Credit Lines
In January 1997, the Company and its bank executed a loan
agreement that provides for a $5,000,000 committed unsecured
revolving credit line (the Committed Line) and a $5,000,000
discretionary unsecured revolving credit line (the Discretionary
Line). Interest on the credit lines is based on the prime rate
(8.5% at December 31, 1997) or LIBOR plus 1.65%, as elected by the
Company at each borrowing date. The Company is required to
maintain certain financial ratios, including, among others,
minimum working capital and tangible net worth, as defined in the
agreements. The Discretionary Line expired on September 30, 1997.
The Committed Line extends through September 30, 1998. As of
December 31, 1997, the Company had $1,000,000 outstanding under
the Committed Line.
In January 1998, the Company and its bank signed a term sheet for
an $11,000,000 secured, committed revolving line of credit. This
line of credit is secured by substantially all assets of the
Company and extends through January 31, 2000. Interest on this
credit line is based on the prime rate or LIBOR plus 1.55% to
2.40%. There is an unused fee ranging from .15% to .25%, based on
borrowing levels. The Company will be required to maintain certain
financial ratios, including, among others, minimum working capital
and tangible net worth. The credit line is for working capital and
merger and acquisition purposes.
(c) GECPF Obligations
In connection with the purchase of the building and manufacturing
equipment for Quail, in Magnolia, Arkansas, GECPF financed the
issuance of $4,300,000 of Arkansas State Industrial Revenue Bonds,
of which $3,600,000 represents bonds related to equipment and
$700,000 represents bonds related to real estate, building
improvements and other equipment, (collectively, the Borrowings).
The Borrowings bear interest at 5.89% with interest beginning on
January 1, 1998. Payments on the Borrowings are $35,833 per month
beginning January 1, 1998 and ending December 31, 2007. The
equipment bonds are secured by the related financed assets and the
real estate bonds are secured by a self-reducing letter of credit
equal to the outstanding principal balance plus 90 days interest,
which reduces the availability under the Company's line of credit.
As of December 31, 1997, there was $1,477,292 outstanding related
to the GECPF obligations. The balance of the proceeds remains in
escrow, to be disbursed as final payments of the equipment and
real estate.
F-16
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(d) Capital Leases
The Company leases certain equipment under capital leases. Future
minimum lease payments under these leases as of December 31, 1997
are as follows:
Year Capital
Leases
1998 $ 179,275
1999 147,413
2000 132,314
2001 51,404
------------
Total minimum lease payments 510,406
Less--Amount representing interest 59,207
-------------
Capital lease obligations 451,199
Less--Current portion of capital lease obligations 149,326
-------------
$ 301,873
=============
(11) NOTE RECEIVABLE FROM STOCKHOLDER/OFFICER
On October 1, 1991, the Company loaned $350,000 to a stockholder/officer
of the Company. The terms of the loan were amended on March 31, 1993, and
interest began accruing on April 1, 1996 at the prime rate (8.5% as of
December 31, 1997) plus 1%. The outstanding principal and interest are
due in equal quarterly payments, which commenced in April 1996, over a
five-year period. The proceeds of the loan were used for the purchase of
Company common stock by the officer from another stockholder.
(12) STOCKHOLDERS' EQUITY
(a) Initial Public Offering
In May 1996, the Company sold 1,334,000 shares of common stock to
the public, at an offering price of $7.50 per share (including
174,000 shares sold pursuant to an overallotment option exercised
by the underwriters), of which 1,000,000 shares were sold by the
Company and 334,000 shares were sold by selling stockholders. Net
proceeds to the Company were $6,165,871 after deducting offering
expenses of $1,334,129.
F-17
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(b) Stock Split
In March 1996, the Board of Directors approved an 836-to-1 stock
split of the Company's common stock. All share and per share
amounts have been retroactively restated as a result of this stock
split.
(c) Preferred Stock
The Board of Directors has the authority to issue up to 1,000,000
shares of preferred stock, $10.00 par value, in one or more series
and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or
action of the stockholders.
(d) Contingent Shares
In connection with the establishment of Quail, the Company and the
individual hired as President of Quail (the Executive) have
entered into a stock purchase agreement whereby the Company has
agreed to sell to the Executive 68,461 shares of the Company's
common stock for $6.50 per share if certain financial performance
milestones are met in any one of the first three years of Quail's
operation. The purchase price for the shares was paid to the
Company in July 1997 and was in the form of certain equipment and
trademark rights valued at $145,000 and a $300,000 irrevocable
letter of credit. The total purchase price of $445,000 was
recorded in stockholders' equity. If the performance milestones
are not met, the shares will not be sold to the Executive and the
Executive forfeits to the Company the amounts paid for the shares.
The Company will recognize as compensation expense the difference
between the fair market value of the share and the selling price
per share when the performance milestones are achieved.
(e) Equity Incentive Plan
On March 11, 1996, the Board of Directors and stockholders
approved the Asahi/America Equity Incentive Plan (the Incentive
Plan). The aggregate number of shares of common stock that may be
issued pursuant to the Incentive Plan is 330,000 shares. The
Company may grant incentive stock options and other stock
compensation arrangements to eligible employees and consultants.
The exercise price of each incentive stock option may not be less
than 100% (110% for greater than 10% stockholders) of the fair
market value of common stock at the date of grant. Nonqualified
stock options may be granted to any employee, officer, director or
consultant of the Company. The terms of each nonqualified stock
option are determined by the Board of Directors. All options vest
in three equal annual increments beginning on the first
anniversary of the date of grant.
F-18
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(f) Independent Directors' Stock Option Plan
On March 11, 1996, the Board of Directors and stockholders
approved the Asahi/America Independent Directors' Stock Option
Plan (the Directors' Plan). The Directors' Plan authorizes the
issuance of an option to each Company director who is neither an
employee of the Company nor a holder of, or affiliated with or
related to a holder of, five percent or more of the Company's
common stock, to purchase up to 10,000 shares of the Company's
common stock on the date of election to the Board of Directors. A
total of 20,000 shares of common stock is reserved under the
Directors' Plan.
The following schedules summarize the activity under the Company's
stock option plans for the year ended December 31, 1997:
Shares Weighted
Average
Exercise
Price
Granted, Fiscal 1996 359,500 $ 7.56
Canceled (9,500) 7.50
---------- ------
Outstanding, December 31, 1996 350,000 7.56
Granted 16,500 7.83
Canceled (53,333) 7.50
---------- ------
Outstanding, December 31, 1997 313,167 $ 7.58
========== ======
The range of the options outstanding at December 31, 1997 was
$7.50 to $9.50.
There were 110,000 stock options exercisable under both stock
option plans as of December 31, 1997; no stock options were
exercisable at December 31, 1996. The weighted average exercise
price was $7.56 and the range of actual exercise prices was $7.50
to $9.50 for the shares exercisable at December 31, 1997.
There were 36,833 total stock options available for future grants
under the equity incentive plan as of December 31, 1997. There
were no stock options available for future grant under the
Directors' Plan.
F-19
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(g) Employee Stock Purchase Plan
In July 1996, the Company established the Asahi/America, Inc.
Employee Stock Purchase Plan (the Purchase Plan), which allows
substantially all employees to acquire shares of the common stock
of the Company. The Purchase Plan authorizes the issuance of up to
a total of 150,000 shares of common stock to participating
employees.
The price at which shares may be purchased will be at 85% of the
fair market value per share of the common stock on either the
semiannual offering commencement date or the semiannual offering
termination date. Purchases under the Purchase Plan are subject to
certain limitations, as defined. During fiscal 1996, there were no
shares issued under the Purchase Plan. In 1997, 18,669 shares were
issued under the Purchase Plan.
(h) Stock-Based Compensation Plans
SFAS No. 123 established a fair-value-based method of accounting
for stock-based compensation plans. The Company has adopted the
disclosure-only alternative under SFAS No. 123 for stock options
granted to employees and directors, which requires disclosure of
the pro forma effects on earnings and earnings per share as if the
fair value accounting as calculated under SFAS No. 123 had been
used, as well as certain other information. The Company accounts
for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, as permitted by SFAS No. 123.
The Company had no stock option grants prior to 1996; accordingly,
the Company has computed only the pro forma disclosures required
under SFAS No. 123 for all stock options granted since 1996 and
under the Purchase Plan using the Black-Scholes option pricing
model.
The assumptions used for the years ended December 31, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Risk-free interest rates 6.48%-6.69% 6.20%-6.38%
Expected dividend yield 0% 0%
Expected lives 5 years 5 years
Expected volatility 25% 25%
Weighted average remaining contractual 9.33 years 8.51 years
life of options outstanding
Weighted average fair value of options granted $ 2.70 $ 2.77
</TABLE>
F-20
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
The pro forma effect of applying SFAS No. 123 would be as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Net income as reported $ 2,438,152 $ 1,781,849
================= =================
Pro forma net income $ 2,226,948 $ 1,435,489
================= =================
Basic and diluted earnings per share as reported $ .82 $ .53
================= =================
Pro forma basic and diluted earnings per share $ .77 $ .43
================= =================
</TABLE>
(i) Issuance of Stock
On March 31, 1993, the Company sold a total of 1,287,000 shares of
stock to AOC and Nichimen. In connection with the sale of stock,
an officer/stockholder had the right to repurchase from AOC and
Nichimen a certain number of the Company's shares (at a
formula-based value) if certain performance milestones were met,
as defined in the stock purchase agreement. The Company accounted
for this repurchase right in accordance with Accounting Principles
Board Opinion No. 25. Accordingly, compensation is measured based
on the difference between the purchase price and the fair market
value of the Company's common stock. For the year ended December
31, 1995, $20,163 of compensation expense was recorded, as the
fair market value was in excess of the formula-based value. The
performance milestones were met as of December 31, 1995, and on
March 11, 1996, the officer/stockholder exercised his right in
full and repurchased 140,400 shares from AOC.
(13) COMMITMENTS
(a) Lease Commitments
The Company leases certain office space and certain equipment
under operating leases through May 2001. The approximate future
minimum lease payments under these leases are as follows:
Year Amount
1998 $ 283,000
1999 234,000
2000 146,000
2001 24,000
--------------
Total minimum lease payments $ 687,000
=============
Rental expense incurred under these leases and charged to
operations was approximately $165,000, $204,000 and $ 344,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
F-21
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(14) OTHER EMPLOYEE BENEFITS
(a) Profit Sharing Plan
The Asahi/America, Inc. Profit Sharing Plan (the Plan) is a
combined 401(k) and profit sharing plan.
Employer contributions for the profit sharing portion of the Plan
are discretionary and determined by the Board of Directors. The
Company made contributions to the Plan of $100,000 in 1995 and
1996. There was no contribution made in 1997.
Under the terms of the 401(k) portion of the Plan, eligible
employees may contribute limited percentages of their salaries to
the Plan, and the Company matches a portion. The Company's
matching contributions were approximately $27,000, $31,000 and
$43,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
(b) Postretirement and Postemployment Benefits
The Company has no obligations for postretirement or
postemployment benefits.
(15) SIGNIFICANT CUSTOMER AND EXPORT SALES
During 1995, 1996 and 1997, one customer accounted for 26%, 23%
and 32%, respectively, of net sales. During 1995, 1996 and 1997,
export sales accounted for 5%, 4% and 7%, respectively, of net
sales.
F-22
<PAGE>
ASAHI/AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(16) ACQUISITION
In May 1997, the Company acquired the vortex flow meter division of
Universal Flow Monitors, Inc. and the Rosaen Company for $3,000,000. The
acquisition was accounted for as a purchase. The results of operations of
the vortex flow meter division have been included in the Company's
statement of income since the date of acquisition. Pro forma information
has not been presented due to immateriality. The Company allocated the
purchase price to the acquired assets as follows:
Patents $ 1,100,000
Goodwill 1,652,120
Fixed assets 71,906
Inventory 155,974
Noncompete agreement 20,000
--------------
$ 3,000,000
==============
(17) PATENT LITIGATION
In July 1997, the United States Patent and Trademark Office reconfirmed
the validity of a patent owned by the Company. In August 1997, the
Company instituted a patent infringement suit in the United States
District Court in the New York against a competitor. The Court has yet to
render a decision with respect to the December 1997 bench trial. In the
fourth quarter of 1997, the Company incurred approximately $400,000 in
legal expenses related to this patent issue.
F-23
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- ------
<S> <C> <C>
3.1* Restated Articles of Organization of the Registrant.
3.2* Bylaws of the Registrant, as amended to date.
4.1* 1996 Equity Incentive Plan.
4.2* Independent (Non-Employee and Non-Five Percent Stockholder)
Directors' Stock Option Plan.
4.3** Employee Stock Purchase Plan
4.4.1* Loan Agreement between Registrant and Massachusetts Industrial
Finance Agency dated as of March 1, 1994 pertaining to
$4,150,000 Massachusetts Industrial Finance Agency Industrial
Revenue Bonds, Asahi/America Issue, Series 1994.
4.4.2* Bond Purchase Agreement by and among Tucker Anthony Incorporated
and Massachusetts Industrial Finance Agency and the Registrant.
4.4.3* Reimbursement Agreement between the Registrant and Citizens
Trust Company dated as of March 1, 1994.
9.1* Asahi/America, Inc. Voting Trust Agreement dated January 11,
1993.
10.1* Distribution Agreement dated April 1, 1993, among Asahi Yukizai
Kogyo Co., Ltd., Nichimen Corporation, Nichimen America
Inc. and Registrant.
10.1.1*** Equipment Purchase Agreement, dated August 13, 1997 by and
between Unicor Plastic Machinery, Inc. and Asahi/America, Inc.
10.2 Employment Agreement (Restated) dated as of January 1, 1996 by
and between Registrant and Leslie B. Lewis.
10.2.1* Life insurance policy covering Leslie B. Lewis.
10.2.2* Employment Agreement dated as of April 22, 1996 by and between
Registrant and Kozo Terada.
10.3* Master Equipment Lease No. 9000118 between Registrant (Lessee)
and Citizens Leasing Corporation (Lessor) dated September 23,
1993.
10.3.1* First Amendment to Lease Schedule by and between Citizens
Leasing Corporation and Registrant dated March 11, 1994.
10.4.1** Credit Agreement between Registrant and Citizens Bank of
Massachusetts dated as of January 23, 1997.
10.4.2** Revolving Credit Note in favor of Citizens Bank of Massachusetts
dated as of January 23, 1997.
10.4.3** Discretionary Credit Line Note in favor of Citizens Bank of
Massachusetts dated as of January 23, 1997.
10.5* Restated Contract dated as of January 1, 1995 between Registrant
and Agru-Alois Gruber GmbH.
10.6* Agreement entered into as of July 26, 1995 by and between
Registrant and Watts Industries, Inc.
10.8* Consulting Agreement dated January 8, 1995 by and between
Registrant and Bloomberg Associates, Inc.
10.9* Purchase and Sale Agreement dated as of February 2, 1996 by and
between Manganaro Realty Associates and Registrant.
10.10* Purchase and Sale Agreement dated as of March 11, 1996 by and
between Asahi/America Co., Inc. and Creative Filtration Systems,
Inc.
10.11 Letter Agreement regarding security interest dated December 30,
1997 by the Registrant and Asahi Engineered Products, Inc. in
favor of Citizens Bank of Massachusetts, Inc.
10.12 Loan Agreement (Equipment) among GE Capital Public Finance,
Inc., Lender, Arkansas Development Finance Authority, Issuer,
and Quail Piping Products, Inc., Borrower, dated as of November
1, 1997.
10.13 Loan Agreement (Real Estate) among GE Capital Public Finance,
Inc., Lender, Arkansas Development Finance Authority, Issuer,
and Quail Piping Products, Inc., Borrower, dated as of November
1, 1997.
10.14 Guaranty and Negative Pledge Agreement in favor of Registrant
and GE Capital Public Finance, Inc.
21.1 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule (Restated)
</TABLE>
- --------------------------------------------
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1 as amended (File No. 333-2314)
** Incorporated by reference to the Registrant's 1996 Form 10K (File No.
0-28322)
*** Incorporated by reference to the Registrant's September 30, 1997 Form 10Q
(File No. 0-28322)
EMPLOYMENT AGREEMENT (AMENDED AND RESTATED)
EMPLOYMENT AGREEMENT (the "Agreement") dated as of January 1, 1996, by and
between, ASAHI/AMERICA, INC., a Massachusetts corporation (the "Company"), and
LESLIE B. LEWIS, an individual (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is presently Chairman, Chief Executive Officer and
President of the Company;
WHEREAS, the Company desires to retain the Executive as Chairman, Chief
Executive Officer and President of the Company;
WHEREAS, the Executive is willing to provide his services as an employee of
the Company for the inducements and on the terms and conditions set forth below
in this Agreement; and
WHEREAS, the parties hereto desire to amend and restate the existing
Employment Agreement among the parties.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
Employment. Upon the terms and subject to the conditions of this Agreement,
the Company employs the Executive and the Executive accepts employment with the
Company in the capacity hereinafter set forth.
Term of Employment. The initial term of Executive's employment by the
Company under this Agreement shall commence as of January 1, 1996 (the
<PAGE>
"Commencement Date") and shall continue until the third anniversary of the
Commencement Date (the "Termination Date"), unless terminated earlier pursuant
to Section 3. On each anniversary date of the Commencement Date the term shall
be extended automatically for an additional one (1) year period effective on
each anniversary of the Commencement Date until notice of non-extension is given
by either party to the other at least forty-five (45) days prior to the next
anniversary of the Commencement Date. The term of employment of the Executive
under this Agreement, including any annual extensions, and exclusive of any
earlier termination pursuant to Section 3, is referred to in this Agreement as
the "Employment Period".
Duties. The Executive shall be employed as Chairman, Chief Executive
Officer and President of the Company. In that capacity, he shall be responsible,
subject to the direction and control of the Board of Directors of the Company or
its designee (the "Board"), for the supervision and control of the operation,
finances, personnel and management of the Company, including, without
implication of limitation, (i) the selection, hiring and firing of all personnel
of the Company, (ii) the operation, control and selection of the Company's
facility, including the selection and purchase of equipment, fixtures, inventory
and parts, and the implementation of all modifications, alterations and
renovations of the Company's facility and equipment and (iii) the selection of
all products and services offered for sale by the Company and the implementation
of such sales, including responsibility for advertising and marketing of
products and directing of the Company's sales force.
At all times during the Employment Period, except for illness and permitted
vacation periods, during the Executive's employment with the Company, the
Executive
<PAGE>
shall: (i) devote his full time and attention during normal business hours to
the business and best interests of the Company; and (ii) discharge such
executive and administrative duties as may be assigned to him by the Board as
are reasonably consistent with the Executive's title and office and report to
and obey the lawful directions of the Board; provided that such instructions do
not violate or cause a violation of law and do not constitute a breach of the
directors' fiduciary duties to the Company. The foregoing shall not be construed
to prohibit the Executive from: (i) serving as a director of any corporation
which is not a competitor of the Company, provided that such service by the
Executive does not materially interfere with the performance by the Executive of
his duties hereunder and the Executive has obtained the prior consent of the
Company, which consent shall not be unreasonably withheld; or (ii) engaging in
civic, educational, religious, charitable or other community or non-profit
activities that do not impair the Executive's ability to fulfill the Executive's
duties and responsibilities under this Agreement.
Compensation. Until the termination of the Executive's employment
hereunder, in consideration for the services of the Executive hereunder, the
Company shall compensate the Executive as follows:
Base Compensation. During the first three (3) years of the Employment
Period, the Company will pay to the Executive a base salary at the annual rate
of Three Hundred Thousand Dollars ($300,000), payable semi-monthly or in such
other manner as the Executive and the Company may mutually agree (the "Base
Salary"). The Base Salary may be increased from time to time at the sole
discretion of the Board. The Board shall annually review the Executive's job
performance and shall annually consider increasing the Executive's Base Salary.
Without limiting the Board's discretion concerning increases to the Executive's
Base Salary, the Board shall consider the Company's past practice with respect
to executive salary increases in making salary
<PAGE>
increase decisions. Nothing herein shall be construed as guaranteeing the
Executive the right to receive any such salary increases. Notwithstanding the
foregoing, if the Employment Period is extended beyond the third anniversary of
the Commencement Date pursuant to Section 1(a) and the Executive's Base Salary
has not previously been increased to at least Three Hundred Thirty Thousand
Dollars ($330,000) by the Board, the Executive's Base Salary shall be increased
to at least Three Hundred Thirty Thousand Dollars ($330,000) for the remainder
of the Employment Period as so extended.
Bonus. The Executive shall also be eligible to receive a bonus payable on
or prior to the 120th day following the end of each full calendar year during
which this Agreement is in effect or, notwithstanding the foregoing, with
respect to any portion of the bonus which may be in dispute and which has been
challenged by institution of the dispute mechanism set forth in paragraph (d)
below, ten (10) days after the rendering of a determination pursuant to
paragraph (d) below, in an amount equal to the sum of (i) an amount equal to the
product of (A) $100,000 and (B) a fraction, the numerator of which shall be the
net operating income after interest but before non-cash charges, directors'
expenses, officers' bonuses, amortization, profit sharing, and depreciation) and
taxes ("NOI") for such year and the denominator of which shall be the Target NOI
(as defined below), such fraction in no event to be greater than 1, and (ii) the
amount which is equal to ten percent (10%) of the amount of the NOI for such
year which is in excess of the Target NOI. For purposes of the determination of
Target NOI for a given year, the amount, if any, of any NOI above the Target NOI
shall be, at the election of the Executive, (i) included in such
<PAGE>
calculation of Target NOI, or (ii) carried forward and included in the
calculation of NOI for the succeeding year. For purposes of the calculation,
inventory shall be calculated on the FIFO basis. The determination of NOI under
this Section 2(b) and elsewhere in this Agreement shall be made in accordance
with and subject to the provisions of paragraph (d) below.
In order to illustrate the calculation of the Executive's bonus, the
following is set forth as an example. Assume the following:
Year Target NOI NOI
-----------------------------------------------
1996 $200 $280
1997 $300 $280
The Executive's 1996 bonus would be calculated as follows:
$100,000 x 200 + 10 x 80
--- ---
200 100
100 + 8
The Executive would receive $108,000.
The Executive's 1997 bonus would be calculated as follows:
$100,000 x 280 + 0
---
300
The Executive would receive $93,333.34.
As used in this Agreement, "Target NOI" shall mean the target earnings and
projections set forth on Schedule A hereto. The Executive and the Company
acknowledge that the Target NOI amounts have been prepared by the Board, based
on the historical performance of the Company, and his projection of future
trends and circumstances in the economy, the industry and the Company's
business. The Executive and the Company agree that notwithstanding any change in
circumstances or unforeseen events, no adjustment shall be made to the Target
NOI; provided, however, that the Company and the Executive shall negotiate in
good faith to adjust the Target
<PAGE>
NOI upon the occurrence of (i) a force majeure event, (ii) the imposition by
governmental authorities of prohibitive import duties or tariffs on the products
purchased by the Company pursuant to the Distributorship Agreement among Asahi
Organic Chemicals Industry Co., Ltd. (formerly known as Asahi Yukizai Kogyo Co.,
Ltd.) ("AOC") and the Company dated as of January 2, 1982 (such agreement, as
amended or replaced by a distribution agreement or agreements with AOC, Nichimen
Corporation ("NMC") and Nichimen America Inc. ("NAI"), the "Distributorship
Agreement") and the Company or (iii) a material breach by AOC, NMC or NAI of the
Distributorship Agreement, including the failure of such parties to deliver
products thereunder. Failure by the Company to achieve the Target NOI shall not
be actionable against the Executive, the Company, AOC, NMC or NAI, and shall not
constitute "Cause" for termination of the Executive's employment. The foregoing
shall not be deemed to constitute a waiver by any such party of any rights such
party may have under the Distributorship Agreement.
Other Benefits. During the Executive's employment with the Company, the
Executive shall be entitled to the following benefits:
a) five (5) weeks vacation time per calendar year, accruing on January 1 of
each year during his employment with the Company, with unused vacation, at the
election of the Executive, to be paid in cash or carried forward to the next
year;
a) participation in all employee life, medical and dental insurance,
retirement and profit sharing plans and other benefit programs now or hereafter
maintained by the Company for senior executives of the Company according to the
terms of those plans as amended from time to time by the Company; provided,
however, that the Executive will in no event be entitled to benefits in amounts
or of the type less or worse than those which he was entitled to receive from
the Company as of December 1, 1992;
a) use of an automobile, the lease or finance costs of which shall not
exceed $1,000 per month;
<PAGE>
a) payment for or reimbursement for all reasonable and properly documented
expenses incurred or paid by him in connection with the performance of his
duties hereunder;
(v) payment for or reimbursement for all reasonable and properly
documented expenses incurred or paid by him for financial planning, income
tax preparation and estate planning services; provided, however, such
amount under this clause shall in no event annually exceed $10,000; and
(vi) participation in a term life insurance program with a face amount
of at least ten (10) times the Executive's then current Base Salary,
provided that the Executive shall be entitled to name the beneficiary of
that policy.
All determinations of NOI under Section 2 and elsewhere in this Agreement
shall be made in good faith by the Board in accordance with generally accepted
accounting principles consistently applied and subject to normal year-end
adjustments within ninety (90) days of the end of the Company's fiscal year.
The Company shall maintain keyman insurance (a combination of term and
straight line ordinary) on the life of the Executive in the amount of
$5,000,000, with the cash surrender value thereof to be payable to the Company,
for the period ending on December 31, 2005. If the Executive is employed with
the Company as of December 31, 2005, but leaves the employ of the Company as of
such time, (i) any cash surrender value of such policies in excess of the
aggregate of the premiums paid for the period through November 21, 2005 (the
"Excess Value") will be used by the Company to fund a retirement plan for the
Executive and (ii) the beneficiary of the policies shall be changed to the
estate of the Executive. If the Executive remains employed by the Company after
December 31, 2005, (i) any Excess Value will be used by the Company to fund a
retirement plan for the Executive and (ii)
<PAGE>
the beneficiary of the policies shall remain the Company until such time as the
Executive thereafter leaves the employ of the Company, whereupon the beneficiary
will be changed to the estate of the Executive.
Termination. The Executive's employment hereunder shall commence on the
Commencement Date and continue until the expiration of the Employment Period,
except that the employment of the Executive hereunder shall terminate earlier:
(a) Death or Disability. Upon the death of the Executive during the
Employment Period or, at the option of the Company, in the event of the
Executive's disability, upon thirty (30) days' written notice from the Company.
The Executive shall be deemed disabled if an independent medical doctor
(selected by mutual agreement of the Executive and the Company) after
consultation with the Executive's physician and examination of the Executive
certifies that the Executive has for 180 consecutive days or for a
non-consecutive period of 180 days during any twelve (12) month period been
mentally or physically disabled in a manner which renders him unable to perform
his responsibilities under this Agreement.
(b) For Cause. For "Cause" immediately upon written notice by the Company
to the Executive, specifying in detail the basis for such Cause. For purposes of
this Agreement, "Cause" shall mean:
(i) a breach of any material provision of this Agreement, including
without implication of limitation any breach of Sections 4(a) through (d)
hereof which breach, if curable, is not cured within thirty (30) days after
written notice thereof, specifying the particulars of such breach, is given
to the Executive by the Board;
(ii) one or more acts of dishonesty or fraud by the Executive during
the Employment Period in the performance of his duties on behalf of the
Company;
(iii) any plea of nolo contendere, guilty plea or any conviction of
the Executive of any felony or any other crime which conviction has, or is
reasonably likely to have, a material adverse effect on the Company or its
business or reputation;
<PAGE>
(iv) any material act or omission by the Executive during the
Employment Period involving willful malfeasance or gross negligence in the
performance of his duties hereunder which breach, if curable, is not cured
within thirty (30) days after written notice thereof, specifying the
particulars of such breach, is given to the Executive by the Board;
(v) the repeated failure of the Executive to follow the reasonable
instructions of the Board, which instructions shall have been on at least
one occasion set forth in a resolution or a written communication of the
Board delivered to the Executive; provided, however that compliance with
such instructions would not violate or cause a violation of law, would not
constitute a breach of fiduciary duty to the Company and would not
otherwise be inconsistent with this Agreement; or
(vi) the inability of the Executive as a result of continued alcohol
or drug use to carry out the responsibilities of his office.
(c) Resignation; Termination Without Cause. Upon ninety (90) days' written
notice by either the Company or the Executive to the other party hereto, except
that the Executive may terminate his employment with Good Reason upon thirty
(30) days' written notice to the Company. For purposes of this Agreement, the
term "Good Reason" shall mean the occurrence of any of the events or conditions
described in subparagraphs (i) through (iv) hereof without the Executive's
express written consent:
(i) a material adverse change in the Executive's status, title,
position, scope of authority or responsibilities (including reporting
responsibilities); the assignment to the Executive of any duties or
responsibilities which, are materially inconsistent with such status,
title, position, authorities or responsibilities; or any removal of the
Executive from or failure to reappoint or reelect him to any of such
positions, except in connection with the termination of his employment for
Cause, as a result of his death or disability or by the Executive other
than for Good Reason;
(ii) the relocation of the Company's principal executive offices to a
location outside a 30-mile radius of 120 Cabot Street, Chestnut Hill,
Massachusetts or the Company's requiring Executive to be based at any place
other than the Company's principal executive offices, except for reasonably
required travel on the Company's business which is not substantially
greater than such travel requirements prior to the date hereof; or
(iii) any material breach by the Company of any provision of this
Agreement, including without implication of limitation a reduction by the
<PAGE>
Company in the Executive's compensation or a material adverse change in the
level of benefits as set forth in Section 2 hereof.
(d) Rights and Remedies on Termination.
(i) If the Executive's employment hereunder is terminated pursuant to
Section 3(a) as a result of the Executive's death or disability then the
Executive (or his estate) shall be entitled to receive Death or Disability
Pay consisting of the continuation of the Executive's Base Salary in effect
at the time of such termination for twenty-four (24) months less any
payments received by the Executive under any applicable disability policy
maintained by the Company and a lump sum amount equal to the Executive's
most recent bonus payable no later than thirty (30) days following such
termination.
(ii) If the Executive's employment hereunder is terminated:
(1) as a result of a nonrenewal of this Agreement pursuant to
Section 1(a);
(2) by the Company pursuant to Section 3(c); or
(3) by the Executive for Good Reason pursuant to Section 3(c);
then the Executive shall be entitled to receive Severance Pay consisting of
the continuation of the Executive's Base Salary in effect at the time of
such termination for the greater of twenty-four (24) months or the
remainder of the Employment Period (the "Severance Period") and a lump sum
amount equal to the Executive's most recent bonus payable no later than
thirty (30) days following such termination. In addition, the Company shall
provide the Executive with a reasonable office and secretarial services
throughout the Severance Period.
(iii) In the event of a termination of the Executive's employment
entitling the Executive to rights pursuant to Section 3(d)(i) or (ii)
above, the Executive and/or any members of his family insured through the
Company (the "Insured Parties") shall have the option to continue their
medical and dental insurance coverage pursuant to the law known as "COBRA",
provided, however, that the Company shall continue to pay on the Insured
Parties' behalf the same portion of their medical and dental insurance
premiums
<PAGE>
that it paid during the Employment Period if they elect to continue
coverage pursuant to COBRA during the period that such COBRA otherwise
applies. Any share of premium payments to be paid by the Insured Parties
shall be deducted from the Death or Disability Pay or the Severance Pay as
if the Executive remained actively employed. Notwithstanding the foregoing,
in the event that the Executive receives any equivalent medical and/or
dental coverage from any other source, then the Company, shall no longer be
obligated to provide such coverage.
(iv) Except as otherwise set forth in this Section 3(d), the Executive
shall not be entitled to any severance or other compensation after the
termination of his employment with the Company other than payment of his
Base Salary through the date of termination, payment for then accrued but
unused vacation pay as calculated pursuant to Section 2(c)(i), provision of
other benefits pursuant to Section 2(c)(ii) and (iii) through the date of
termination, any expense reimbursements under Section 2(c)(iv) and (v) for
expenses incurred prior to termination, and the option to continue the life
insurance coverage provided pursuant to Section 2(c)(vi) at his own expense
after the termination of his employment with the Company.
(e) Termination Pursuant to a Change of Control. If there is a Change of
Control, as defined in Section 3(e)(i) below, during the Executive's employment
with the Company, the provisions of this Section 3(e) shall apply and shall
continue to apply throughout the remainder of the Employment Period. If, within
one (1) year following a Change of Control, the Executive's employment is
terminated by the Company without cause (pursuant to Section 3(c) above), or if
the Executive resigns his employment for Good Reason following the occurrence of
any of the events listed in Section 3(c) above, in lieu of any payments under
Section 3(d) above, the Company shall pay to the Executive (or the Executive's
estate, if applicable) a lump sum amount equal to 2.99 times the Executive's
"base amount" within the meaning of Section 280G(b)(3) of the Internal Revenue
Code of 1986, as amended (the "Code").
(i) Change of Control shall mean the occurrence of one or more of the
following events:
(1) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) becomes a "beneficial owner" (as such term is defined
in Rule 13d-3 promulgated under the Exchange
<PAGE>
Act) (other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any
corporation owned, directly or indirectly, by the stockholders of the
Company, in substantially the same proportions as their ownership of
stock of the Company), directly or indirectly, of securities of the
Company or the Company's parent (the "Parent") representing fifty
percent (50%) or more of the combined voting power of the Company's
then outstanding securities; or
(2) persons who, as of the Commencement Date, constituted the
Company's Board of Directors or the Parent's Board of Directors (the
"Incumbent Board") cease for any reason including, without limitation,
as a result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board of
Directors, provided that any person becoming a director of the Company
or the Parent subsequent to the Commencement Date whose election was
approved by at least a majority of the directors then comprising the
Incumbent Board shall, for purposes of this Section 3(e), be
considered a member of the Incumbent Board; or
(3) the stockholders of the Company or the Parent approve a
merger or consolidation of the Company or the Parent with any other
corporation or other entity, other than (a) a merger or consolidation
which would result in the voting securities of the Company or the
Parent outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or
the Parent or such surviving entity outstanding immediately after such
merger or consolidation or (b) a merger or consolidation effected to
implement a recapitalization of the Company or the Parent (or similar
transaction) in which no "person" (as hereinabove defined) acquires
more than fifty percent (50%) of the combined voting power of the
Company's or the Parent's then outstanding securities; or
(4) the stockholders of the Company or the Parent approve a plan
of complete liquidation of
<PAGE>
the Company or the Parent or an agreement for the sale or disposition
by the Company or the Parent of all or substantially all of the
Company's or the Parent's assets.
(ii) The Executive shall provide the Company with reasonable notice
and an opportunity to cure any of the events listed in Section 3(c) which
would constitute Good Reason for his resignation and shall not be entitled
to compensation pursuant to this Section 3(e) unless the Company fails to
cure within a reasonable period, but in no event shall such period exceed
thirty (30) days; and
(iii) It is the intention of the Executive and of the Company that no
payments by the Company to or for the benefit of the Executive under this
Agreement shall be nondeductible to the Company by reason of the operation
of Section 280G of the Code relating to parachute payments or any like
statutory or regulatory provision. Accordingly, and notwithstanding any
other provision of this Agreement or any such agreement or plan, if by
reason of the operation of said Section 280G or any like statutory or
regulatory provision, any such payments exceed the amount which can be
deducted by the Company, such payments shall be reduced to the maximum
amount which can be deducted by the Company. To the extent that payments
exceeding such maximum deductible amount have been made to or for the
benefit of the Executive, such excess payments shall be refunded to the
Company with interest thereon at the applicable Federal rate determined
under Section 1274(d) of the Code, compounded annually, or at such other
rate as may be required in order that no such payments shall be
nondeductible to the Company by reason of the operation of said Section
280G or any like statutory or regulatory provision. To the extent that
there is more than one method of reducing the payments to bring them within
the limitations of said Section 280G or any like statutory or regulatory
provision, the Executive shall determine which method shall be followed,
provided that if the Executive fails to make such determination within
forty-five (45) days after the Company has given notice of the need for
such reduction, the Company may determine the method of such reduction in
its sole discretion.
A. Covenants of the Executive.
1. Non-Solicitation of Customers or Employees of the Company.
During the Employment Period and at all times thereafter, except in
connection with a dispute arising under this Agreement or the terms and
conditions of the Executive's employment, the Executive will not disparage the
Company or any
<PAGE>
subsidiaries or affiliates of the Company ("Affiliates"). During the
Non-Solicitation Period (as defined below), the Executive shall not, and shall
use his best efforts to cause each other business or entity with which he is or
shall become associated in any capacity not to, directly or indirectly employ
any person (other than the Executive's son, Robert Lewis) who at any time during
the Executive's final two years of employment with the Company was employed in
any capacity by the Company or any of its Affiliates. During the
Non-Solicitation Period, the Executive shall not, and shall use his best efforts
to cause each other business or entity with which he is or shall become
associated in any capacity not to, (i) directly or indirectly solicit for
employment any person (other than the Executive's son, Robert Lewis) who at any
time during the Executive's final two years of employment with the Company was
employed in any capacity by the Company or any of its Affiliates; (ii) directly
or indirectly solicit any person or entity who at any time during the
Executive's final two years of employment with the Company was a customer of the
Company or its Affiliates in respect of the products or services supplied by the
Company or its Affiliates; or (iii) directly or intentionally indirectly
interfere or seek to interfere with the continuance of supplies to the Company
or its Affiliates (or with the terms relating to such supplies) from any persons
or entities who have been supplying materials or services to the Company during
the Executive's final two years of employment with the Company.
For purposes of this Agreement, the term "Non-Solicitation Period" shall
mean the period of time during which the Executive is actively employed by the
Company and (i) with respect to termination of the Executive's employment
hereunder for "Cause" pursuant to Section 3(b) or by the Executive pursuant to
Section 3(c) other
<PAGE>
than for Good Reason, a period beginning on the date of the termination and
ending six (6) months following the expiration of the Employment Period in
effect at the time of the termination; or (ii) with respect to termination of
the Executive's employment hereunder as a result of the Executive's disability
pursuant to Section 3(a), as a result of nonrenewal of this Agreement pursuant
to Section 1(a), by the Company without Cause pursuant to Section 3(c) or by the
Executive for Good Reason pursuant to Section 3(c), the period during which the
Executive receives Disability Pay or Severance Pay pursuant to Section 3(d)
hereof.
(b) Confidentiality. Without the specific prior written consent of the
Company, the Executive shall not, directly or indirectly, at any time after the
date hereof, divulge to any person, any confidential information concerning the
business, affairs, customers or clients of the Company or any of its Affiliates,
including, without limitation, customer lists, names and addresses, sales
targets and statistics, market share statistics, surveys and reports, insofar as
the same have come to the Executive's knowledge during his employment with the
Company, all of which information is confidential and proprietary to the Company
and shall remain the sole and exclusive property of the Company. Notwithstanding
the foregoing, the Executive shall have the right to use the generic knowledge
and expertise acquired by him during his employment with the Company so as to
enable him to be otherwise gainfully employed within the Company's industry. The
Company also expressly agrees that the Executive may disclose information as
necessary to proposed underwriters (and their agents) in connection with the
proposed public offering of the Company's capital stock, or as may be required
by law or to comply with legal process.
(c) Intellectual Property. The Executive shall as soon as practicable
disclose to the Company all ideas, inventions and business plans developed by
the Executive during his employment with the Company which relate directly or
indirectly to the business or then currently anticipated business of the Company
or its Affiliates, including, without limitation, any process, operation,
product or improvement
<PAGE>
("Intellectual Property"). The Executive agrees that such Intellectual Property
will be the property of the Company and that the Executive shall, without
further payment to the Executive at the Company's request and cost, do whatever
is reasonably necessary for the Company to secure the rights thereto by patent,
copyright or otherwise for the Company.
Representation and Warranties.
The Company The Company hereby represents and warrants to the
Executive as follows:
a) the Company is duly organized, validly existing and in good standing
under the laws of the Commonwealth of Massachusetts;
a) this Agreement has been duly authorized, executed and delivered by
the Company; and
a) the execution and delivery of this Agreement by the Company, the
performance by the Company of its obligations hereunder and the consummation by
the Company of the transactions contemplated hereby will not violate any
agreement to which the Company is a party or any provision of its Articles of
Organization or By-Laws.
The Executive. The Executive hereby represents and warrants to the
Company as follows:
a) the Executive has full legal capacity to enter into this Agreement;
b) this Agreement has been duly executed and delivered by the
Executive;
a) the execution and delivery of this Agreement by the Executive, the
performance by the Executive of his obligations hereunder and the consummation
by the Executive of the transactions contemplated hereby will not violate any
agreement to which he is a party; and
a) the Executive has made such investigations of the business and
properties of the Company as he deems necessary or appropriate before entering
into this Agreement.
<PAGE>
A. Successors: Assignment.
1. The Company. Except as herein provided, the Company may not assign any of
its rights or obligations under this Agreement without the written consent of
the Executive; provided, however, that the Company may assign this Agreement
without such consent if assigned to the acquiring party as part of a transfer by
the Company of all or substantially all of its assets. A change in control of
the Company or merger of the Company with and into any other corporation
(whether or not the Company shall be the surviving entity) shall not be deemed
an assignment of this Agreement.
The Executive. Neither this Agreement, nor any right, obligation or
interest hereunder, may be assigned by the Executive, his beneficiaries, or his
legal representatives.
Notices. All notices and other communications hereunder shall be in writing
and shall be deemed to have been given when delivered by hand, or three business
days after being mailed by first-class certified mail, postage prepaid and
return receipt requested, addressed as follows:
If to the Company:
Asahi/America, Inc.
35 Green Street
Malden, Massachusetts 02148
Attention: President
with copies to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109-2881
Attention: Richard E. Floor, P.C. and H. David Henken, Esq.
and
<PAGE>
Dechert Price & Rhodes
477 Madison Avenue
New York, New York 10022
Attention: Robert D. Wurwarg, Esq.
If to the Executive:
Leslie B. Lewis
120 Cabot Street
Chestnut Hill, Massachusetts 02167
with a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109-2881
Attention: Richard E. Floor, P.C. and H. David Henken, Esq.
Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Massachusetts without
giving effect to the conflicts of law principles thereof.
Expenses. All costs and expenses (including attorneys' fees) incurred by
the Company and the Executive in connection with the negotiation and preparation
of this Agreement shall be paid by the Company.
Entire Agreement. This Agreement contains the entire agreement of the
parties and their affiliates relating to the subject matter hereof and
supersedes all prior agreements, representations, warranties and understandings,
written or oral with respect thereto including, without implication of
limitation: (1) the Memorandum of Understanding dated as of February 26, 1993
among AOC, NMC, NAI and the Company; (2) the Employment Agreement between the
Executive and the Company dated as of March 31, 1993; and (3) the Employment
Agreement between the Executive and the Company dated as of November 1, 1995.
<PAGE>
Severability.
(a) Generally. If any term or provision of this Agreement or the
application thereof to any person, property or circumstances shall to any extent
be invalid or unenforceable, the remainder of this Agreement, or the application
of such term or provision to persons, property or circumstances other than those
as to which it is invalid or unenforceable, shall not be affected thereby, and
each term and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
(b) Duration and Scope of Certain Covenants. Without limiting Section 11(a)
hereof, if any court or arbitrator determines that any of the covenants
contained in Section 4 hereof, or any part of such covenants, are unenforceable
because of the duration or geographic scope of such provision, such court or
arbitrator shall have the power to and is hereby requested to modify the
duration or scope of such provisions as the case may be to the extent necessary
to make such provision enforceable, and in its modified form, such provision
shall then be enforceable.
Arbitration. In the event of any dispute arising out of or relating to this
Agreement or in the case of breach hereof, the parties shall try in the first
instance to arrive at an amicable settlement, within sixty (60) days after
notice thereof has been given in writing by the complaining party. Should this
fail, the dispute or breach shall be referred to and finally settled by
arbitration which shall be held in Boston, Massachusetts and conducted in the
English language in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA"); provided, however, that disputes with
regard to the determination of NOI hereunder shall be resolved in accordance
with the procedures set forth in Section 2(d) hereof. The AAA shall select three
arbitrators (or in the event of a monetary dispute involving less than $25,000,
one arbitrator) to arbitrate the disputed matter. The arbitration decision shall
be binding and final and judgment on any award rendered by the
<PAGE>
arbitrators may be entered in any court having jurisdiction thereof. Each side
shall bear the cost of its respective attorneys' fees associated with the
foregoing procedures.
Remedies: Equitable Relief. The Executive acknowledges and agrees that the
covenants and obligations of the Executive contained in Section 4 hereof relate
to special, unique and extraordinary matters and are reasonable and necessary to
protect the legitimate interests of the Company and its Affiliates and that a
breach of any of the terms of such covenants and obligations will cause the
Company irreparable injury for which adequate remedies at law are not available.
The Executive therefore consents to injunctive relief, a restraining order, an
order of specific performance or any other equitable relief (together,
"Equitable Relief") with respect to any of its obligations under Section 4. As
to such obligations, any order for Equitable Relief shall be in lieu of damages
except for damages accrued up to the date of compliance with the order. The
Executive hereby waives any claim or defense therein that the Company has an
adequate remedy at law or that money damages would provide an adequate remedy.
It shall, however, be the election of the Company as to whether or not to seek
Equitable Relief. An order for Equitable Relief shall be among the remedies
which can be granted pursuant to an arbitration instituted under Section 12
hereof and enforced by any court of competent jurisdiction. Additionally, solely
for the purpose of provisional relief pending a determination on the merits
pursuant to the arbitration process provided for in Section 12 hereof, the
Company may seek from an appropriate court Equitable Relief.
Amendments, Miscellaneous, etc. Neither this Agreement, nor any term
hereof, may be amended, modified, waived, discharged or terminated except by an
<PAGE>
instrument in writing signed by the party against which such change, waiver,
discharge or termination is sought to be enforced. The Agreement may be executed
in one or more counterparts, each of which shall be deemed an original, and all
of which together shall constitute one and the same instrument. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. All references to
Sections shall be to Sections of this Agreement.
Effective Date and Termination of Previous Employment Agreements. By their
execution hereof, the parties agree that this Agreement shall be effective as of
January 1, 1996, and that the Employment Agreements between them dated as of
March 31, 1993 and November 1, 1995 are of no further force and effect and are
terminated in their entirety.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement under seal as of the date first written above.
ASAHI/AMERICA, INC.
By: /s/ Kozo Terada
Kozo Terada
Title: Vice President and Treasurer
/s/ Leslie B. Lewis
Leslie B. Lewis
DOCSB\504293.5
<PAGE>
SCHEDULE A
TARGET NOI
$US
---
1996 $5,400,000
1997 $6,400,000
1998 $7,200,000
DOCSB\504293.5
December 30, 1997
Mr. Robert Bender, Vice President
Citizens Bank of Massachusetts
55 Summer Street
Boston, Massachusetts 02110
Re: Grant of Security Interest in All Assets
Dear Bob:
This will confirm that each of the undersigned, Asahi/America, Inc. and
Asahi Engineered Products, Inc. (collectively, the "Debtors"), hereby grants to
Citizens Bank of Massachusetts ("Citizens"), on behalf of itself and as agent
for any of Citizens' affiliates and any participants in any of the Credit
Arrangements described below, a security interest in all of each Debtor's
accounts, inventory, general intangibles and any other rights to the payment of
money, equipment, instruments, securities, chattel paper, books and records,
intellectual property rights, goods and any other personal property in which a
security interest may be perfected by filing a financing statement, and all
proceeds and products thereof and substitutions therefor.
This security interest will secure the prompt and punctual payment and
performance of all indebtedness and other obligations from time to time owed by
either or both of the Debtors under or in respect of (i) that certain Loan and
Security Agreement dated September 23, 1993 (as amended), (ii) that certain
Credit Agreement dated as of January 23, 1997, (iii) that certain Reimbursement
Agreement dated as of March 1, 1994 with Citizens Trust Company ("CTC"), an
affiliate of Citizens, with respect to the reimbursement obligations of the
account party in respect of a letter of credit dated March 16, 1994 issued by
CTC for the benefit of holders of those certain Massachusetts Industrial Finance
Agency Industrial Revenue Bonds Asahi/America Issue, Series 1994, and (iv) any
letters of credit issued by Citizens or
<PAGE>
any affiliate thereof for the account of either or both of the Debtors or any
affiliate thereof; including any amendments to any of the aforementioned
agreements or other documents and any documents or instruments in any way
related thereto (the "Credit Arrangements").
Debtors represent and warrant to and agree with Citizens that: (i) the
Debtors' books and records are kept at the address set forth at the end of this
letter, such address being the location of their chief executive offices; (ii)
Debtors will not change the location of their chief executive offices or the
location where its assets and books and records are kept without 30 days' prior
written notice to Citizens; (iii) Debtors will promptly notify Citizens of all
locations of collateral; (iv) except for the security interest herein granted,
the Debtors are and shall be the owners of the collateral free from any lien,
security interest or encumbrance (except (y) liens in favor of Citizens or any
affiliate thereof, and (z) liens securing any existing or future equipment
leases or similar existing or future purchase money financing arrangements
("Permitted Financing Arrangements") with Siemens Credit corporation, Vanguard
Financial Service Corp., AT&T Systems Leasing Corporation, Mellon First United
Leasing Corp., Jules and Associates, Inc. and/or N.B.D. Equipment Finance, Inc.,
whereby only the specific items of equipment financed by such third party are
encumbered to secure payment of such acquisition debt or lease obligation), and
the Debtors shall defend the same against all claims and demands of all persons
at any time claiming the same or any interests therein adverse to Citizens, and
the Debtors shall not hereafter pledge, mortgage or create, or suffer to exist,
a security interest in the collateral in favor of any person other than Citizens
or any affiliate thereof or except pursuant to Permitted Financing Arrangements,
nor will the Debtors sell or offer to sell or otherwise transfer the collateral
or any interest therein except for sales of inventory in the ordinary course of
business and bona fide disposition of obsolete or scrap equipment or equipment
no longer needed or used.
The Debtors shall at their expense keep the collateral in reasonably good
order and repair, use the same in compliance with applicable law, and have and
maintain at all times with respect to the collateral property damage insurance
in form, amount and issued by a company satisfactory to Citizens, which
insurance shall include Citizens as a loss payee as its interest may appear at
the time of any damage to or loss of one or more items of collateral, provided,
however, that unless a default has occurred, Citizens will allow Debtors to use
insurance proceeds to apply toward the cost of repairing or replacing damaged or
destroyed property. Citizens shall be provided with evidence satisfactory to it
of the existence and terms of such insurance coverage, and the insurer shall be
obligated to provide Citizens
<PAGE>
with not fewer than 20 days prior written notice of the reduction, expiration or
cancellation of any such coverage. In the event of failure to provide and
maintain insurance as provided above or upon the occurrence of a default (beyond
any applicable grace period) in respect of any of the Credit Arrangements,
Citizens may act as attorney for the Debtors in obtaining, adjusting, settling
and cancelling such insurance and endorsing any drafts and apply any amounts
collected or received under any such policies to any indebtedness secured hereby
in such order or preference as Citizens in its discretion may determine, or as
provided above the same may be released to the Debtors, but such application or
release shall not cure or waive any default hereunder, and no amount so released
shall be deemed a payment on any indebtedness secured hereby. Such designation
to act as attorney for the Debtors shall be deemed coupled with an interest and
irrevocable.
Citizens may inspect the collateral at reasonable times, and in the absence
of a default upon reasonable advance notice, wherever located. The Debtors will
pay promptly all taxes and assessments upon the collateral or for its use or
operation or upon this agreement prior to the time when any penalties or
interest accrue with respect thereto, unless, in any such case, the same is
being contested in good faith by appropriate proceedings and an adequate reserve
therefor has been established and is maintained in accordance with generally
accepted accounting principles.
Citizens may in its discretion discharge taxes and other encumbrances at
any time levied or placed on the collateral, pay any insurance premiums in
respect thereof and make repairs thereto and pay any necessary filing fees. The
Debtors agree to reimburse Citizens on demand for any and all expenditures so
made, and until paid the amount thereof shall be a debt secured by the
Collateral. Citizens shall have no obligation to the Debtor to make any such
expenditures, nor shall the making thereof relieve the Debtor of any default.
The Debtors hereby irrevocably authorize Citizens, or its designee, at the
Debtors' expense, to file such financing statements, with or without the
Debtor's signature, as Citizens may deem appropriate, and irrevocably appoints
Citizens as the Debtors' attorney-in-fact to execute such financing statements.
Upon the occurrence of a default (beyond any applicable grace periods) in
respect of any of the Credit Arrangements, Citizens may without notice or demand
declare this agreement to be in default, and Citizens shall thereafter have in
any jurisdiction in which enforcement hereof is sought, in addition to all other
rights and remedies, the rights and remedies of a secured party under the
Uniform Commercial Code, including
<PAGE>
without limitation the right to take possession of the collateral, and for that
purpose Citizens may, so far as the Debtors can give authority therefor, enter
upon any premises on which the collateral may be situated and remove the same
therefrom or render the same unusable. Unless the collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, Citizens shall give to the Debtors (by hand delivery,
overnight delivery service or certified mail, return receipt requested) at least
ten (10) days' prior written notice of the time and place of any public sale of
collateral or of the time after which any private sale or any other intended
disposition is to be made, and such notice shall be given in the manner and to
the address of the Debtors set forth below. To the extent permitted by law, the
Debtors hereby waive any and all rights that they may have to judicial hearing
in advance of the enforcement of any of Citizens' rights hereunder, including
without limitation its right following a default to take immediate possession of
the collateral and exercise its rights with respect thereto.
The Debtors hereby waive demand, notice, protest, notice of acceptance of
this security agreement, notice of loans made, credit extended, collateral
received or delivered or other action taken in reliance hereon and all other
demands and notices of any description. With respect to the obligations secured
hereby and the collateral, the Debtors assent to any extension or postponement
of the time of payment or any other indulgence, to any substitution, exchange or
release of collateral, to the addition or release of any party or person
primarily or secondarily liable, to the acceptance of partial payment thereon
and the settlement, compromising or adjusting of any thereof, all in such manner
and at such time or times as Citizens may deem advisable. Except as otherwise
provided by applicable law, Citizens shall have no duty as to the collection or
protection of the collateral or any income thereon, nor as to the preservation
of rights against prior parties, nor as to the preservation of any rights
pertaining thereto beyond the safe custody of any collateral in its actual
possession. Except as otherwise provided by applicable law which may not be
waived, Citizens may exercise its rights with respect to the collateral without
resorting or regard to other collateral or sources of reimbursement for
liability. Except as otherwise provided by applicable law, Citizens shall not be
required to marshal any present or future security for (including but not
limited to this Agreement and the collateral subject to the security interest
created hereby), or guaranties of, the obligations hereby secured or any of
them, or to resort to such security or guaranties in any particular order; and
all of Citizens' rights hereunder and in respect of the collateral and any
source of payment shall be cumulative and in addition to all other rights,
however existing or arising.
<PAGE>
The Debtors shall pay to Citizens on demand any and all reasonable
expenses, including reasonable counsel fees, incurred or paid by Citizens in
protecting or enforcing its rights hereunder. After deducting all of said
expenses, the residue of any proceeds of collection or sale of the collateral
shall be applied to the payment of principal or interest on the obligations
hereby secured in such order as Citizens may determine, proper allowance for
interest not then due being made, and any excess shall be returned to the
Debtors, and the Debtors shall remain liable for any deficiency.
In the event any provision of this security agreement shall for any reason
be held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other term or provision
hereof, and this agreement shall be interpreted and construed as if such
provision to the extent the same shall have been invalid, illegal or
unenforceable had never been contained herein. The parties agree that they will
negotiate in good faith to replace any provision hereof so held invalid, illegal
or unenforceable with a valid provision which is as similar as possible in
substance to the invalid, illegal or unenforceable provision.
Neither this security agreement nor any term hereof may be changed, waived,
discharged or terminated except by a written instrument expressly referring to
this agreement and to the provisions so modified or limited, and executed by the
party to be charged. This security agreement and all obligations of the Debtors
hereunder shall be binding upon the successors and assigns of the Debtors, and
shall, together with the rights and remedies of Citizens hereunder, inure to the
benefit of Citizens, its successors and assigns. The Debtors acknowledge receipt
of a copy of this security agreement. Terms used herein without definition which
are defined in the Uniform Commercial Code of Massachusetts have such defined
meanings herein, unless the context otherwise indicates or requires.
This security agreement and all rights and obligations hereunder, including
matters of construction, validity and performance, shall be governed by the
internal laws of Massachusetts, without reference to the conflict of laws rules
of any jurisdiction. This security agreement is intended to take effect as a
sealed instrument. All obligations of the Debtors hereunder shall be joint and
several.
Sincerely,
ASAHI/AMERICA, INC.
<PAGE>
By: /s/ Leslie B. Lewis
---------------------------
Title: Chairman, President
---------------------------
ASAHI ENGINEERED PRODUCTS, INC.
By: /s/ Leslie B. Lewis
---------------------------
Title: President
---------------------------
Address: 35 Green Street
Malden, MA 02148
LOAN AGREEMENT (EQUIPMENT)
Among
GE CAPITAL PUBLIC FINANCE, INC.,
as Lender,
ARKANSAS DEVELOPMENT FINANCE AUTHORITY,
as Issuer,
and
QUAIL PIPING PRODUCTS, INC.,
as Borrower
Dated as of November 1, 1997
This instrument constitutes a security agreement
under the Arkansas Uniform Commercial Code.
<PAGE>
LOAN AGREEMENT (EQUIPMENT)
Lender: GE Capital Public Finance, Inc.
Suite 470
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Telephone: (800) 346-3164
Telecopier: (612) 897-5601
Issuer: Arkansas Development Finance Authority
100 Main Street, Suite 200
Little Rock, Arkansas 72201
Telephone: (501) 682-5900
Telecopier: (501) 682-5939
Borrower: Quail Piping Products, Inc. Asahi/America, Inc.
2410 South Washington Street 35 Green Street
Magnolia, Arkansas 71753 Malden, Massachusetts 02148
Telephone: (617) 388-4505
Telecopier: (617) 324-3407
THIS LOAN AGREEMENT (Equipment) dated as of November 1, 1997 (this
"Agreement") among GE Capital Public Finance, Inc., a Delaware corporation, as
lender (with its successors and assigns, "Lender"), Arkansas Development Finance
Authority, a body politic and corporate and public instrumentality duly
organized and validly existing under the laws of the State of Arkansas (the
"State"), as issuer ("Issuer"), and Quail Piping Products, Inc., a Massachusetts
corporation, as borrower ("Borrower").
WHEREAS, Issuer is authorized and empowered under the laws of the State,
including Act 1069 of 1985, as amended (the "Act"), to enter into loan
agreements, contracts and other instruments and documents necessary or
convenient to obtain loans for the purpose of facilitating the financing of
certain projects as described in the Act; and
WHEREAS, in furtherance of the purposes of the Act, Issuer proposes to
finance all or a portion of the acquisition and installation of the Equipment
(as hereinafter defined) by Borrower pursuant to this Agreement by obtaining a
loan from Lender and lending the proceeds thereof to Borrower; and
WHEREAS, Borrower proposes to borrow the proceeds of the loan made by
Lender to Issuer upon the terms and conditions set forth herein to finance the
acquisition and installation of the Equipment; and
WHEREAS, Borrower shall make Loan Payments (as hereinafter defined)
directly to Lender as assignee of Issuer; and
<PAGE>
WHEREAS, this Agreement shall not be deemed to constitute a debt or
liability or moral obligation of the State or any political subdivision thereof,
or a pledge of the faith and credit or taxing power of the State or any
political subdivision thereof, but shall be a special obligation payable solely
from the Loan Payments payable hereunder by Borrower to Lender as assignee of
Issuer;
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, and in consideration of the premises contained in this
Agreement, Lender, Issuer and Borrower agree as follows:
ARTICLE I
DEFINITIONS AND EXHIBITS
Section 1.01. Definitions. The following terms used herein will have the
meanings indicated below unless the context clearly requires otherwise:
"Acquisition Costs" means the contract price paid or to be paid to Vendors
or reimbursed to Borrower for any portion of the Equipment, including
administrative, engineering, legal, financial, costs of issuance hereof and
other costs incurred by Lender, Issuer, Borrower, Escrow Agent and Vendors in
connection with the acquisition, installation and financing by Lender of such
Equipment, which Acquisition Costs are set forth in Exhibit A hereto.
"Agreement" means this Agreement, including all exhibits hereto, as any of
the same may be supplemented or amended from time to time in accordance with the
terms hereof.
"Borrower" means Quail Piping Products, Inc., a Massachusetts corporation.
"Business Day" means a day other than a Saturday or Sunday on which banks
are generally open for business in New York, New York.
"Certificate of Acceptance" means a Certificate of Acceptance, in
substantially the form set forth as Exhibit B hereto, whereby Borrower
acknowledges receipt in good condition of particular items of Equipment
identified therein and confirms the date of delivery thereof and certain other
matters.
"Code" means the Internal Revenue Code of 1986, as amended, and United
States Treasury regulations promulgated thereunder.
"Default" means an event that, with giving of notice or passage of time or
both, would constitute an Event of Default as provided in Article XI hereof.
"Environmental Laws" has the meaning ascribed thereto in paragraph (h) of
Article V hereof.
2
<PAGE>
"Equipment" means the property identified in Exhibit A hereto, as amended
from time to time pursuant to Section 12.07 hereof, to be used in connection
with Borrower's operations (including, to the extent permitted pursuant to the
Code without jeopardizing the tax-exempt status of the Interest, certain items
originally financed through internal advances of Borrower in anticipation of
obtaining permanent financing through Issuer), together with all replacement
parts, additions, repairs, accessions and accessories incorporated therein
and/or affixed to such property.
"Escrow Agent" means National City Bank of Minneapolis, as escrow agent
under the Escrow Agreement, and its successors and assigns permitted under the
Escrow Agreement.
"Escrow Agreement" means the Escrow Agreement dated as of November 1, 1997
among Lender, Issuer, Borrower and Escrow Agent relating to this Agreement.
"Escrow Fund" means the fund established and held by Escrow Agent pursuant
to the Escrow Agreement.
"Event of Taxability" means the Interest is or becomes includable in
Lender's gross income as the result of (i) any act or failure to act by Issuer
or Borrower or use of the proceeds of the Loan, (ii) a change in use of the
Equipment, (iii) any misrepresentation or inaccuracy in any of the
representations, warranties or covenants contained in this Agreement or the Tax
Regulatory Agreement by Issuer or Borrower, (iv) the enactment of any federal
legislation after the date of this Agreement or (v) the promulgation of any
income tax regulation or ruling by the Internal Revenue Service after the date
of this Agreement.
"Gross-Up Rate" means, with respect to any Interest payment (including
payments made prior to the Event of Taxability), the rate necessary to calculate
an additional payment in an amount sufficient such that the sum of the Interest
payment plus the additional payments would, after reduced by the federal tax
(including interest and penalties) actually imposed thereon, equal the amount of
the Interest payment.
"Guarantor" means Asahi/America, Inc., a Massachusetts corporation.
"Guaranty" means the Guaranty and Negative Pledge Agreement of even date
herewith from Guarantor for the benefit of Lender.
"Interest" means the portion of any payment from Issuer to Lender
designated as and comprising interest as shown in Exhibit A hereto.
"Issuer" means Arkansas Development Finance Authority, acting as issuer
under this Agreement.
3
<PAGE>
"Lender" means (i) GE Capital Public Finance, Inc., acting as lender under
this Agreement, (ii) any surviving, resulting or transferee corporation of GE
Capital Public Finance, Inc. and (iii) except where the context requires
otherwise, any assignee(s) of Lender.
"Loan" means the loan from Issuer to Borrower pursuant to this Agreement.
"Loan Payments" means the loan payments payable by Borrower pursuant to the
provisions of this Agreement as specifically set forth in Exhibit A hereto. As
provided in Article II hereof, Loan Payments shall be payable by Borrower
directly to Lender, as assignee of Issuer, in the amounts and at the times as
set forth in Exhibit A hereto.
"Loan Proceeds" means the total amount of money to be paid pursuant to
Section 2.02 hereof to Escrow Agent for deposit and application in accordance
with the Escrow Agreement.
"Prepayment Amount" means the amount which Borrower may or must from time
to time pay or cause to be paid to Lender as assignee of Issuer in order to
prepay the Loan, as provided in Article Section 2.07 hereof, such amounts being
set forth in Exhibit A hereto, together with accrued interest and all other
amounts due hereunder.
"Principal" means the portion of any Loan Payment designated as principal
in Exhibit A hereto.
"Purchase Agreements" means Borrower's purchase agreements with Vendors of
the Equipment.
"Real Estate Loan Agreement" means the Loan Agreement (Real Estate) of even
date herewith among Lender, Issuer and Borrower.
"State" means the State of Arkansas.
"Tax Regulatory Agreement" means the Tax Regulatory Agreement of even date
herewith among Borrower, Issuer and Lender, as such Tax Regulatory Agreement may
be amended from time to time in accordance with its terms.
"UCC" means the Uniform Commercial Code as adopted and in effect in the
State.
"Vendor" means the manufacturer or vendor of an item of Equipment, as well
as the agents or dealers of the manufacturer, from whom Borrower has purchased
or is purchasing items of Equipment.
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Section 1.02. Exhibits. The following exhibits are attached hereto and made
a part hereof:
Exhibit A: Form of Schedule of Equipment and Loan Payments, describing the
Equipment and setting forth the Loan Payments and Prepayment Amounts. Issuer
hereby authorizes Lender to insert in Exhibit A the serial or other identifying
numbers relating to the Equipment when available.
Exhibit B: Form of Certificate of Acceptance.
Exhibit C: Form of opinion of counsel to Borrower.
Exhibit D: Form of opinion of counsel to Issuer.
Exhibit E: Form of opinion of special tax counsel.
Section 1.03. Rules of Construction. (a) The singular form of any word used
herein, including the terms defined in Section 1.01 hereof, shall include the
plural, and vice versa. The use herein of a word of any gender shall include
correlative words of all genders.
(b) Unless otherwise specified, references to Articles, Sections and other
subdivisions of this Agreement are to the designated Articles, Sections and
other subdivision of this Agreement as originally executed. The words "hereof,"
"herein," "hereunder" and words of similar import refer to this Agreement as a
whole.
(c) The headings or titles of the several articles and sections shall be
solely for convenience of reference and shall not affect the meaning,
construction or effect of the provisions hereof.
ARTICLE II
FINANCING OF EQUIPMENT AND TERMS OF LOAN
Section 2.01. Acquisition of Equipment. Borrower either has ordered or
shall order the Equipment pursuant to one or more Purchase Agreements from one
or more Vendors. Borrower shall remain liable to the Vendor or Vendors in
respect of its duties and obligations in accordance with each Purchase Agreement
and shall bear the risk of loss with respect to any loss or claim relating to
any item of Equipment covered by any Purchase Agreement, and neither Lender nor
Issuer shall assume any such liability or risk of loss.
Section 2.02. Loan. Lender hereby agrees, subject to the terms and
conditions of this Agreement, to make a loan to Issuer in the amount of
$3,600,000; Issuer hereby agrees, subject to the terms and conditions of this
Agreement, to borrow such amount from Lender and to lend such amount to
Borrower; and Borrower hereby agrees to borrow such amount from Issuer.
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Upon fulfillment of the conditions set forth in Article III hereof, Lender shall
deposit the Loan Proceeds in the Escrow Fund to be held, invested and disbursed
as provided in the Escrow Agreement. Issuer's obligation to repay the loan from
Lender, and Borrower's obligation to repay the Loan, shall commence, and
interest shall begin to accrue, on the date that Loan Proceeds are disbursed to
Borrower on behalf of Issuer or deposited in the Escrow Fund.
Section 2.02. Interest. The principal amount of the loan from Lender to
Issuer and the Loan hereunder outstanding from time to time shall bear interest
(computed on the basis of actual days elapsed in a 360-day year) at the rate of
five and eighty-nine hundredths percent (5.89%). Interest accruing on the
principal balance of such loans outstanding from time to time shall be payable
as provided in Exhibit A and upon earlier demand in accordance with the terms
hereof or prepayment in accordance with Section 2.07 hereof. Upon the occurrence
of an Event of Taxability, Borrower shall, with respect to future interest
payments, begin making Loan Payments calculated at the Gross-Up Rate unless
Borrower has prepaid the Loan pursuant to Section 2.07(c) hereof. In addition,
Borrower shall make within thirty days after written demand of Lender a payment
to Lender sufficient to supplement prior Loan Payments to the Gross-Up Rate.
Section 2.04. Payments. Issuer shall pay the principal of, premium, if any
in accordance with Section 2.07 hereof, and interest on the loan from Lender to
Issuer, but only out of the amounts paid by Borrower pursuant to this Agreement.
Borrower shall pay to Lender, as assignee of Issuer, Loan Payments, in the
amounts and on the dates set forth in Exhibit A hereto. As security for its
obligation to pay the principal of, premium, if any in accordance with Section
2.07 hereof, and interest on the loan from Lender, Issuer assigns to Lender all
of Issuer's right to receive Loan Payments from Borrower hereunder, all of
Issuer's rights hereunder and all of Issuer's right, title and interest in and
to the Equipment, and Issuer irrevocably constitutes and appoints Lender and any
present or future officer or agent of Lender as its lawful attorney, with full
power of substitution and resubstitution, and in the name of Issuer or
otherwise, to collect the Loan Payments and any other payments due hereunder and
to sue in any court for such Loan Payments or other payments, to exercise all
rights hereunder with respect to the Equipment, and to withdraw or settle any
claims, suits or proceedings pertaining to or arising out of this Agreement upon
any terms. Such Loan Payments and other payments shall be made by Borrower
directly to Lender, as Issuer's assignee, and shall be credited against Issuer's
payment obligations hereunder. No provision, covenant or agreement contained in
this Agreement or any obligation herein imposed on Issuer, or the breach
thereof, shall constitute or give rise to or impose upon Issuer a pecuniary
liability, a charge upon its general credit or taxing powers or a pledge of its
general revenues. In making the agreements, provisions and covenants set forth
in this Agreement, Issuer has not obligated itself except with respect to the
Equipment and the application of the Loan Payments to be paid by Borrower
hereunder. All amounts required to be paid by Borrower hereunder shall be paid
in lawful money of the United States of America in immediately available funds.
No recourse shall be had by Lender or Borrower for any claim based on this
Agreement or the Tax Regulatory Agreement against any director, officer,
employee or agent of Issuer alleging personal liability on the part of such
person, unless such claim is based on the willful dishonesty of or intentional
violation of law by such person.
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Section 2.05. Payment on Non-Business Days. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Business Day, such
payment may be made on the next succeeding Business Day, and such extension of
time shall in such case be included in the computation of interest hereunder.
Section 2.06. Loan Payments To Be Unconditional. The obligations of
Borrower to make the Loan Payments required under this Article II and to make
other payments hereunder and to perform and observe the covenants and agreements
contained herein shall be absolute and unconditional in all events, without
abatement, diminution, deduction, setoff or defense for any reason, including
(without limitation) any failure of the Equipment to be delivered or installed,
any defects, malfunctions, breakdowns or infirmities in the Equipment or any
accident, condemnation, destruction or unforeseen circumstances. Notwithstanding
any dispute between Borrower and any of Issuer, Lender, any Vendor or any other
person, Borrower shall make all Loan Payments when due and shall not withhold
any Loan Payments pending final resolution of such dispute, nor shall Borrower
assert any right of set-off or counterclaim against its obligation to make such
payments required under this Agreement.
Section 2.07. Prepayments. (a) Borrower may, in its discretion, prepay the
Loan in whole at any time after the third anniversary of the date hereof by
paying the applicable Prepayment Amount; provided, however, that the applicable
premium for the privilege of prepayment used to calculate the Prepayment Amount
under this clause (a) may be reduced by 100 basis points as provided in Section
7.09 hereof but in no event to a percentage less than zero.
(b) Borrower shall prepay the Loan in whole or in part at any time pursuant
to Article IX hereof by paying the applicable Prepayment Amount, subject to
adjustment as provided in Article IX hereof.
(c) Borrower shall prepay the Loan in full immediately upon demand of
Lender after the occurrence and during the continuance of an Event of Default by
paying the applicable Prepayment Amount.
(d) Borrower may prepay the Loan in full at any time within 90 days after
the occurrence of an Event of Taxability by paying the applicable Prepayment
Amount plus an amount necessary to supplement the prior Loan Payments to the
Gross-Up Rate; provided, however, that if the Event of Taxability is the result
of an act or failure to act by Issuer, a determination that a representation or
warranty of Issuer was untrue in any material respect when made or a failure of
Issuer to comply with Article IV(n) hereof, the Prepayment Amount shall not
include any premium.
(e) The amounts due hereunder shall be repaid in part without premium with
funds remaining in the Escrow Fund upon termination of the Escrow Agreement as
provided in Sections 2.03 or 2.04 of the Escrow Agreement.
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Upon any prepayment in part of the Loan, the prepayment shall be applied
first to interest accrued thereon and next to the Principal portion of the Loan
Payments in the inverse order of maturity.
ARTICLE III
CONDITIONS PRECEDENT
Lender's agreement to make the loan to Issuer hereunder and to disburse the
Loan Proceeds shall be subject to the condition precedent that Lender shall have
received all of the following, each in form and substance satisfactory to
Lender:
(a) This Agreement, properly executed on behalf of Issuer and
Borrower, and each of the Exhibits hereto properly completed.
(b) The Tax Regulatory Agreement, properly executed on behalf of
Issuer and Borrower.
(c) The Escrow Agreement, properly executed on behalf of Issuer,
Lender and Escrow Agent.
(d) The Guaranty, properly executed on behalf of Guarantor.
(e) A certificate of the Clerk or an Assistant Clerk of Borrower,
certifying as to (i) the resolutions of the board of directors of Borrower,
authorizing the execution, delivery and performance of this Agreement, the
Escrow Agreement and the Tax Regulatory Agreement and any related
documents, (ii) the bylaws of Borrower, and (iii) the signatures of the
officers or agents of Borrower authorized to execute and deliver this
Agreement, the Escrow Agreement and the Tax Regulatory Agreement and other
instruments, agreements and certificates on behalf of Borrower.
(f) Currently certified copies of the Articles of Organization of
Borrower.
(g) A Certificate of Good Standing issued as to Borrower by the
Secretary of State of the state of Borrower's incorporation not more than
10 days prior to the date hereof.
(h) A certificate of the Clerk or an Assistant Clerk of Guarantor,
certifying as to (i) the resolutions of the board of directors of
Guarantor, authorizing the execution, delivery and performance of the
Guaranty and any related documents, (ii) the bylaws of Guarantor, and (iii)
the signatures of the officers or agents of Guarantor authorized to execute
and deliver the Guaranty and other instruments, agreements and certificates
on behalf of Guarantor.
(i) Currently certified copies of the Articles of Organization of
Guarantor.
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(j) A Certificate of Good Standing issued as to Guarantor by the
Secretary of State of the state of Guarantor's incorporation not more than
10 days prior to the date hereof.
(k) Certificates of the insurance required hereunder, containing a
lender's loss payable clause or endorsement in favor of Lender.
(l) A completed and executed Form 8038 or evidence of filing thereof
with the Secretary of Treasury.
(m) A resolution or evidence of other official action taken by or on
behalf of Issuer to authorize the transactions contemplated hereby.
(n) Evidence that the financing of the Equipment has been approved by
the "applicable elected representative" of Issuer after a public hearing
held upon reasonable notice.
(o) As applicable, financing statements executed by Borrower, as
debtor, and naming Issuer, as secured party, and Lender, as assignee,
and/or the original certificate of title or manufacturer's certificate of
origin and title application if any of the Equipment is subject to
certificate of title laws.
(p) Financing statements executed by Issuer, as debtor, and naming
Lender, as secured party.
(q) Current searches of appropriate filing offices showing that (i) no
state or federal tax liens have been filed and remain in effect against
Borrower, (ii) no financing statements have been filed and remain in effect
against Borrower relating to the Equipment except those financing
statements filed by Lender, (iii) Lender has duly filed all financing
statements necessary to perfect the security interest created pursuant to
this Agreement and (iv) Lender has duly filed all financing statements
necessary to perfect the transfer of Issuer's interest in this Agreement
and the Loan Payments.
(r) An opinion of counsel to Borrower and Guarantor, addressed to
Lender and Issuer, in the form attached hereto as Exhibit C.
(s) Evidence that each of the conditions contained in Article III of
the Real Estate Loan Agreement have been satisfied.
(t) An opinion of counsel to Issuer, addressed to Lender and Borrower,
in the form attached hereto as Exhibit D.
(u) An opinion of special tax counsel, addressed to Lender, in the
form attached hereto as Exhibit E.
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(v) Payment of Issuer's fees, commissions and expenses incurred in
connection with this Agreement and the transactions contemplated hereby.
(w) Any other documents or items reasonably required by Lender.
Lender's agreement to make the loan to Issuer hereunder, to disburse the
Loan Proceeds and to consider approval of any disbursement from the Escrow Fund
shall be subject to the further conditions precedent that on the date thereof:
(x) Lender shall have received each of the items required for a
disbursement pursuant to the Escrow Agreement;
(y) Lender shall have received in form and substance reasonably
satisfactory to Lender Vendor invoice(s) and/or bill(s) of sale relating to
the Equipment (unless a letter of credit with respect to such disbursement
has been provided pursuant to Section 2.02 of the Escrow Agreement) and, if
such invoices have been paid by Issuer or Borrower, evidence of payment
thereof and, if applicable, evidence of official intent to reimburse such
payment as required by the Code;
(z) the representations and warranties contained in Articles IV and V
hereof are correct in all material respects on and as of the date of such
disbursement as though made on and as of such date, except to the extent
that such representations and warranties relate solely to an earlier date;
and
(aa) no event has occurred and is continuing, or would result from
such loan to Issuer or the Loan which constitutes a Default, an Event of
Default or an Event of Taxability.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF ISSUER
Issuer represents, warrants and covenants for the benefit of Lender and
Borrower, as follows:
(a) Issuer is a body politic and corporate and a public
instrumentality duly created and validly existing under the Constitution
and laws of the State.
(b) Issuer will exercise its best efforts to preserve and keep in full
force and effect its existence as a body corporate and politic.
(c) Issuer is authorized under the Constitution and laws of the State
to enter into this Agreement, the Escrow Agreement, the Tax Regulatory
Agreement and the transactions contemplated hereby and to perform all of
its obligations hereunder.
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(d) Issuer has duly authorized the execution and delivery of this
Agreement, the Escrow Agreement and the Tax Regulatory Agreement under the
terms and provisions of the resolution of its governing body or by other
appropriate official approval, and further represents, covenants and
warrants that all requirements have been met and procedures have occurred
in order to ensure the enforceability of this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement against Issuer. Issuer has taken
all necessary action and has complied with all provisions of the Act,
including (without limitation) the making of the findings required by the
Act, required to make this Agreement, the Escrow Agreement and the Tax
Regulatory Agreement the valid and binding obligation of Issuer.
(e) The officer of Issuer executing this Agreement and any related
documents has been duly authorized to execute and deliver this Agreement,
the Escrow Agreement and the Tax Regulatory Agreement and such related
documents under the terms and provisions of a resolution of Issuer's
governing body, or by other appropriate official action.
(f) This Agreement, the Escrow Agreement and the Tax Regulatory
Agreement are legal, valid and binding obligations of Issuer, enforceable
in accordance with their respective terms, except to the extent limited by
bankruptcy, reorganization or other laws of general application relating to
or affecting the enforcement of creditors' rights.
(g) Issuer has assigned to Lender all of Issuer's rights in the
Equipment and this Agreement (except any indemnification payable to Issuer
pursuant to Section 7.06 hereof and notice to Issuer pursuant to Section
12.03 hereof) including the assignment of all rights in the security
interest granted to Issuer by Borrower.
(h) Issuer will not pledge, mortgage or assign this Agreement or its
duties and obligations hereunder to any person, firm or corporation, except
as provided under the terms hereof.
(i) None of the execution and delivery of this Agreement, the Escrow
Agreement or the Tax Regulatory Agreement, the consummation of the
transactions contemplated hereby or the fulfillment of or compliance with
the terms and conditions of this Agreement, the Escrow Agreement or the Tax
Regulatory Agreement violates any law, rule, regulation or order, conflicts
with or results in a breach of any of the terms, conditions or provisions
of any restriction or any agreement or instrument to which Issuer is now a
party or by which it is bound or constitutes a default under any of the
foregoing or results in the creation or imposition of any prohibited lien,
charge or encumbrance of any nature whatsoever upon any of the property or
assets of Issuer under the terms of any instrument or agreement.
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(j) There is no action, suit, proceeding, claim, inquiry or
investigation, at law or in equity, before or by any court, regulatory
agency, public board or body pending or, to the best of Issuer's knowledge,
threatened against or affecting Issuer, challenging Issuer's authority to
enter into this Agreement, the Escrow Agreement or the Tax Regulatory
Agreement or any other action wherein an unfavorable ruling or finding
would adversely affect the enforceability of this Agreement, the Escrow
Agreement or the Tax Regulatory Agreement or any other transaction of
Issuer which is similar hereto, or the exclusion of the Interest from gross
income for federal tax purposes under the Code, or would materially and
adversely affect any of the transactions contemplated by this Agreement.
(k) Issuer will submit or cause to be submitted to the Secretary of
the Treasury a Form 8038 (or other information reporting statement) at the
time and in the form required by the Code.
(l) The financing of the Equipment has been approved by the
"applicable elected representative" (as defined in Section 147(f) of the
Code) of Issuer after a public hearing held upon reasonable notice.
(m) Issuer will comply fully at all times with the Tax Regulatory
Agreement, and Issuer will not take any action, or omit to take any action,
which, if taken or omitted, respectively, would violate the Tax Regulatory
Agreement.
(n) Issuer will take no action that would cause the Interest to become
includable in gross income for federal income tax purposes under the Code
(including, without limitation, intentional acts under Treas. Reg. ss.
1.148-2(c) or consenting to a deliberate action within the meaning of
Treas. Reg. ss. 1.141-2(d)), and Issuer will take and will cause its
officers, employees and agents to take all affirmative actions legally
within its power necessary to ensure that the Interest does not become
includable in gross income of the recipient for federal income tax purposes
under the Code (including, without limitation, the calculation and payment
of any rebate required to preserve such exclusion).
ARTICLE V
REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER
Borrower represents, warrants and covenants for the benefit of Lender and
Issuer, as follows:
(a) Borrower is a corporation duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts, has
power to enter into this Agreement and by proper corporate action has duly
authorized the execution and delivery of this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement. Borrower is in good standing
and is duly licensed or qualified to transact business in the
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State and in all jurisdictions where the character of the property owned or
leased or the nature of the business transacted by it makes such licensing
or qualification necessary.
(b) Borrower has been fully authorized to execute and deliver this
Agreement, the Escrow Agreement and the Tax Regulatory Agreement under the
terms and provisions of the resolution of its board of directors, or by
other appropriate official approval, and further represents, covenants and
warrants that all requirements have been met, and procedures have occurred
in order to ensure the enforceability of this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement and this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement have been duly authorized,
executed and delivered.
(c) The officer of Borrower executing this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement and any related documents has
been duly authorized to execute and deliver this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement and such related documents under
the terms and provisions of a resolution of Borrower's board of directors.
(d) This Agreement, the Escrow Agreement and the Tax Regulatory
Agreement constitute valid and legally binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms,
except to the extent limited by bankruptcy, reorganization or other laws of
general application relating to effecting the enforcement of creditors'
rights.
(e) The execution and delivery of this Agreement, the Escrow Agreement
and the Tax Regulatory Agreement, the consummation of the transactions
contemplated hereby and the fulfillment of the terms and conditions hereof
do not and will not violate any law, rule, regulation or order, conflict
with or result in a breach of any of the terms or conditions of the
articles of organization or bylaws of Borrower or of any corporate
restriction or of any agreement or instrument to which Borrower is now a
party and do not and will not constitute a default under any of the
foregoing or result in the creation or imposition of any liens, charges or
encumbrances of any nature upon any of the property or assets of Borrower
contrary to the terms of any instrument or agreement.
(f) To the best of Borrower's knowledge, the authorization, execution,
delivery and performance of this Agreement by Borrower do not require
submission to, approval of, or other action by any governmental authority
or agency, which action with respect to this Agreement has not been taken
and which is final and nonappealable.
(g) There is no action, suit, proceeding, claim, inquiry or
investigation, at law or in equity, before or by any court, regulatory
agency, public board or body pending or, to the best of Borrower's
knowledge, threatened against or affecting Borrower, challenging Borrower's
authority to enter into this Agreement, the Escrow Agreement or the Tax
Regulatory Agreement or any other action wherein an unfavorable ruling or
finding would adversely affect the enforceability of this Agreement, the
Escrow
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Agreement or the Tax Regulatory Agreement or any other transaction of
Borrower which is similar hereto, or the exclusion of the Interest from
gross income for federal tax purposes under the Code, or would materially
and adversely affect any of the transactions contemplated by this
Agreement.
(h) The property at which the Equipment is located is properly zoned
for its current and anticipated use and the use of the Equipment will not
violate any applicable zoning, land use, environmental or similar law or
restriction the violation of which would have a material adverse effect on
Borrower. Borrower has all licenses and permits to use the Equipment.
Borrower has obtained all permits, licenses and other authorizations which
are required under federal, state and local laws relating to emissions,
discharges, releases of pollutants, contaminants, hazardous or toxic
materials, or wastes into ambient air, surface water, ground water or land,
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants,
contaminants or hazardous or toxic materials or wastes ("Environmental
Laws") at the Borrower's facilities or in connection with the operation of
its facilities. Except as previously disclosed to Lender in writing,
Borrower and all activities of the Borrower at its facilities comply with
all Environmental Laws and with all terms and conditions of any required
permits, licenses and authorizations applicable to Borrower with respect
thereto the failure with which to comply would have a material adverse
effect on Borrower. Except as previously disclosed to Lender in writing,
Borrower is also in compliance with all limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules
and timetables contained in Environmental Laws or contained in any plan,
order, decree, judgment or notice of which Borrower is aware the failure
with which to comply would have a material adverse effect on Borrower.
Except as previously disclosed to Lender in writing, Borrower is not aware
of, nor has Borrower received notice of, any events, conditions,
circumstances, activities, practices, incidents, actions or plans which may
interfere with or prevent continued compliance with, or which may give rise
to any liability under, any Environmental Laws.
(i) The Equipment is of the type authorized and permitted to be
financed pursuant to the Act.
(j) Borrower owns or will own the Equipment and intends to operate the
Equipment, or cause the Equipment to be operated, as a "project," within
the meaning of the Act, until the date on which all of the Loan Payments
have been fully paid or the applicable Prepayment Amount has been fully
paid.
(k) Borrower will not take any action, or permit any action within its
control to be taken on its behalf, that would cause the Interest to become
includable in gross income of the recipient for federal income tax purposes
under the Code (including, without limitation, intentional acts under
Treas. Reg. ss. 1.148-2(c) or deliberate action within the meaning of
Treas. Reg. ss. 1.141-2(d)), and Borrower will take and will cause its
officers, employees and agents to take all affirmative actions legally
within its power necessary to ensure that the Interest does not become
includable in gross income of the
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recipient for federal income tax purposes under the Code (including,
without limitation, the calculation and payment of any rebate required to
preserve such exclusion).
(l) Borrower has heretofore furnished to Lender the audited financial
statement of Guarantor for Guarantor's fiscal years ended December 31,
1994, December 31, 1995 and December 31, 1996 and the unaudited financial
statement of Guarantor for the six months ended June 30, 1997, and those
statements fairly present the financial condition of Guarantor on the dates
thereof and the results of its operations and cash flows for the periods
then ended and were prepared in accordance with generally accepted
accounting principles. Since the date of the most recent financial
statements, there has been no material adverse change in the business,
properties or condition (financial or otherwise) of Guarantor.
(m) Borrower and Guarantor have paid or caused to be paid to the
proper authorities when due all federal, state and local taxes required to
be withheld by them. Borrower and Guarantor have filed all federal, state
and local tax returns which are required to be filed, and Borrower and
Guarantor have paid or caused to be paid to the respective taxing
authorities all taxes as shown on said returns or on any assessment
received by them to the extent such taxes have become due.
(n) Borrower has or will have good and absolute title to all Equipment
and all proceeds thereof, free and clear of all mortgages, security
interests, liens and encumbrances except for the security interest created
pursuant to this Agreement.
(o) All financial and other information provided to Lender by or on
behalf of Borrower or Guarantor in connection with Borrower's request for
the Loan contemplated hereby is true and correct in all material respects
and, as to projections, valuations or pro forma financial statements,
present a good faith opinion as to such projections, valuations and pro
forma condition and results.
(p) None of the Equipment is or will become a fixture on real estate.
None of the Equipment constitutes a replacement of, substitution for or
accessory to any property of Borrower subject to a lien of any kind.
Borrower owns the real property where the Equipment will be located subject
to no liens or encumbrances of any kind except for easements and similar
encumbrances that do not cover the Equipment or have a material adverse
effect on the use of such real property.
(q) Upon delivery and installation of the Equipment, Borrower will
provide to Issuer and Lender a completed and executed copy of the
Certificate of Acceptance attached hereto as Exhibit B.
(r) Borrower will aid and assist Issuer in connection with preparing
and submitting to the Secretary of the Treasury a Form 8038 (or other
applicable information reporting statement) at the time and in the form
required by the Code.
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(s) Borrower will comply fully at all times with the Tax Regulatory
Agreement, and Borrower will not take any action, or omit to take any
action, which, if taken or omitted, respectively, would violate the Tax
Regulatory Agreement.
(t) Expenses for work done by officers or employees of Borrower in
connection with the Equipment will be included as an Acquisition Cost, if
at all, only to the extent (i) such persons were specifically employed for
such particular purpose, (ii) the expenses do not exceed the actual cost
thereof and (iii) such expenses are treated or capable of being treated
(whether or not so treated) on the books of Borrower as a capital
expenditure in conformity with generally accepted accounting principles
applied on a consistent basis.
(u) Any costs incurred with respect to that part of the Equipment paid
from the Loan Proceeds shall be treated or capable of being treated on the
books of Borrower as capital expenditures in conformity with generally
accepted accounting principles applied on a consistent basis.
(v) No part of the Loan Proceeds will be used to finance inventory or
rolling stock or will be used for working capital or to finance any other
cost not constituting an Acquisition Cost.
(w) No person other than Borrower is in occupancy or possession of any
portion of the real property where the Equipment is located.
(x) The Equipment is property of the character subject to the
allowance for depreciation under Section 167 of the Code.
ARTICLE VI
TITLE TO EQUIPMENT; SECURITY INTEREST
Section 6.01. Title to Equipment. Borrower will at all times protect and
defend, at its own cost and expense, its title from and against all claims,
liens and legal processes of creditors of Borrower, and keep all Equipment free
and clear of all such claims, liens and processes.
Section 6.02. Security Interest in Equipment. This Agreement is intended to
constitute a security agreement within the meaning of the UCC. As security for
Borrower's payment to Lender, as assignee of Issuer, of Loan Payments and all
other amounts payable to Lender hereunder or under the Real Estate Loan
Agreement, or any other obligation (whether direct or indirect and whether now
existing or hereafter arising), Borrower hereby grants to Issuer, and Issuer
hereby assigns to Lender, a security interest constituting a first lien on the
Equipment, all repairs, replacements, substitutions and modifications thereto or
thereof and all proceeds of the foregoing. Issuer and Borrower agree to execute
such additional documents, including financing statements, assignments,
affidavits, notices and similar instruments, in form satisfactory to Lender, and
take such other actions that Lender deems necessary or appropriate to establish
and
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maintain the security interest created by this Section, and Issuer and Borrower
hereby designate and appoint Lender as their agent, and grant to Lender a power
of attorney (which is coupled with an interest), to execute on behalf of Issuer
and Borrower, as the case may be, such additional documents and to take such
other actions. If requested by Lender, Borrower shall obtain a landlord and/or
mortgagee's consent and waiver with respect to the property where the Equipment
is located. If requested by Lender, Borrower shall conspicuously mark the
Equipment with appropriate lettering, labels or tags, and maintain such
markings, so as clearly to disclose Lender's security interest in the Equipment.
Section 6.03. Change in Name or Corporate Structure of Borrower; Change in
Location of Borrower's Principal Place of Business. Borrower's chief executive
office is located at the address set forth above, and all of Borrower's records
relating to its business and the Equipment are kept at such location or at 35
Green Street, Malden, Massachusetts. Borrower hereby agrees to provide written
notice to Lender and Issuer of any change or proposed change in its name,
corporate structure, place of business or chief executive office or change or
proposed change in the location of the Equipment. Such notice shall be provided
at least 30 days in advance of the date that such change or proposed change is
planned to take effect. Borrower does business, and has done business, only
under its own name.
Section 6.04. Liens and Encumbrances to Title. Borrower shall not, directly
or indirectly, create, incur, assume or suffer to exist any mortgage, pledge,
lien, charge, encumbrance or claim on or with respect to the Equipment
(together, "Liens") other than the respective rights of Lender and Issuer as
herein provided. Borrower shall promptly, at its own expense, take such action
as may be necessary duly to discharge or remove any such Lien. Borrower shall
reimburse Lender for any expenses incurred by Lender to discharge or remove any
Lien.
Section 6.05. Personal Property. The parties hereby agree that the
Equipment is, and during the period this Agreement is in force will remain,
personal property and, when subjected to use by Borrower hereunder, will not be
or become fixtures; provided, however, that if contrary to the parties' intent
the Equipment is or may be deemed to be a fixture, Borrower shall cause filings
to be made with the applicable government officials or filing offices to create
and preserve for Lender as assignee of Issuer a perfected first priority
security interest in the Equipment.
Section 6.06. Assignment of Insurance. As additional security for the
payment and performance of Borrower's obligations hereunder, Borrower hereby
assigns to Lender, as assignee of Issuer, any and all moneys (including, without
limitation, proceeds of insurance and refunds of unearned premiums) due or to
become due under, and all other rights of Borrower with respect to, any and all
policies of insurance now or at any time hereafter covering the Equipment or any
evidence thereof or any business records or valuable papers pertaining thereto,
and Borrower hereby directs the issuer of any such policy to pay all such moneys
directly to Lender. Borrower hereby assigns to Lender, as assignee of Issuer,
any and all moneys due or to become due with respect to any condemnation
proceeding affecting the Equipment. At any time, whether before or after the
occurrence of any Event of Default, Lender may (but need not), in Lender's name
or in Borrower's name, execute and deliver proof of claim, receive all such
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moneys, endorse checks and other instruments representing payment of such
moneys, and adjust, litigate, compromise or release any claim against the issuer
of any such policy or party in any condemnation proceeding. All such proceeds
received by Lender shall be applied as provided in Article IX hereof.
Section 6.07. Occupancy. (a) Borrower hereby irrevocably grants to Lender
the right to occupy the property where the Equipment is located (the "Premises")
at any time after the acceleration of all amounts due hereunder after occurrence
and during the continuance of an Event of Default.
(b) Lender may occupy the Premises only to hold, sell, store, liquidate,
realize upon or otherwise dispose of the Equipment and for other purposes that
Lender may in good faith deem to be related or incidental purposes.
(c) The right of Lender to occupy the Premises shall cease and terminate
upon the earlier of (1) payment in full and discharge of all obligations of
Borrower and Issuer hereunder, and (2) final sale or disposition of all of the
Equipment and delivery of all such Equipment to purchasers; provided, however,
that in no event shall such right extend beyond a commercially reasonable time.
(d) Lender shall not be obligated to pay or account for any rent or other
compensation for the occupancy of the Premises. Borrower will pay, or reimburse
Lender for, all taxes, fees, duties, levies, charges and expenses at any time
incurred by or imposed upon Lender by reason of the execution, delivery,
existence, recordation, performance or enforcement of this Section.
Section 6.08. Agreement as Financing Statement. To the extent permitted by
applicable law, a carbon, photographic or other reproduction of this Agreement
or of any financing statements signed by Borrower is sufficient as a financing
statement in any state to perfect the security interests granted in this
Agreement.
ARTICLE VII
AFFIRMATIVE COVENANTS OF BORROWER
So long as the Loan shall remain unpaid, Borrower will comply with the
following requirements:
Section 7.01. Reporting Requirements. Borrower will deliver, or cause to be
delivered, to Lender each of the following, which shall be in form and detail
acceptable to Lender:
(a) as soon as available, and in any event within 120 days after the
end of each fiscal year of Guarantor, audited consolidated financial
statements of Guarantor and Borrower with the unqualified opinion of
independent certified public accountants selected by Borrower and
acceptable to Lender, which annual financial statements shall include the
consolidated balance sheet of Guarantor and Borrower as at the end of such
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fiscal year and the related consolidated statements of income, retained
earnings and cash flows of Guarantor and Borrower for the fiscal year then
ended, all in reasonable detail and prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the
accounting practices applied in the financial statements referred to in
Article V hereof, together with a certificate of the chief financial
officer of Guarantor stating that such financial statements have been
prepared in accordance with generally accepted accounting principles
applied on a basis consistent with the accounting practices reflected in
the annual financial statements referred to in Article V hereof and whether
or not such officer has knowledge of the occurrence of any Default or Event
of Default hereunder and, if so, stating in reasonable detail the facts
with respect thereto;
(b) as soon as available and in any event within 90 days after the end
of each fiscal quarter of Guarantor and Borrower, an unaudited/internal
consolidated balance sheet and consolidated statements of income and
retained earnings of Guarantor and Borrower as at the end of and for such
month and for the year to date period then ended, in reasonable detail and
stating in comparative form the figures for the corresponding date and
periods in the previous year, all prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the
accounting practices reflected in the financial statements referred to in
Article V hereof and certified by the chief financial officer of Guarantor,
subject to year-end audit adjustments; and accompanied by a certificate of
that officer stating (i) that such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
basis consistent with the accounting practices reflected in the financial
statements referred to in Article V hereof, (ii) whether or not such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder not theretofore reported and remedied and, if so, stating in
reasonable detail the facts with respect thereto, and (iii) all relevant
facts in reasonable detail to evidence, and the computations as to, whether
or not Guarantor and Borrower are in compliance with the financial
covenants contained in Section 7.10 hereof;
(c) immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or regulatory
agency affecting Borrower or Guarantor of the type described in Article
V(g) hereof or which seek a monetary recovery against Borrower in excess of
$100,000 or Guarantor in excess of $500,000;
(d) as promptly as practicable (but in any event not later than five
Business Days) after an officer of Borrower obtains actual knowledge of the
occurrence of any event that constitutes a Default or an Event of Default
hereunder, notice of such occurrence, together with a detailed statement by
a responsible officer of Borrower of the steps being taken by Borrower to
cure the effect of such Default or Event of Default;
(e) promptly upon knowledge thereof, notice of any material loss or
destruction of or damage to any Equipment or of any material adverse change
in any Equipment;
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(f) promptly upon their distribution, copies of all financial
statements, reports and proxy statements that Borrower or Guarantor shall
have sent to its stockholders;
(g) promptly after the amending thereof, copies of any and all
amendments to its certificate of incorporation, articles of organization or
bylaws;
(h) promptly upon actual knowledge thereof, notice of the violation by
Borrower of any law, rule or regulation;
(i) promptly upon actual knowledge thereof, notice of any material
adverse change in the financial or operating condition of Borrower;
(j) at the time when audited financial statements are delivered
pursuant to the requirements of Section 7.01(a) hereof, projections of
Borrower's and Guarantor's business and financial results for the next
succeeding fiscal year, together with a balance sheet, income statement and
supporting facts and assumptions used to formulate such projections; and
(k) promptly after the amending thereof, financial covenants required
by Borrower's and/or Guarantor's working capital lender.
Section 7.02. Books and Records; Inspection and Examination. Borrower will
keep accurate books of record and account for itself pertaining to the Equipment
and pertaining to Borrower's business and financial condition in which true and
complete entries will be made in accordance with generally accepted accounting
principles consistently applied and, upon reasonable request of Lender and three
Business Days' prior written notice, will permit any officer, employee, attorney
or accountant for Lender to audit, review, make extracts from, or copy any and
all corporate and financial books, records and properties of Borrower at all
times during ordinary business hours, and to discuss the affairs of Borrower
with any of its directors, officers, employees or agents. Borrower will permit
Lender, or its employees, accountants, attorneys or agents, to examine and copy
any or all of its records and to examine and inspect the Equipment at any time
during Borrower's business hours. Unless an Event of Default has occurred and is
continuing, the inspections and examinations referred to in this Section shall
be conducted not more than once per calendar year and shall be at the expense of
Lender.
Section 7.03. Compliance With Laws; Environmental Indemnity. Borrower will
(a) comply with the requirements of applicable laws and regulations the
noncompliance with which would materially and adversely affect its business or
its financial condition, (b) comply with all applicable Environmental Laws and
regulations and obtain any permits, licenses or similar approvals required by
any such laws or regulations the noncompliance with which would materially and
adversely affect its business or its financial condition and (c) use and keep
the Equipment, and will require that others use and keep the Equipment, only for
lawful purposes, without violation of any federal, state or local law, statute
or ordinance the violation of which would materially and adversely affect its
business or its financial condition. Borrower shall
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secure all permits and licenses, if any, necessary for the installation and
operation of the Equipment. Borrower shall comply in all respects (including,
without limitation, with respect to the use, maintenance and operation of each
item of the Equipment) with all laws of the jurisdictions in which its
operations involving any component of Equipment may extend and of any
legislative, executive, administrative or judicial body exercising any power or
jurisdiction over the items of the Equipment or its interest or rights under
this Agreement. Borrower will indemnify, defend and hold Lender harmless from
and against any claims, loss or damage to which Lender may be subjected as a
result of any past, present or future existence, use, handling, storage,
transportation or disposal of any hazardous waste or substance or toxic
substance by Borrower or on property owned, leased or controlled by Borrower and
on which the Equipment will be located. This indemnification shall survive the
termination of this Agreement and payment of the indebtedness hereunder.
Section 7.04. Payment of Taxes and Other Claims. Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including, without limitation, the Equipment) or upon or against the
creation, perfection or continuance of the security interest created pursuant to
this Agreement, prior to the date on which penalties attach thereto, (b) all
federal, state and local taxes required to be withheld by it, and (c) all lawful
claims for labor, materials and supplies which, if unpaid, might by law become a
lien or charge upon any properties of Borrower; provided, that Borrower shall
not be required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings. Borrower will pay, as the same respectively come due, all taxes and
governmental charges of any kind whatsoever that may at any time be lawfully
assessed or levied against or with respect to the Equipment, as well as all gas,
water, steam, electricity, heat, power, telephone, utility and other charges
incurred in the operation, maintenance, use, occupancy and upkeep of the
Equipment.
Section 7.05. Maintenance of Equipment. (a) Borrower shall, at its own
expense, maintain, preserve and keep the Equipment in good repair, working order
and condition, and shall from time to time make all repairs and replacements
necessary to keep the Equipment in such condition, and in compliance with state
and federal laws, ordinary wear and tear excepted. Borrower shall maintain the
Equipment in a condition suitable for certification by the manufacturer thereof
(if certification is available) and in conformance with all manufacturer's
recommended maintenance requirements, but Borrower shall not be required
pursuant to this Section to obtain any such certification. In the event that any
material parts or accessories forming part of any item or items of Equipment
become worn out, lost, destroyed, damaged beyond repair or otherwise rendered
unfit for use, Borrower, at its own expense and expeditiously, will replace or
cause the replacement of such parts or accessories by replacement parts or
accessories free and clear of all liens and encumbrances and with a value and
utility at least equal to that of the parts or accessories being replaced
(assuming that such replaced parts and accessories were otherwise in good
working order and repair). All such replacement parts and accessories shall be
deemed to be incorporated immediately into and to constitute an integral portion
of the Equipment and, as such, shall be subject to the terms of this Agreement.
Neither
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Lender nor Issuer shall have any responsibility in any of these matters, or for
the making of improvements or additions to the Equipment.
(b) Borrower will defend the Equipment against all claims or demands of all
persons (other than Lender) claiming the Equipment or any interest therein.
(c) Borrower will keep the Equipment free and clear of all security
interests, liens and encumbrances except the security interest created pursuant
to this Agreement.
Section 7.06. Insurance. (a) Borrower shall, at its own expense, procure
and maintain continuously in effect: (i) public liability insurance for personal
injuries, death or damage to or loss of property arising out of or in any way
relating to the Equipment sufficient to protect Lender from liability in all
events, with a coverage limit of not less than $1,000,000 per occurrence, and
(ii) insurance against such hazards as Lender may require, including, but not
limited to, all-risk casualty and property insurance, in an amount equal to the
greater of the full replacement cost of the Equipment with new equipment having
substantially similar specifications or the applicable Prepayment Amount.
(b) If required by State law, Borrower shall carry workers' compensation
insurance covering all employees on, in, near or about the Equipment, and upon
request, shall furnish to Lender certificates evidencing such coverage.
(c) All insurance policies required by this Article shall be taken out and
maintained with insurance companies acceptable to Lender; and shall contain a
provision that the insurer shall not cancel or revise coverage thereunder
without giving written notice to the insured parties at least thirty (30) days
before the cancellation or revision becomes effective. No insurance shall be
subject to any co-insurance clause. Each insurance policy required by this
Article shall name Lender as an additional insured party and loss payee without
regard to any breach of warranty or other act or omission of Borrower and shall
include a lender's loss payable endorsement for the benefit of Lender. Prior to
the delivery of Equipment, Borrower shall deposit with Lender evidence
satisfactory to Lender of such insurance and, prior to the expiration thereof,
shall provide Lender evidence of all renewals or replacements thereof.
(d) As among Lender, Borrower and Issuer, Borrower assumes all risks and
liabilities from any cause whatsoever, whether or not covered by insurance, for
loss or damage to any Equipment and for injury to or death of any person or
damage to any property, whether such injury or death be with respect to agents
or employees of Borrower or of third parties, and whether such property damage
be to Borrower's property or the property of others. Whether or not covered by
insurance, Borrower hereby assumes responsibility for and agrees to reimburse
Lender and Issuer for and will indemnify, defend and hold Lender and Issuer
harmless from and against all liabilities, obligations, losses, damages,
penalties, claims, actions, costs and expenses (including reasonable attorneys'
fees) of whatsoever kind and nature, imposed on, incurred by or asserted against
Lender or Issuer that in any way relate to or arise out of this Agreement, the
transactions contemplated hereby and the Equipment, including but not limited
to, (i) the selection, manufacture, purchase, acceptance or rejection of
Equipment or the ownership of the
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Equipment, (ii) the delivery, lease, possession, maintenance, use, condition,
return or operation of the Equipment, (iii) the condition of the Equipment sold
or otherwise disposed of after possession by Borrower, (iv) any patent or
copyright infringement, (v) the conduct of Borrower, its officers, employees and
agents, (vi) a breach of Borrower of any of its covenants or obligations
hereunder and (vii) any claim, loss, cost or expense involving alleged damage to
the environment relating to the Equipment, including, but not limited to
investigation, removal, cleanup and remedial costs. All amounts payable by
Borrower pursuant to the immediately preceding sentence shall be paid
immediately upon demand of Issuer or Lender, as the case may be. This provision
shall survive the termination of this Agreement.
Section 7.07. Preservation of Corporate Existence. Borrower will preserve
and maintain its corporate existence and all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business; and
shall conduct its business in an orderly, efficient and regular manner.
Section 7.08. Performance by Lender. If Borrower at any time fails to
perform or observe any of the covenants or agreements contained in this
Agreement, and if such failure shall continue for a period of ten calendar days
after Lender gives Borrower written notice thereof (or in the case of the
agreements contained in Sections 7.05 and 7.06 hereof, immediately upon the
occurrence of such failure, without notice or lapse of time), Lender may, but
need not, perform or observe such covenant on behalf and in the name, place and
stead of Borrower (or, at Lender's option, in Lender's name) and may, but need
not, take any and all other actions which Lender may reasonably deem necessary
to cure or correct such failure (including, without limitation, the payment of
taxes, the satisfaction of security interests, liens or encumbrances, the
performance of obligations owed to account debtors or other obligors, the
procurement and maintenance of insurance, the execution of assignments, security
agreements and financing statements, and the endorsement of instruments); and
Borrower shall thereupon pay to Lender on demand the amount of all moneys
reasonably expended and all costs and expenses (including reasonable attorneys'
fees and legal expenses) reasonably incurred by Lender in connection with or as
a result of the performance or observance of such agreements or the taking of
such action by Lender, together with interest thereon from the date expended or
incurred at the lesser of 12% per annum or the highest rate permitted by law. To
facilitate the performance or observance by Lender of such covenants of
Borrower, Borrower hereby irrevocably appoints effective upon the occurrence and
continuance of an Event of Default Lender, or the delegate of Lender, acting
alone, as the attorney in fact of Borrower with the right (but not the duty)
from time to time to create, prepare, complete, execute, deliver, endorse or
file in the name and on behalf of Borrower any and all instruments, documents,
assignments, security agreements, financing statements, applications for
insurance and other agreements and writings required to be obtained, executed,
delivered or endorsed by Borrower under this Agreement.
Section 7.09. Management of Guarantor. Borrower hereby agrees, upon written
request of Lender after Leslie B. Lewis is at any time not the chief executive
officer of Guarantor or not otherwise actively involved in the management of
Guarantor (a "Management Change"), to provide to Lender a letter of credit in
form and substance and issued by a bank acceptable to Lender in Lender's sole
discretion in an amount equal to 50% of the outstanding amount of the
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Loan; provided, however, that Lender will not request any such letter of credit
until 90 days after a Management Change occurs; and, provided, further, the
premium used to calculate the Prepayment Amount pursuant to Section 2.07(a)
hereof shall be reduced by 100 basis points but in no event to a percentage less
than zero.
Section 7.10. Financial Covenants. (a) Guarantor, on a consolidated basis,
will maintain at all times its ratio of Debt (as defined below) to Tangible Net
Worth (as defined below) at not more than 1.70 to 1.00. "Debt" shall mean (i)
all items of indebtedness or liability which in accordance with generally
accepted accounting principles or federal tax law would be included in
determining total liabilities as shown on the liabilities side of a balance
sheet or otherwise classified as debt, and (ii) guaranties and endorsements
(other than for purposes of collection in the ordinary course of business) by
Guarantor and other contingent obligations of Guarantor in respect of, or to
purchase or otherwise acquire, indebtedness of others (other than for members of
the consolidated group). "Tangible Net Worth" means the excess of:
(A) the tangible assets of Guarantor, which, in accordance with
generally accepted accounting principles, are tangible assets, after
deducting adequate reserves in each case where, in accordance with
generally accepted accounting principles, a reserve is proper over
(B) all Debt of Guarantor;
provided, however, that (i) inventory shall be taken into account on the basis
of the cost (determined on a first-in, first-out basis) or current market value,
whichever is lower, (ii) in no event shall there be included as such tangible
assets patents, trademarks, trade names, copyrights, licenses, good will,
advances or loans to, or receivables from, directors, officers, employees or
affiliates, intangible assets, amounts relating to covenants not to compete,
pensions assets, deferred charges or treasury stock or any securities or Debt of
Guarantor or any other securities unless the same are readily marketable in the
United States of America or entitled to be used as a credit against federal
income tax liabilities, (iii) securities included as such tangible assets shall
be taken into account at their current market price or cost, whichever is lower,
and (iv) any write-up in the book value of any assets shall not be taken into
account.
(b) Guarantor, on a consolidated basis, will maintain at its fiscal year
end its Debt Service Coverage Ratio (as defined below) at not less than 1.20 to
1.00. "Debt Service Coverage Ratio" means the ratio of (i) Guarantor's Cash Flow
Available for Debt Service (as defined below) to (ii) Guarantor's Debt Service
(as defined below). "Cash Flow Available for Debt Service" of Guarantor means
Guarantor's income before taxes and interest, plus depreciation, amortization
and other non-cash charges less the aggregate of (x) capital expenditures not
financed with long-term debt and (y) any taxes paid, all based upon the prior
twelve (12) month period. "Debt Service" of Guarantor means the aggregate of (i)
interest expense of Guarantor for the prior twelve (12) months, and (ii) the
current portion of the long-term Debt of Guarantor for the prior twelve (12)
month period.
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(c) Guarantor will maintain at all times its Tangible Net Worth at not less
than $12,000,000.
(d) Guarantor will maintain at all times its net working capital (as
determined in accordance with generally accepted accounting principles) at not
less than $3,500,000.
(e) If the financial covenants required by Borrower's and/or Guarantor's
working capital lender are at any time changed, Lender may in its discretion
require Borrower and Guarantor to comply with such changed financial covenants
for the benefit of Lender, and Borrower hereby agrees to amend this Section to
reflect such changed financial covenants.
ARTICLE VIII
NEGATIVE COVENANTS OF BORROWER
So long as the Loan shall remain unpaid, Borrower agrees that:
Section 8.01. Lien. Borrower will not create, incur or suffer to exist any
mortgage, deed of trust, pledge, lien, security interest, assignment or transfer
for security upon or of any of the Equipment (except for the security interest
created pursuant to this Agreement) or any of its inventory, accounts
receivables or cash. Guarantor may create, incur or suffer to exist mortgages,
deeds of trust, pledges, liens, security interests and assignments or transfers
for security upon all or any part of its assets.
Section 8.02. Sale of Assets. Borrower will not, and will not permit
Guarantor to, sell, lease, assign, transfer or otherwise dispose of all or
substantially all of its assets or of any of the Equipment or any interest
therein (whether in one transaction or in a series of transactions); provided,
however, that Borrower or Guarantor may enter into such transaction if Borrower
or Guarantor, as the case may be, is the surviving entity, Lender receives a tax
opinion in form and substance satisfactory to Lender and no Default or Event of
Default has occurred or would result from such transaction.
Section 8.03. Consolidation and Merger. Borrower will not, and will not
permit Guarantor to, consolidate with or merge into any person, or permit any
other person to merge into it, or acquire (in a transaction analogous in purpose
or effect to a consolidation or merger) all or substantially all of the assets
of any other person); provided, however, that Borrower or Guarantor may enter
into such transaction if Borrower or Guarantor, as the case may be, is the
surviving entity, Lender receives a tax opinion in form and substance
satisfactory to Lender and no Default or Event of Default has occurred or would
result from such transaction; and provided, further, that Guarantor may in all
events sell not more than 50% of the outstanding common stock of Borrower.
Section 8.04. Accounting. Borrower will not, and will not permit Guarantor
to, adopt, permit or consent to any material change in accounting principles
other than as required by
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generally accepted accounting principles. Borrower will not, and will not permit
Guarantor to, adopt, permit or consent to any change in its fiscal year.
Section 8.05. Other Defaults. Borrower will not permit any breach, default
or event of default to occur under any note, loan agreement, indenture, lease,
mortgage, contract for deed, security agreement or other contractual obligation
binding upon Borrower beyond any applicable grace or cure period or any
judgment, decree, order or determination applicable to Borrower which is not
stayed or being diligently contested in good faith.
Section 8.06. Place of Business. Borrower will not permit any of the
Equipment to be located in any state or area in which, in the event of such
location, a financing statement covering such Equipment would be required to be,
but has not in fact been, filed in order to perfect the security interest
created pursuant to this Agreement.
Section 8.07. Modifications and Substitutions. (a) Borrower will not make
any material alterations, modifications or additions to the Equipment which
cannot be removed without materially damaging the functional capabilities or
economic value of the Equipment. Upon delivery of the Equipment to Lender
pursuant to Section 11.03 hereof and at the request of Lender, Borrower, at its
sole cost and expense, will remove all alterations, modifications and additions
and repair the Equipment as necessary to return the Equipment to the condition
in which it was furnished, ordinary wear and tear and permitted modifications
excepted.
(b) Notwithstanding the provisions of subparagraph (a) of this section,
Borrower may, with the prior written consent of Lender, substitute for parts,
elements, portions or all of the Equipment, other parts, elements, portions,
equipment or facilities; provided, however, that any substitutions that are not
material or are made pursuant to Borrower's obligations to make repairs
referenced under any provision of this Agreement shall not require such prior
written consent. Borrower shall provide such documents or assurances as Lender
may reasonably request to maintain or confirm the security interest assigned to
Lender in the Equipment as so modified or substituted.
Section 8.08. Use of the Equipment. Borrower will not install, use, operate
or maintain the Equipment improperly, carelessly, in violation of any applicable
law or in a manner contrary to that contemplated by this Agreement.
ARTICLE IX
DAMAGE AND DESTRUCTION; USE OF NET PROCEEDS
Borrower shall provide a complete written report to Lender immediately upon
any material loss, theft, damage or destruction of any Equipment and of any
accident involving any Equipment. If all or any part of the Equipment is lost,
stolen, destroyed or damaged beyond repair ("Damaged Equipment"), Borrower shall
as soon as practicable after such event either: (a) replace the same at
Borrower's sole cost and expense with equipment having substantially similar
specifications and of equal or greater value to the Damaged Equipment
immediately prior
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<PAGE>
to the time of the loss occurrence, such replacement equipment to be subject to
Lender's approval, whereupon such replacement equipment shall be substituted in
this Agreement and the other related documents by appropriate endorsement or
amendment; or (b) pay the applicable Prepayment Amount of the Damaged Equipment;
provided, however, that if the damage or destruction is the result of any act of
God, arson, natural disaster, riot or war, the applicable Prepayment Amount
shall be calculated by reducing the applicable premium by one-half. Borrower
shall notify Lender of which course of action it will take within forty-five
(45) calendar days after the loss occurrence. If, within sixty (60) calendar
days of the loss occurrence, (a) Borrower fails to notify Lender; (b) Borrower
and Lender fail to execute an amendment to this Agreement to delete the Damaged
Equipment and add the replacement equipment or (c) Borrower fails to pay the
applicable Prepayment Amount, then Lender may, at its sole discretion, declare
the applicable Prepayment Amount to be immediately due and payable, and Borrower
is required to pay the same. The Net Proceeds of insurance with respect to the
Damaged Equipment promptly shall be made available by Lender to be applied to
discharge Borrower's obligation under this Article, and any Net Proceeds in
excess of the amounts necessary to satisfy Borrower's obligations under this
Article shall be paid to Borrower. The payment of the Prepayment Amount and the
termination of Lender's interest in the Damaged Equipment is subject to the
terms of Section 2.07 hereof. For purposes of this Article, the term "Net
Proceeds" shall mean the amount remaining from the gross proceeds of any
insurance claim or condemnation award after deducting all expenses (including
reasonable attorneys' fees) incurred in the collection of such claim or award.
ARTICLE X
ASSIGNMENT, SUBLEASING AND SELLING
Section 10.01. Assignment by Lender. This Agreement, and the obligations of
Borrower to make payments hereunder, may be assigned and reassigned in whole or
in part to one or more assignees or subassignees by Lender at any time
subsequent to its execution, without the necessity of obtaining the consent of
Issuer or Borrower; provided, however, that no such assignment or reassignment
shall be effective unless and until (a) Issuer and Borrower shall have received
notice of the assignment or reassignment disclosing the name and address of the
assignee or subassignee and (b) in the event that such assignment or
reassignment is made to a bank or trust company as trustee for holders of
certificates representing interests in this Agreement, such bank or trust
company agrees to maintain, or cause to be maintained, a book-entry system by
which a record of the names and addresses of such holders as of any particular
time is kept and agrees, upon request of Issuer or Borrower, to furnish such
information to Issuer or Borrower; provided, further, that there shall not be
more than one person acting as lender or servicer hereunder at any one time; and
provided, finally, that no such assignment shall amend the terms hereof or
require Borrower to pay any fees or expenses in connection with such assignment.
Upon receipt of notice of assignment, Borrower will reflect in a book-entry the
assignee designated in such notice of assignment, and shall agree to make all
payments to the assignee designated in the notice of assignment, notwithstanding
any claim, defense, setoff or counterclaim whatsoever (whether arising from a
breach of this Agreement or otherwise) that Issuer and Borrower may from time to
time have against Lender or the assignee.
27
<PAGE>
Issuer and Borrower agree to execute all documents, including notices of
assignment and chattel mortgages or financing statements, which may be
reasonably requested by Lender or its assignee to protect their interest in the
Equipment and in this Agreement.
Section 10.02. No Sale or Assignment by Borrower. This Agreement and the
interest of Borrower in the Equipment may not be sold, assumed, assigned or
encumbered by Borrower.
ARTICLE XI
EVENTS OF DEFAULT AND REMEDIES
Section 11.01. Events of Default. The following constitute "Events of
Default" under this Agreement:
(a) failure by Borrower to pay to Lender, as assignee of Issuer, when
due any Loan Payment or to pay any other payment required to be paid
hereunder and the continuation of such failure for a period of ten days;
(b) failure by Borrower to maintain insurance on the Equipment in
accordance with Section 7.06 hereof;
(c) failure by Borrower or Issuer to observe and perform any other
covenant, condition or agreement contained herein, in the Escrow Agreement,
in the Tax Regulatory Agreement or in any other document or agreement
executed in connection herewith on its part to be observed or performed for
a period of 30 days after written notice is given to Borrower or Issuer, as
the case may be, specifying such failure and requesting that it be
remedied; provided, however, that, if the failure stated in such notice
cannot be corrected within such 30-day period, Lender will not unreasonably
withhold its consent to an extension of such time if corrective action is
instituted by Borrower or Issuer, as the case may be, within the applicable
period and diligently pursued until the default is corrected;
(d) initiation by Issuer of a proceeding under any federal or state
bankruptcy or insolvency law seeking relief under such laws concerning the
indebtedness of Issuer;
(e) Borrower or Guarantor shall be or become insolvent, or admit in
writing its inability to pay its or his debts as they mature, or make an
assignment for the benefit of creditors; or Borrower or Guarantor shall
apply for or consent to the appointment of any receiver, trustee or similar
officer for it or for all or any substantial part of its property; or such
receiver, trustee or similar officer shall be appointed without the
application or consent of Borrower or Guarantor, as the case may be; or
Borrower or Guarantor shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization,
arrangement, readjustment of debt, dissolution, liquidation or similar
proceeding relating to it under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application or otherwise)
against
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<PAGE>
Borrower or Guarantor; or any judgment, writ, warrant of attachment or
execution or similar process shall be issued or levied against a
substantial part of the property of Borrower or Guarantor;
(f) determination by Lender that any representation or warranty made
by Borrower, Issuer or Guarantor herein, in the Tax Regulatory Agreement,
in the Guaranty or in any other document executed in connection herewith
was untrue in any material respect when made;
(g) failure of Lender to have a valid and perfected security interest
in the Equipment, subject to no other security interest, assignment, lien
or encumbrance;
(h) the occurrence of a default or an event of default under any
instrument, agreement or other document evidencing or relating to any
indebtedness or other monetary obligation of Borrower or Guarantor beyond
any applicable grace or cure period in an amount greater than $100,000 with
respect to Borrower or in an amount greater than $500,000 with respect to
Guarantor;
(i) Guarantor shall repudiate, purport to revoke or fail to perform
Guarantor's obligations under the Guaranty;
(j) Guarantor shall at any time own less than 50% of the outstanding
common stock of Borrower (Borrower hereby acknowledges that Lender has made
its decision to enter into the transactions contemplated hereby based in
part upon the management expertise of Guarantor and its ownership of the
stock of Borrower);
(k) an Event of Default shall occur and continue under the Real Estate
Loan Agreement; or
(l) the breach by Borrower of any of its obligations under the Escrow
Agreement.
Section 11.02. Remedies on Default. Whenever any Event of Default shall
have occurred and be continuing, Lender, as assignee of Issuer, shall have the
right, at its sole option without any further demand or notice, to take any one
or any combination of the following remedial steps to the extent that the same
are available to secured parties under Article 9 of the UCC in effect in the
State from time to time and which are otherwise accorded to Lender, as assignee
of Issuer, by applicable law:
(a) by notice to Issuer and Borrower, declare the entire unpaid
principal amount of the Loan then outstanding, all interest accrued and
unpaid thereon and all amounts payable under this Agreement to be forthwith
due and payable, whereupon the Loan, all such accrued interest and all such
amounts shall become and be forthwith due and payable, without presentment,
notice of dishonor, protest or further notice of any kind, all of which are
hereby expressly waived by Borrower;
29
<PAGE>
(b) take possession of the Equipment wherever situated, without any
court order or other process of law and without liability for entering the
premises, and lease, sublease or make other disposition of the Equipment
for use over a term in a commercially reasonable manner, all for the
account of Lender, provided that Borrower shall remain directly liable for
the deficiency, if any, between the rent or other amounts paid by a lessee
or sublessee of the Equipment pursuant to such lease or sublease during the
same period of time, after deducting all reasonable costs and expenses,
including reasonable attorneys' fees and expenses, incurred with respect to
the recovery, repair and storage of the Equipment during such period of
time;
(c) take possession of the Equipment wherever situated, without any
court order or other process of law and without liability for entering the
premises, and sell the Equipment in a commercially reasonable manner. All
proceeds from such sale shall be applied in the following manner:
FIRST, to pay all proper and reasonable costs and expenses
associated with the recovery, repair, storage and sale of the
Equipment, including reasonable attorneys' fees and expenses;
SECOND, to pay (i) Lender the amount of all unpaid Loan Payments
or other obligations (whether direct or indirect owed by Borrower to
Lender), if any, which are then due and owing, together with interest
and late charges thereon, (ii) Lender the then applicable Prepayment
Amount (taking into account the payment of past-due Loan Payments as
aforesaid), plus a pro rata allocation of interest, at the rate
utilized to calculate the Loan Payments, from the next preceding due
date of a Loan Payment until the date of payment by the buyer, and
(iii) any other amounts due hereunder, including indemnity payments,
taxes, charges, reimbursement of any advances and other amounts
payable to Lender or Issuer hereunder; and
THIRD, to pay the remainder of the sale proceeds, purchase moneys
or other amounts paid by a buyer of the Equipment to Borrower;
(d) proceed by appropriate court action to enforce specific
performance by Issuer or Borrower of the applicable covenants of this
Agreement or to recover for the breach thereof, including the payment of
all amounts due from Borrower. Borrower shall pay or repay to Lender or
Issuer all costs of such action or court action, including, without
limitation, reasonable attorneys' fees;
(e) with or without notice to Borrower or Issuer submit one or more
drafts under any letter of credit provided pursuant to Section 7.09 hereof
or pursuant to the Escrow Agreement for any amounts due hereunder; and
30
<PAGE>
(f) take whatever action at law or in equity may appear necessary or
desirable to enforce its rights with respect to the Equipment. Borrower
shall pay or repay to Lender or Issuer all costs of such action or court
action, including, without limitation, reasonable attorneys' fees.
Notwithstanding any other remedy exercised hereunder, Borrower shall remain
obligated to pay to Lender any unpaid portion of the Prepayment Amount.
Section 11.03. Delivery of Equipment. Upon an Event of Default, Borrower
shall within ten calendar days after notice from Lender, at its own cost and
expense: (a) perform any testing and repairs required to place the Equipment in
the condition required by Article VII; (b) if deinstallation, disassembly or
crating is required, cause the Equipment to be deinstalled, disassembled and
crated by an authorized manufacturer's representative or such other service
person as is satisfactory to Lender; and (c) deliver the Equipment to a location
specified by Lender, freight and insurance prepaid by Borrower. If Borrower
refuses to deliver the Equipment in the manner designated, Lender may enter upon
Borrower's premises where the Equipment is kept and take possession of the
Equipment and charge to Borrower the commercially reasonable costs of such
taking. Borrower hereby expressly waives any damages occasioned by such taking
that are the result of Lender's or Lender's agent's gross negligence or willful
misconduct.
Section 11.04. No Remedy Exclusive. No remedy herein conferred upon or
reserved to Lender or Issuer is intended to be exclusive and every such remedy
shall be cumulative and shall be in addition to every other remedy given under
this Agreement or now or hereafter existing at law or in equity. No delay or
omission to exercise any right or power accruing upon any Event of Default shall
impair any such right or power or shall be construed to be a waiver thereof, but
any such right or power may be exercised from time to time and as often as may
be deemed expedient. In order to entitle Lender or Issuer to exercise any remedy
reserved to it in this Article, it shall not be necessary to give any notice
other than such notice as may be required by this Article. All remedies herein
conferred upon or reserved to Lender or Issuer shall survive the termination of
this Agreement.
Section 11.05. Late Charge. Any Loan Payment not paid by Borrower on the
due date thereof shall, to the extent permissible by law, bear a late charge
equal to the lesser of three cents ($.03) per dollar of the delinquent amount or
the lawful maximum, and Borrower shall be obligated to pay the same immediately
upon receipt of Lender's written invoice therefor, but such late charge shall
not apply to any amounts accelerated hereunder or to any other Prepayment
Amounts.
ARTICLE XII
MISCELLANEOUS
Section 12.01. Costs and Expenses of Lender. Borrower shall pay to Lender,
in addition to the Loan Payments payable by Borrower hereunder, such amounts in
each year as
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<PAGE>
shall be required by Lender in payment of any reasonable costs and expenses
incurred by Lender in connection with the enforcement of this Agreement after
the occurrence of an Event of Default, including (without limitation) payment of
all reasonable fees, costs and expenses and all administrative costs of Lender
in connection with the Equipment, expenses (including, without limitation,
attorneys' fees and disbursements), fees of auditors or attorneys, insurance
premiums not otherwise paid hereunder and all other direct and necessary
administrative costs of Lender or charges required to be paid by it in order to
comply with the terms of, or to enforce its rights under, this Agreement. Such
costs and expenses shall be billed to Borrower by Lender from time to time,
together with a statement certifying that the amount so billed has been paid by
Lender for one or more of the items above described, or that such amount is then
payable by Lender for such items. Amounts so billed shall be due and payable by
Borrower within 30 days after receipt of the bill by Borrower.
Section 12.02. Disclaimer of Warranties. LENDER AND ISSUER MAKE NO WARRANTY
OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE VALUE, DESIGN,
CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR FITNESS FOR
USE OF THE EQUIPMENT, OR ANY OTHER WARRANTY OR REPRESENTATION, EXPRESS OR
IMPLIED, WITH RESPECT THERETO. In no event shall Lender or Issuer be liable for
any loss or damage in connection with or arising out of this Agreement, the
Equipment or the existence, furnishing, functioning or Borrower's use of any
item or products or services provided for in this Agreement.
Section 12.03. Notices. All notices, certificates, requests, demands and
other communications provided for hereunder or under the Escrow Agreement or the
Tax Regulatory Agreement shall be in writing and shall be (a) personally
delivered, (b) sent by first class United States mail, (c) sent by overnight
courier of national reputation, or (d) transmitted by telecopy, in each case
addressed to the party to whom notice is being given at its address as set forth
above and, if telecopied, transmitted to that party at its telecopier number set
forth above or, as to each party, at such other address or telecopier number as
may hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) three Business Days after
deposited in the mail if delivered by mail, (c) the date sent if sent by
overnight courier, or (d) the date of transmission if delivered by telecopy. If
notice to Borrower of any intended disposition of the Equipment or any other
intended action is required by law in a particular instance, such notice shall
be deemed commercially reasonable if given (in the manner specified in this
Section) at least ten (10) Business Days prior to the date of intended
disposition or other action. A courtesy copy of all notices to Borrower shall
also be given to the following person; provided, however, that the failure to
provide such courtesy copy shall not affect the rights or obligations of Lender,
Issuer or Borrower:
Burton Winnick, Esq.
Gadsby & Hannah LLP
225 Franklin Street
Boston, Massachusetts 02110
32
<PAGE>
Section 12.04. Further Assurance and Corrective Instruments. Issuer and
Borrower hereby agree that they will, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, such further
acts, instruments, conveyances, transfers and assurances, as Lender reasonably
deems necessary or advisable for the implementation, correction, confirmation or
perfection of this Agreement, the Escrow Agreement or the Tax Regulatory
Agreement and any rights of Lender hereunder or thereunder.
Section 12.05. Binding Effect; Time of the Essence. This Agreement shall
inure to the benefit of and shall be binding upon Lender, Issuer, Borrower and
their respective successors and assigns. Time is of the essence.
Section 12.06. Severability. In the event any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof.
Section 12.07. Amendments. To the extent permitted by law, the terms of
this Agreement shall not be waived, altered, modified, supplemented or amended
in any manner whatsoever except by written instrument signed by the parties
hereto, and then such waiver, consent, modification or change shall be effective
only in the specific instance and for the specific purpose given.
Borrower and Lender agree to amend Exhibit A to this Agreement to more
specifically identify the Equipment being financed hereunder at such time as
such identification is possible. Such amendment shall be effected by written
instrument signed by Borrower and Lender. Issuer's consent to the amendment
referred to in this paragraph shall not be required. Such amendment may take the
form of a Payment Request Form in the form attached to the Escrow Agreement as
Exhibit A executed by Borrower and Lender.
Issuer's consent to an amendment of the financial covenants contained in
Section 7.10 hereof shall not be required.
Section 12.08. Execution in Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute one and the same instrument, and any of the parties hereto may
execute this Agreement by signing any such counterpart, provided that only the
original marked "Original: 1 of 6" on the execution page thereof shall
constitute chattel paper under the UCC.
Section 12.09. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State.
Section 12.10. Captions. The captions or headings in this Agreement are for
convenience only and in no way define, limit or describe the scope or intent of
any provisions or sections of this Agreement.
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<PAGE>
Section 12.11. Entire Agreement. This Agreement, the Tax Regulatory
Agreement, the Escrow Agreement and the exhibits hereto and thereto constitute
the entire agreement among Lender, Issuer, Borrower and Escrow Agent. There are
no understandings, agreements, representations or warranties, express or
implied, not specified herein or in such documents regarding this Agreement or
the Equipment financed hereby.
Section 12.12. Usury. It is the intention of the parties hereto to comply
with any applicable usury laws; accordingly, it is agreed that, notwithstanding
any provisions to the contrary in this Agreement, in no event shall this
Agreement require the payment or permit the collection of interest or any amount
in the nature of interest or fees in excess of the maximum permitted by
applicable law.
Section 12.13. Waiver of Jury Trial. LENDER, ISSUER AND BORROWER HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS AGREEMENT, ANY OF THE
RELATED DOCUMENTS, ANY DEALINGS AMONG LENDER, ISSUER OR BORROWER RELATING TO THE
SUBJECT MATTER OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY RELATED
TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED AMONG LENDER,
ISSUER AND BORROWER. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING
OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER
COMMON LAW AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE, MEANING THAT IT
MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO
ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
AGREEMENT, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY RELATED
TRANSACTIONS. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A
WRITTEN CONSENT TO A TRIAL BY THE COURT.
[REMAINDER OF PAGE INTENTIONALLY BLANK; EXECUTION PAGE FOLLOWS.]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
their respective corporate names by their duly authorized officers, all as of
the date first written above.
Lender: GE CAPITAL PUBLIC FINANCE, INC.
By_________________________________
Title______________________________
Issuer: ARKANSAS DEVELOPMENT FINANCE
AUTHORITY
By_________________________________
Title______________________________
Borrower: QUAIL PIPING PRODUCTS, INC.
By: /s/ Leslie B. Lewis
---------------------------
Title: Chairman
---------------------------
ORIGINAL: __ OF 6
[EXECUTION PAGE OF LOAN AGREEMENT (EQUIPMENT)]
<PAGE>
Exhibit A to Loan Agreement (Equipment)
SCHEDULE OF EQUIPMENT AND LOAN PAYMENTS
Description of Equipment
The following Equipment is the subject of the Loan Agreement (Equipment)
dated as of November 1, 1997 among GE Capital Public Finance, Inc. ("Lender"),
Arkansas Development Finance Authority ("Issuer"), and Quail Piping Products,
Inc. ("Borrower"):
Description Manufacturer
Quantity of Equipment or Vendor Serial Number
The Equipment is located at the following address:
2410 South Washington Street
Magnolia, Arkansas 71753
Prior to the relocation of the Equipment or portion thereof, Borrower will
provide 30 days' prior written notice to Lender.
<PAGE>
Schedule of Loan Payments
Interest Rate: 5.89%
PAYMENT PAYMENT TOTAL PRINCIPAL INTEREST PREPAYMENT
NO. DATE PAYMENT COMPONENT COMPONENT AMOUNT
_____________________
After payment of Loan Payment due opposite Prepayment Amount.
<PAGE>
Exhibit B to Loan Agreement (Equipment)
FORM OF CERTIFICATE OF ACCEPTANCE
I, the undersigned, hereby certify that I am the duly qualified and acting
_______________ of Quail Piping Products, Inc. ("Borrower") and, with respect to
the Loan Agreement (Equipment) dated as of November 1, 1997 (the "Agreement") by
and among Borrower, GE Capital Public Finance, Inc. ("Lender") and Arkansas
Development Finance Authority ("Issuer"), that:
1. The equipment described in Exhibit A to the Agreement (the
"Equipment") has been delivered and installed in accordance with Borrower's
specifications and has been accepted by Borrower.
2. Borrower has obtained from a reputable insurance company qualified
to do business in the State (as defined in the Agreement) insurance with
respect to all risks required to be covered thereby pursuant to Section
7.06 of the Agreement.
3. Attached to this Certificate of Acceptance are Vendor invoice(s)
and/or bill(s) of sale relating to the Equipment and, if such invoices have
been paid by Issuer or Borrower, evidence of payment thereof and, if
applicable, evidence of official intent to reimburse such payment as
required by the Code (as defined in the Agreement).
4. All of the representations and warranties of Borrower contained in
the Agreement are true and correct as of the date hereof and no Default or
Event of Default has occurred thereunder.
Dated: _________ __, 19__.
QUAIL PIPING PRODUCTS, INC.,
Borrower
By_____________________________
Title__________________________
Date___________________________
<PAGE>
Exhibit C to Loan Agreement (Equipment)
FORM OF OPINION OF COUNSEL TO BORROWER
_________ __, 19__
Arkansas Development Finance Authority
Suite 200
100 Main Street
Little Rock, Arkansas 72203
Quail Piping Products, Inc.
2410 South Washington Street
Magnolia, Arkansas 71753
GE Capital Public Finance, Inc.
Suite 470
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Re: Loan Agreement (Equipment) dated as of November 1, 1997 by and among
GE Capital Public Finance, Inc. ("Lender"), Arkansas Development
Finance Authority ("Issuer") and Quail Piping Products, Inc.
("Borrower")
Ladies and Gentlemen:
We have acted as counsel to Borrower with respect to the Loan Agreement
(Equipment) described above (the "Loan Agreement"), the Escrow Agreement of even
date therewith (the "Escrow Agreement") among Lender, Issuer, Borrower and
National City Bank of Minneapolis, as escrow agent, the Tax Regulatory Agreement
of even date therewith (the "Tax Regulatory Agreement"; the Loan Agreement, the
Escrow Agreement and the Tax Regulatory Agreement may be referred to herein
collectively as the "Agreements") and various related matters and we have acted
as counsel to Asahi/America, Inc. in connection with the Guaranty and Negative
Pledge Agreement dated as of November 1, 1997 (the "Guaranty") for the benefit
of Lender and various related matters and, in this capacity, have reviewed a
duplicate original or certified copy of each of the Agreements and the Guaranty.
Based upon the examination of these and such other documents as we deem
relevant, it is our opinion that:
1. Borrower has been duly organized and is validly existing as a
corporation in good standing under the laws of The Commonwealth of
Massachusetts with full power and authority to own its properties and
conduct its business.
<PAGE>
2. Borrower has full power and authority to execute and deliver the
Agreements and to carry out the terms thereof. The Agreements have been
duly and validly authorized, executed and delivered, are in full force and
effect and are the legal, valid and binding contracts of Borrower
enforceable in accordance with their respective terms (including against
claims of usury), except to the extent limited by state and federal laws
affecting remedies and by bankruptcy, reorganization, or other laws of
general application relating to or affecting the enforcement of creditors'
rights.
3. The consummation of the transactions contemplated by the Agreements
and the carrying out of the terms thereof will not result in violation of
any provisions of the articles of organization or bylaws of Borrower or
result in the violation of any provision of, or in a default under, any
indenture, mortgage, deed of trust, indebtedness, agreement, judgment,
decree, order, statute, rule or regulation to which Borrower is a party or
by which it or its property is bound.
4. There are no legal or governmental actions, suits, proceedings,
inquiries or investigations pending, threatened or contemplated, or any
basis therefor, to which Borrower is or may become a party or of which any
property of Borrower is or may become subject, other than ordinary routine
litigation incident to the kind of business conducted by Borrower which, if
determined adversely to Borrower, would not, individually or in the
aggregate, have a material adverse effect on the financial position or
results of operations of Borrower.
5. There are no legal or governmental proceedings pending, threatened
or contemplated, or any basis therefor, wherein an unfavorable decision,
ruling or finding would adversely affect the validity of or security for
the Agreements or the transactions contemplated thereby.
6. Guarantor has been duly organized and is validly existing as a
corporation in good standing under the laws of The Commonwealth of
Massachusetts with full power and authority to own its properties and
conduct its business.
7. Guarantor has full power and authority to execute and deliver the
Guaranty and to carry out the terms thereof. The Guaranty has been duly and
validly authorized, executed and delivered, are in full force and effect
and is the legal, valid and binding contract of Guarantor enforceable in
accordance with its terms, except to the extent limited by state and
federal laws affecting remedies and by bankruptcy, reorganization, or other
laws of general application relating to or affecting the enforcement of
creditors' rights.
8. The consummation of the transactions contemplated by the Guaranty
and the carrying out of the terms thereof will not result in violation of
any provisions of the articles of organization or bylaws of Guarantor or
result in the violation of any provision
C-2
<PAGE>
of, or in a default under, any indenture, mortgage, deed of trust,
indebtedness, agreement, judgment, decree, order, statute, rule or
regulation to which Guarantor is a party or by which it or its property is
bound.
9. There are no legal or governmental actions, suits, proceedings,
inquiries or investigations pending, threatened or contemplated, or any
basis therefor, to which Guarantor is or may become a party or of which any
property of Guarantor is or may become subject, other than ordinary routine
litigation incident to the kind of business conducted by Guarantor which,
if determined adversely to Guarantor, would not, individually or in the
aggregate, have a material adverse effect on the financial position or
results of operations of Guarantor.
10. There are no legal or governmental proceedings pending, threatened
or contemplated, or any basis therefor, wherein an unfavorable decision,
ruling or finding would adversely affect the validity of for the Guaranty
or the transactions contemplated thereby.
11. The Equipment (defined in the Loan Agreement) constitutes personal
property and when used by Borrower will not become fixtures under
applicable law.
12. The provisions of the Loan Agreement are effective to create a
security interest in favor of Lender, as assignee of Issuer, in all of
Borrower's right, title and interest in and to the Equipment and all
proceeds thereof. Such security interest has been properly perfected and is
subject to no liens or encumbrances.
Very truly yours,
C-3
<PAGE>
Exhibit D to Loan Agreement (Equipment)
FORM OF OPINION OF COUNSEL TO ISSUER
_________ __, 19__
Arkansas Development Finance Authority
Suite 200
100 Main Street
Little Rock, Arkansas 72203
Quail Piping Products, Inc.
2410 South Washington Street
Magnolia, Arkansas 71753
GE Capital Public Finance, Inc.
Suite 470
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Re: Loan Agreement (Equipment) dated as of November 1, 1997 by and among
GE Capital Public Finance, Inc. ("Lender"), Arkansas Development
Finance Authority ("Issuer")and Quail Piping Products, Inc.
("Borrower")
Ladies and Gentlemen:
We have acted as counsel to Issuer with respect to the Loan Agreement
(Equipment) described above (the "Loan Agreement"), the Escrow Agreement of even
date therewith (the "Escrow Agreement") among Lender, Issuer, Borrower and
National City Bank of Minneapolis, as escrow agent, the Tax Regulatory Agreement
of even date therewith (the "Tax Regulatory Agreement"; the Loan Agreement, the
Escrow Agreement and the Tax Regulatory Agreement may be referred to herein
collectively as the "Agreements") and various related matters and, in this
capacity, have reviewed a duplicate original or certified copy of the
Agreements. Based upon the examination of these and such other documents as we
deem relevant, it is our opinion that:
1. Issuer is a political subdivision of the State of Arkansas (the
"State") under the Internal Revenue Code of 1986, as amended, duly
organized, existing and operating under the Constitution and laws of the
State.
<PAGE>
2. Issuer is authorized and has power under applicable law to enter
into the Agreements and to carry out its obligations thereunder and the
transactions contemplated thereby.
3. The Agreements have been duly authorized, approved, executed and
delivered by and on behalf of Issuer and are the legal, valid and binding
contracts of Issuer enforceable in accordance with their terms, except to
the extent limited by state and federal laws affecting remedies and by
bankruptcy, reorganization or other laws of general application relating to
or affecting the enforcement of creditors' rights.
4. The authorization, approval and execution of the Agreements and all
other proceedings of Issuer relating to the transactions contemplated
thereby have been performed in accordance with all open meeting, public
bidding and other laws, rules and regulations of the State.
5. There is no litigation, action, suit or proceeding pending or
before any court, administrative agency, arbitrator or governmental body
that challenges the organization or existence of Issuer; the authority of
Issuer or its officers or its employees to enter into the Agreements; the
proper authorization, approval and/or execution of the Agreements and the
other documents contemplated thereby; or the ability of Issuer otherwise to
perform its obligations under the Agreements and the transactions
contemplated thereby.
Very truly yours,
D-2
<PAGE>
Exhibit E to Loan Agreement (Equipment)
FORM OF OPINION OF SPECIAL TAX COUNSEL
__________ __, 19__
GE Capital Public Finance, Inc.
Suite 470
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Re: Loan Agreement (Equipment) dated as of November 1, 1997 by and among
GE Capital Public Finance, Inc. ("Lender"), Arkansas Development
Finance Authority ("Issuer") and Quail Piping Products, Inc.
("Borrower")
Ladies and Gentlemen:
We have acted as special counsel to GE Capital Public Finance, Inc. in
connection with the Loan Agreement (Equipment) described above (the "Loan
Agreement"), the Escrow Agreement of even date therewith (the "Escrow
Agreement") among Lender, Issuer, Borrower and National City Bank of
Minneapolis, as escrow agent, and the Tax Regulatory Agreement of even date
therewith (the "Tax Regulatory Agreement"; the Loan Agreement, the Escrow
Agreement and the Tax Regulatory Agreement may be referred to herein
collectively as the "Agreements"). In such capacity, we have examined a
certified copy of a resolution adopted by the Issuer (the "Resolution")
authorizing the execution and delivery of the Agreements.
Based upon an examination of the aforementioned documents and such other
documents and opinions as we have deemed relevant and necessary as a basis for
the opinions set forth herein, and in reliance thereon, it is our opinion as
special tax counsel that, assuming compliance with certain covenants contained
in the Agreements, under the statutes, regulations, rulings and judicial
decisions existing on the date of the original delivery of the Loan Agreement,
the portion of the payments that is paid by Issuer to Lender and which is
designated as and comprising interest, as provided in the Loan Agreement, is not
includable in gross income for purposes of federal income taxation; however such
interest portion is a specific preference item for purposes of the alternative
minimum tax provisions imposed on individuals and corporations set forth in the
Internal Revenue Code of 1986, as amended.
Very truly yours,
LOAN AGREEMENT (REAL ESTATE)
Among
GE CAPITAL PUBLIC FINANCE, INC.,
as Lender,
ARKANSAS DEVELOPMENT FINANCE AUTHORITY,
as Issuer,
and
QUAIL PIPING PRODUCTS, INC.,
as Borrower
Dated as of November 1, 1997
This instrument constitutes a security agreement
under the Arkansas Uniform Commercial Code.
<PAGE>
LOAN AGREEMENT (REAL ESTATE)
Lender: GE Capital Public Finance, Inc.
Suite 470
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Telephone: (800) 346-3164
Telecopier: (612) 897-5601
Issuer: Arkansas Development Finance Authority
100 Main Street, Suite 200
Little Rock, Arkansas 72201
Telephone: (501) 682-5900
Telecopier: (501) 682-5939
Borrower: Quail Piping Products, Inc. Asahi/America, Inc.
2410 South Washington Street 35 Green Street
Magnolia, Arkansas 71753 Malden, Massachusetts 02148
Telephone: (617) 388-4505
Telecopier: (617) 324-3407
THIS Loan Agreement (Real Estate) dated as of November 1, 1997 (this
"Agreement") among GE Capital Public Finance, Inc., a Delaware corporation, as
lender (with its successors and assigns, "Lender"), Arkansas Development Finance
Authority, a body politic and corporate and public instrumentality duly
organized and validly existing under the laws of the State of Arkansas (the
"State"), as issuer ("Issuer"), and Quail Piping Products, Inc., a Massachusetts
corporation, as borrower ("Borrower").
WHEREAS, Issuer is authorized and empowered under the laws of the State,
including Act 1069 of 1985, as amended (the "Act"), to enter into loan
agreements, contracts and other instruments and documents necessary or
convenient to obtain loans for the purpose of facilitating the financing of
certain projects as described in the Act; and
WHEREAS, in furtherance of the purposes of the Act, Issuer proposes to
finance all or a portion of the acquisition, construction and refurbishment of
the Project (as hereinafter defined) by Borrower pursuant to this Agreement by
obtaining a loan from Lender and lending the proceeds thereof to Borrower; and
WHEREAS, Borrower proposes to borrow the proceeds of the loan made by
Lender to Issuer upon the terms and conditions set forth herein to finance the
acquisition, construction and refurbishment of the Project; and
WHEREAS, Borrower shall make Loan Payments (as hereinafter defined)
directly to Lender as assignee of Issuer; and
<PAGE>
WHEREAS, this Agreement shall not be deemed to constitute a debt or
liability or moral obligation of the State or any political subdivision thereof,
or a pledge of the faith and credit or taxing power of the State or any
political subdivision thereof, but shall be a special obligation payable solely
from the Loan Payments payable hereunder by Borrower to Lender as assignee of
Issuer;
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, and in consideration of the premises contained in this
Agreement, Lender, Issuer and Borrower agree as follows:
ARTICLE I
DEFINITIONS AND EXHIBITS
Section 1.01. Definitions. The following terms used herein will have the
meanings indicated below unless the context clearly requires otherwise:
"Acquisition Costs" means the contract price paid or to be paid to the
Vendors or reimbursed to Borrower for any portion of the Project, including
administrative, engineering, legal, financial, costs of issuance hereof and
other costs incurred by Lender, Issuer, Borrower, Escrow Agent and Vendors in
connection with the acquisition, construction, refurbishment and financing by
Lender of the Project, which Acquisition Costs are set forth in Exhibit A
hereto.
"Agreement" means this Agreement, including all exhibits hereto, as any of
the same may be supplemented or amended from time to time in accordance with the
terms hereof.
"Bank" means Citizens Bank of Massachusetts, N.A., the issuer of the Letter
of Credit.
"Borrower" means Quail Piping Products, Inc., a Massachusetts corporation.
"Business Day" means a day other than a Saturday or Sunday on which banks
are generally open for business in New York, New York.
"Code" means the Internal Revenue Code of 1986, as amended, and United
States Treasury regulations promulgated thereunder.
"Default" means an event that, with giving of notice or passage of time or
both, would constitute an Event of Default as provided in Article X hereof.
"Equipment Loan Agreement" means the Loan Agreement (Equipment) of even
date herewith among Lender, Issuer and Borrower.
"Escrow Agent" means National City Bank of Minneapolis, as escrow agent
under the Escrow Agreement, and its successors and assigns permitted under the
Escrow Agreement.
2
<PAGE>
"Escrow Agreement" means the Escrow Agreement dated as of November 1, 1997
among Lender, Issuer, Borrower and Escrow Agent relating to this Agreement.
"Escrow Fund" means the fund established and held by Escrow Agent pursuant
to the Escrow Agreement.
"Event of Taxability" means the Interest is or becomes includable in
Lender's gross income as the result of (i) any act or failure to act by Issuer
or Borrower or use of the proceeds of the Loan, (ii) a change in use of the
Project, (iii) any misrepresentation or inaccuracy in any of the
representations, warranties or covenants contained in this Agreement or the Tax
Regulatory Agreement by Issuer or Borrower, (iv) the enactment of any federal
legislation after the date of this Agreement or (v) the promulgation of any
income tax regulation or ruling by the Internal Revenue Service after the date
of this Agreement.
"Gross-Up Rate" means, with respect to any Interest payment (including
payments made prior to the Event of Taxability), the rate necessary to calculate
an additional payment in an amount sufficient such that the sum of the Interest
payment plus the additional payments would, after reduced by the federal tax
(including interest and penalties) actually imposed thereon, equal the amount of
the Interest payment.
"Guarantor" means Asahi/America, Inc., a Massachusetts corporation.
"Guaranty" means the Guaranty and Negative Pledge Agreement of even date
herewith from Guarantor for the benefit of Lender.
"Interest" means the portion of any payment from Issuer to Lender
designated as and comprising interest as shown in Exhibit A hereto.
"Issuer" means Arkansas Development Finance Authority, acting as issuer
under this Agreement.
"Lender" means (i) GE Capital Public Finance, Inc., acting as lender under
this Agreement, (ii) any surviving, resulting or transferee corporation of GE
Capital Public Finance, Inc. and (iii) except where the context requires
otherwise, any assignee(s) of Lender.
"Letter of Credit" means the irrevocable standby letter of credit issued by
Bank in the amount of $713,743.33, subject to automatic reduction in the amounts
and on the dates set forth in Exhibit F hereto, in the form attached hereto as
Exhibit E.
"Loan" means the loan from Issuer to Borrower pursuant to this Agreement.
"Loan Payments" means the loan payments payable by Borrower pursuant to the
provisions of this Agreement as specifically set forth in Exhibit A hereto. As
provided in
3
<PAGE>
Article II hereof, Loan Payments shall be payable by Borrower directly to
Lender, as assignee of Issuer, in the amounts and at the times as set forth in
Exhibit A hereto.
"Loan Proceeds" means the total amount of money to be paid pursuant to
Section 2.02 hereof to Escrow Agent for deposit and application in accordance
with the Escrow Agreement.
"Prepayment Amount" means the amount which Borrower may or must from time
to time pay or cause to be paid to Lender as assignee of Issuer in order to
prepay the Loan, as provided in Article Section 2.07 hereof, such amounts being
set forth in Exhibit A hereto, together with accrued interest and all other
amounts due hereunder.
"Principal" means the portion of any Loan Payment designated as principal
in Exhibit A hereto.
"Project" means property identified in Exhibit A hereto to be acquired,
constructed and refurbished.
"Purchase Agreements" means Borrower's purchase agreements with Vendors of
portions of the Project.
"State" means the State of Arkansas.
"Substitute Bank" means the issuer of the a Substitute Letter of Credit,
which issuer must be acceptable to Lender in its sole discretion.
"Substitute Letter of Credit" means an irrevocable standby letter of credit
in form, substance and amount acceptable to Lender it its sole discretion and
issued by a Substitute Bank.
"Tax Regulatory Agreement" means the Tax Regulatory Agreement of even date
herewith among Borrower, Issuer and Lender, as such Tax Regulatory Agreement may
be amended from time to time in accordance with its terms.
"UCC" means the Uniform Commercial Code as adopted and in effect in the
State.
"Vendor" means the seller, manufacturer, contractor or vendor of a portion
of the Project.
Section 1.02. Exhibits. The following exhibits are attached hereto and made
a part hereof:
Exhibit A: Form of Schedule of Project and Loan Payments, describing the
Project and setting forth the Loan Payments and Prepayment Amounts.
Exhibit B: Form of opinion of counsel to Borrower.
Exhibit C: Form of opinion of counsel to Issuer.
4
<PAGE>
Exhibit D: Form of opinion of special tax counsel.
Exhibit E: Form of Letter of Credit
Exhibit F: Schedule of Letter of Credit Amounts setting forth the declining
amounts of the Letter of Credit on certain dates.
Section 1.03. Rules of Construction. (a) The singular form of any word used
herein, including the terms defined in Section 1.01 hereof, shall include the
plural, and vice versa. The use herein of a word of any gender shall include
correlative words of all genders.
(b) Unless otherwise specified, references to Articles, Sections and other
subdivisions of this Agreement are to the designated Articles, Sections and
other subdivision of this Agreement as originally executed. The words "hereof,"
"herein," "hereunder" and words of similar import refer to this Agreement as a
whole.
(c) The headings or titles of the several articles and sections shall be
solely for convenience of reference and shall not affect the meaning,
construction or effect of the provisions hereof.
ARTICLE II
FINANCING OF PROJECT AND TERMS OF LOAN
Section 2.01. Acquisition of Project. Borrower shall acquire, construct and
refurbish the Project. Borrower shall remain liable to the Vendor or Vendors in
respect of its duties and obligations in accordance with each Purchase
Agreement.
Section 2.02. Loan. Lender hereby agrees, subject to the terms and
conditions of this Agreement, to make a loan to Issuer in the amount of
$700,000; Issuer hereby agrees, subject to the terms and conditions of this
Agreement, to borrow such amount from Lender and to lend such amount to
Borrower; and Borrower hereby agrees to borrow such amount from Issuer. Upon
fulfillment of the conditions set forth in Article III hereof, Lender shall
deposit the Loan Proceeds in the Escrow Fund to be held, invested and disbursed
as provided in the Escrow Agreement. Issuer's obligation to repay the loan from
Lender, and Borrower's obligation to repay the Loan, shall commence, and
interest shall begin to accrue, on the date that Loan Proceeds are disbursed to
Borrower on behalf of Issuer or deposited in the Escrow Fund.
Section 2.03. Interest. The principal amount of the loan from Lender to
Issuer and the Loan hereunder outstanding from time to time shall bear interest
(computed on the basis of actual days elapsed in a 360-day year) at the rate of
five and eighty-nine hundredths percent (5.89%). Interest accruing on the
principal balance of such loans outstanding from time to time shall be payable
as provided in Exhibit A and upon earlier demand in accordance with the terms
hereof or prepayment in accordance with Section 2.07 hereof. Upon the occurrence
of an Event of
5
<PAGE>
Taxability, Borrower shall, with respect to future interest payments, begin
making Loan Payments calculated at the Gross-Up Rate unless Borrower has prepaid
the Loan pursuant to Section 2.07(c) hereof. In addition, Borrower shall make
within thirty days after written demand of Lender a payment to Lender sufficient
to supplement prior Loan Payments to the Gross-Up Rate.
Section 2.04. Payments. Issuer shall pay the principal of, premium, if any
in accordance with Section 2.07 hereof, and interest on the loan from Lender to
Issuer, but only out of the amounts paid by Borrower pursuant to this Agreement.
Borrower shall pay to Lender, as assignee of Issuer, Loan Payments, in the
amounts and on the dates set forth in Exhibit A hereto. As security for its
obligation to pay the principal of, premium, if any in accordance with Section
2.07 hereof, and interest on the loan from Lender, Issuer assigns to Lender all
of Issuer's right to receive Loan Payments from Borrower hereunder and all of
Issuer's rights hereunder, and Issuer irrevocably constitutes and appoints
Lender and any present or future officer or agent of Lender as its lawful
attorney, with full power of substitution and resubstitution, and in the name of
Issuer or otherwise, to collect the Loan Payments and any other payments due
hereunder and to sue in any court for such Loan Payments or other payments and
to withdraw or settle any claims, suits or proceedings pertaining to or arising
out of this Agreement upon any terms. Such Loan Payments and other payments
shall be made by Borrower directly to Lender, as Issuer's assignee, and shall be
credited against Issuer's payment obligations hereunder. No provision, covenant
or agreement contained in this Agreement or any obligation herein imposed on
Issuer, or the breach thereof, shall constitute or give rise to or impose upon
Issuer a pecuniary liability, a charge upon its general credit or taxing powers
or a pledge of its general revenues. In making the agreements, provisions and
covenants set forth in this Agreement, Issuer has not obligated itself except
with respect to the Project and the application of the Loan Payments to be paid
by Borrower hereunder. All amounts required to be paid by Borrower hereunder
shall be paid in lawful money of the United States of America in immediately
available funds. No recourse shall be had by Lender or Borrower for any claim
based on this Agreement or the Tax Regulatory Agreement against any director,
officer, employee or agent of Issuer alleging personal liability on the part of
such person, unless such claim is based on the willful dishonesty of or
intentional violation of law by such person.
Section 2.05. Payment on Non-Business Days. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Business Day, such
payment may be made on the next succeeding Business Day, and such extension of
time shall in such case be included in the computation of interest hereunder.
Section 2.06. Loan Payments To Be Unconditional. The obligations of
Borrower to make the Loan Payments required under this Article II and to make
other payments hereunder and to perform and observe the covenants and agreements
contained herein shall be absolute and unconditional in all events, without
abatement, diminution, deduction, setoff or defense for any reason, including
(without limitation) any failure of the Project to be acquired, constructed or
refurbished, any defects, malfunctions, breakdowns or infirmities in the Project
or any accident, condemnation, destruction or unforeseen circumstances.
Notwithstanding any dispute between Borrower and any of Issuer, Lender, any
Vendor or any other person, Borrower shall make all
6
<PAGE>
Loan Payments when due and shall not withhold any Loan Payments pending final
resolution of such dispute, nor shall Borrower assert any right of set-off or
counterclaim against its obligation to make such payments required under this
Agreement.
Section 2.07. Prepayments. (a) Borrower may, in its discretion, prepay the
Loan in whole at any time after the third anniversary of the date hereof by
paying the applicable Prepayment Amount; provided, however, that the applicable
premium for the privilege of prepayment used to calculate the Prepayment Amount
under this clause (a) may be reduced by 100 basis points as provided in Section
7.07 hereof but in no event to a percentage less than zero.
(b) Borrower shall prepay the Loan in full immediately upon demand of
Lender after the occurrence and during the continuance of an Event of Default by
paying the applicable Prepayment Amount.
(c) Borrower may prepay the Loan in full at any time within 90 days after
the occurrence of an Event of Taxability by paying the applicable Prepayment
Amount plus an amount necessary to supplement the prior Loan Payments to the
Gross-Up Rate; provided, however, that if the Event of Taxability is the result
of an act or failure to act by Issuer, a determination that a representation or
warranty of Issuer was untrue in any material respect when made or a failure of
Issuer to comply with Article IV(n) hereof, the Prepayment Amount shall not
include any premium.
(d) The amounts due hereunder shall be repaid in part without premium with
funds remaining in the Escrow Fund upon termination of the Escrow Agreement as
provided in Sections 2.03 or 2.04 of the Escrow Agreement.
(e) Borrower shall prepay the Loan in full immediately upon the failure to
comply with the provisions of Article VI hereof by paying the applicable
Prepayment Amount.
(f) Borrower may prepay the Loan in full upon damage or destruction of the
Project by paying the applicable Prepayment Amount; provided, however, that if
the damage or destruction is the result of any act of God, arson, natural
disaster, riot or war, the applicable Prepayment Amount shall be calculated by
reducing the applicable premium by one-half.
Upon any prepayment in part of the Loan, the prepayment shall be applied
first to interest accrued thereon and next to the Principal portion of the Loan
Payments in the inverse order of maturity.
ARTICLE III
CONDITIONS PRECEDENT
Lender's agreement to make the loan to Issuer hereunder and to disburse the
Loan Proceeds shall be subject to the condition precedent that Lender shall have
received all of the following, each in form and substance satisfactory to
Lender:
7
<PAGE>
(a) This Agreement, properly executed on behalf of Issuer and
Borrower, and each of the Exhibits hereto properly completed.
(b) The Tax Regulatory Agreement, properly executed on behalf of
Issuer and Borrower.
(c) The Escrow Agreement, properly executed on behalf of Issuer,
Lender and Escrow Agent.
(d) The Guaranty, properly executed on behalf of Guarantor.
(e) The Letter of Credit.
(f) A certificate of the Clerk or an Assistant Clerk of Borrower,
certifying as to (i) the resolutions of the board of directors of Borrower,
authorizing the execution, delivery and performance of this Agreement, the
Escrow Agreement and the Tax Regulatory Agreement and any related
documents, (ii) the bylaws of Borrower, and (iii) the signatures of the
officers or agents of Borrower authorized to execute and deliver this
Agreement, the Escrow Agreement and the Tax Regulatory Agreement and other
instruments, agreements and certificates on behalf of Borrower.
(g) Currently certified copies of the Articles of Organization of
Borrower.
(h) A Certificate of Good Standing issued as to Borrower by The
Commonwealth of Massachusetts not more than 10 days prior to the date
hereof.
(i) A certificate of the Clerk or an Assistant Clerk of Guarantor,
certifying as to (i) the resolutions of the board of directors of
Guarantor, authorizing the execution, delivery and performance of the
Guaranty and any related documents, (ii) the bylaws of Guarantor, and (iii)
the signatures of the officers or agents of Guarantor authorized to execute
and deliver the Guaranty and other instruments, agreements and certificates
on behalf of Guarantor.
(j) Currently certified copies of the Articles of Organization of
Guarantor.
(k) A Certificate of Good Standing issued as to Guarantor by The
Commonwealth of Massachusetts not more than 10 days prior to the date
hereof.
(l) A completed and executed Form 8038 or evidence of filing thereof
with the Secretary of Treasury.
(m) A resolution or evidence of other official action taken by or on
behalf of Issuer to authorize the transactions contemplated hereby.
8
<PAGE>
(n) Evidence that the financing of the Project has been approved by
the "applicable elected representative" of Issuer after a public hearing
held upon reasonable notice.
(o) Financing statements executed by Issuer, as debtor, and naming
Lender, as secured party.
(p) An opinion of counsel to Borrower and Guarantor, addressed to
Lender and Issuer, in the form attached hereto as Exhibit B.
(q) Evidence that each of the conditions contained in Article III of
the Equipment Loan Agreement have been satisfied.
(r) An opinion of counsel to Issuer, addressed to Lender and Borrower,
in the form attached hereto as Exhibit C.
(s) An opinion of special tax counsel, addressed to Lender, in the
form attached hereto as Exhibit D.
(t) Payment of Issuer's fees, commissions and expenses incurred in
connection with this Agreement and the transactions contemplated hereby.
(u) Any other documents or items reasonably required by Lender.
Lender's agreement to make the loan to Issuer hereunder, to disburse the
Loan Proceeds and to consider approval of any disbursement from the Escrow Fund
shall be subject to the further conditions precedent that on the date thereof:
(v) Lender shall have received each of the items required for a
disbursement pursuant to the Escrow Agreement;
(w) the representations and warranties contained in Articles IV and V
hereof are correct in all material respects on and as of the date of such
disbursement as though made on and as of such date, except to the extent
that such representations and warranties relate solely to an earlier date;
and
(x) no event has occurred and is continuing, or would result from such
loan to Issuer or the Loan which constitutes a Default, an Event of Default
or an Event of Taxability.
9
<PAGE>
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF ISSUER
Issuer represents, warrants and covenants for the benefit of Lender and
Borrower, as follows:
(a) Issuer is a body politic and corporate and a public
instrumentality duly created and validly existing under the Constitution
and laws of the State.
(b) Issuer will exercise its best efforts to preserve and keep in full
force and effect its existence as a body corporate and politic.
(c) Issuer is authorized under the Constitution and laws of the State
to enter into this Agreement, the Escrow Agreement, the Tax Regulatory
Agreement and the transactions contemplated hereby and to perform all of
its obligations hereunder.
(d) Issuer has duly authorized the execution and delivery of this
Agreement, the Escrow Agreement and the Tax Regulatory Agreement under the
terms and provisions of the resolution of its governing body or by other
appropriate official approval, and further represents, covenants and
warrants that all requirements have been met and procedures have occurred
in order to ensure the enforceability of this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement against Issuer. Issuer has taken
all necessary action and has complied with all provisions of the Act,
including (without limitation) the making of the findings required by the
Act, required to make this Agreement, the Escrow Agreement and the Tax
Regulatory Agreement the valid and binding obligation of Issuer.
(e) The officer of Issuer executing this Agreement and any related
documents has been duly authorized to execute and deliver this Agreement,
the Escrow Agreement and the Tax Regulatory Agreement and such related
documents under the terms and provisions of a resolution of Issuer's
governing body, or by other appropriate official action.
(f) This Agreement, the Escrow Agreement and the Tax Regulatory
Agreement are legal, valid and binding obligations of Issuer, enforceable
in accordance with their respective terms, except to the extent limited by
bankruptcy, reorganization or other laws of general application relating to
or affecting the enforcement of creditors' rights.
(g) Issuer has assigned to Lender all of Issuer's rights in this
Agreement (except notice to Issuer pursuant to Section 11.03 hereof)
including the assignment of all rights in the security interest granted to
Issuer by Borrower.
10
<PAGE>
(h) Issuer will not pledge, mortgage or assign this Agreement or its
duties and obligations hereunder to any person, firm or corporation, except
as provided under the terms hereof.
(i) None of the execution and delivery of this Agreement, the Escrow
Agreement or the Tax Regulatory Agreement, the consummation of the
transactions contemplated hereby or the fulfillment of or compliance with
the terms and conditions of this Agreement, the Escrow Agreement or the Tax
Regulatory Agreement violates any law, rule, regulation or order, conflicts
with or results in a breach of any of the terms, conditions or provisions
of any restriction or any agreement or instrument to which Issuer is now a
party or by which it is bound or constitutes a default under any of the
foregoing or results in the creation or imposition of any prohibited lien,
charge or encumbrance of any nature whatsoever upon any of the property or
assets of Issuer under the terms of any instrument or agreement.
(j) There is no action, suit, proceeding, claim, inquiry or
investigation, at law or in equity, before or by any court, regulatory
agency, public board or body pending or, to the best of Issuer's knowledge,
threatened against or affecting Issuer, challenging Issuer's authority to
enter into this Agreement, the Escrow Agreement or the Tax Regulatory
Agreement or any other action wherein an unfavorable ruling or finding
would adversely affect the enforceability of this Agreement, the Escrow
Agreement or the Tax Regulatory Agreement or any other transaction of
Issuer which is similar hereto, or the exclusion of the Interest from gross
income for federal tax purposes under the Code, or would materially and
adversely affect any of the transactions contemplated by this Agreement.
(k) Issuer will submit or cause to be submitted to the Secretary of
the Treasury a Form 8038 (or other information reporting statement) at the
time and in the form required by the Code.
(l) The financing of the Project has been approved by the "applicable
elected representative" (as defined in Section 147(f) of the Code) of
Issuer after a public hearing held upon reasonable notice.
(m) Issuer will comply fully at all times with the Tax Regulatory
Agreement, and Issuer will not take any action, or omit to take any action,
which, if taken or omitted, respectively, would violate the Tax Regulatory
Agreement.
(n) Issuer will take no action that would cause the Interest to become
includable in gross income for federal income tax purposes under the Code
(including, without limitation, intentional acts under Treas. Reg. ss.
1.148-2(c) or consenting to a deliberate action within the meaning of
Treas. Reg. ss. 1.141-2(d)), and Issuer will take and will cause its
officers, employees and agents to take all affirmative actions legally
within its power necessary to ensure that the Interest does not become
includable in gross income of the recipient for federal income tax purposes
under the Code (including,
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without limitation, the calculation and payment of any rebate required to
preserve such exclusion).
ARTICLE V
REPRESENTATIONS, WARRANTIES
AND COVENANTS OF BORROWER
Borrower represents, warrants and covenants for the benefit of Lender and
Issuer, as follows:
(a) Borrower is a corporation duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts, has
power to enter into this Agreement and by proper corporate action has duly
authorized the execution and delivery of this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement. Borrower is in good standing
and is duly licensed or qualified to transact business in the State and in
all jurisdictions where the character of the property owned or leased or
the nature of the business transacted by it makes such licensing or
qualification necessary.
(b) Borrower has been fully authorized to execute and deliver this
Agreement, the Escrow Agreement and the Tax Regulatory Agreement under the
terms and provisions of the resolution of its board of directors, or by
other appropriate official approval, and further represents, covenants and
warrants that all requirements have been met, and procedures have occurred
in order to ensure the enforceability of this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement and this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement have been duly authorized,
executed and delivered.
(c) The officer of Borrower executing this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement and any related documents has
been duly authorized to execute and deliver this Agreement, the Escrow
Agreement and the Tax Regulatory Agreement and such related documents under
the terms and provisions of a resolution of Borrower's board of directors.
(d) This Agreement, the Escrow Agreement and the Tax Regulatory
Agreement constitute valid and legally binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms,
except to the extent limited by bankruptcy, reorganization or other laws of
general application relating to effecting the enforcement of creditors'
rights.
(e) The execution and delivery of this Agreement, the Escrow Agreement
and the Tax Regulatory Agreement, the consummation of the transactions
contemplated hereby and the fulfillment of the terms and conditions hereof
do not and will not violate any law, rule, regulation or order, conflict
with or result in a breach of any of the terms or conditions of the
articles of organization or bylaws of Borrower or of any corporate
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restriction or of any agreement or instrument to which Borrower is now a
party and do not and will not constitute a default under any of the
foregoing or result in the creation or imposition of any liens, charges or
encumbrances of any nature upon any of the property or assets of Borrower
contrary to the terms of any instrument or agreement.
(f) To the best of Borrower's knowledge, the authorization, execution,
delivery and performance of this Agreement by Borrower do not require
submission to, approval of, or other action by any governmental authority
or agency, which action with respect to this Agreement has not been taken
and which is final and nonappealable.
(g) There is no action, suit, proceeding, claim, inquiry or
investigation, at law or in equity, before or by any court, regulatory
agency, public board or body pending or, to the best of Borrower's
knowledge, threatened against or affecting Borrower, challenging Borrower's
authority to enter into this Agreement, the Escrow Agreement or the Tax
Regulatory Agreement or any other action wherein an unfavorable ruling or
finding would adversely affect the enforceability of this Agreement, the
Escrow Agreement or the Tax Regulatory Agreement or any other transaction
of Borrower which is similar hereto, or the exclusion of the Interest from
gross income for federal tax purposes under the Code, or would materially
and adversely affect any of the transactions contemplated by this
Agreement.
(h) The Project is of the type authorized and permitted to be financed
pursuant to the Act.
(i) Borrower owns or will own the Project and intends to operate the
Project, or cause the Project to be operated, as a "project," within the
meaning of the Act, until the date on which all of the Loan Payments have
been fully paid or the applicable Prepayment Amount has been fully paid.
(j) Borrower will not take any action, or permit any action within its
control to be taken on its behalf, that would cause the Interest to become
includable in gross income of the recipient for federal income tax purposes
under the Code (including, without limitation, intentional acts under
Treas. Reg. ss. 1.148-2(c) or deliberate action within the meaning of
Treas. Reg. ss. 1.141-2(d)), and Borrower will take and will cause its
officers, employees and agents to take all affirmative actions legally
within its power necessary to ensure that the Interest does not become
includable in gross income of the recipient for federal income tax purposes
under the Code (including, without limitation, the calculation and payment
of any rebate required to preserve such exclusion).
(k) Borrower has heretofore furnished to Lender the audited financial
statement of Guarantor for Guarantor's fiscal years ended December 31,
1994, December 31, 1995 and December 31, 1996 and the unaudited financial
statement of Guarantor for the six months ended June 30, 1997, and those
statements fairly present the financial condition of Guarantor on the dates
thereof and the results of its operations and cash flows for the periods
then ended and were prepared in accordance with generally accepted
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accounting principles. Since the date of the most recent financial
statements, there has been no material adverse change in the business,
properties or condition (financial or otherwise) of Guarantor.
(l) Borrower and Guarantor have paid or caused to be paid to the
proper authorities when due all federal, state and local taxes required to
be withheld by them. Borrower and Guarantor have filed all federal, state
and local tax returns which are required to be filed, and Borrower and
Guarantor have paid or caused to be paid to the respective taxing
authorities all taxes as shown on said returns or on any assessment
received by them to the extent such taxes have become due.
(m) All financial and other information provided to Lender by or on
behalf of Borrower or Guarantor in connection with Borrower's request for
the Loan contemplated hereby is true and correct in all material respects
and, as to projections, valuations or pro forma financial statements,
present a good faith opinion as to such projections, valuations and pro
forma condition and results.
(n) Borrower will aid and assist Issuer in connection with preparing
and submitting to the Secretary of the Treasury a Form 8038 (or other
applicable information reporting statement) at the time and in the form
required by the Code.
(o) Borrower will comply fully at all times with the Tax Regulatory
Agreement, and Borrower will not take any action, or omit to take any
action, which, if taken or omitted, respectively, would violate the Tax
Regulatory Agreement.
(p) Expenses for work done by officers or employees of Borrower in
connection with the Project will be included as an Acquisition Cost, if at
all, only to the extent (i) such persons were specifically employed for
such particular purpose, (ii) the expenses do not exceed the actual cost
thereof and (iii) such expenses are treated or capable of being treated
(whether or not so treated) on the books of Borrower as a capital
expenditure in conformity with generally accepted accounting principles
applied on a consistent basis.
(q) Any costs incurred with respect to that part of the Project paid
from the Loan Proceeds shall be treated or capable of being treated on the
books of Borrower as capital expenditures in conformity with generally
accepted accounting principles applied on a consistent basis.
(r) No part of the Loan Proceeds will be used to finance inventory or
rolling stock or will be used for working capital or to finance any other
cost not constituting an Acquisition Cost.
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ARTICLE VI
LETTER OF CREDIT
Borrower hereby agrees to deliver or cause to be delivered to Lender the
Letter of Credit as additional security for the prompt payment and performance
of all of Borrower's obligations under this Agreement. Borrower hereby further
agrees to deliver to Lender not later than 30 days prior to any scheduled
expiration date of the Letter of Credit or any Substitute Letter of Credit (a)
evidence satisfactory to lender that such Letter of Credit or Substitute Letter
of Credit has been renewed on terms acceptable to Lender or (b) a Substitute
Letter of Credit. If at any time (x) the rating of Bank by LACE Financial
Corporation is below "B" or (y) the rating of a Substitute Bank is below the
rating required by Lender at the time the related Substitute Letter of Credit is
accepted by Lender, Borrower shall within 90 days provide to Lender a Substitute
Letter of Credit. A failure by Borrower to fully and timely perform any
obligation under this Article VI or the failure of Bank or any Substitute Bank
to fully and timely honor any draft under the Letter of Credit or any Substitute
Letter of Credit, as the case may be, shall constitute an immediate Event of
Default hereunder.
ARTICLE VII
AFFIRMATIVE COVENANTS OF BORROWER
So long as the Loan shall remain unpaid, Borrower will comply with the
following requirements:
Section 7.01. Reporting Requirements. Borrower will deliver, or cause to be
delivered, to Lender each of the following, which shall be in form and detail
acceptable to Lender:
(a) as soon as available, and in any event within 120 days after the
end of each fiscal year of Guarantor, audited consolidated financial
statements of Guarantor and Borrower with the unqualified opinion of
independent certified public accountants selected by Borrower and
acceptable to Lender, which annual financial statements shall include the
consolidated balance sheet of Guarantor and Borrower as at the end of such
fiscal year and the related consolidated statements of income, retained
earnings and cash flows of Guarantor and Borrower for the fiscal year then
ended, all in reasonable detail and prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the
accounting practices applied in the financial statements referred to in
Article V hereof, together with a certificate of the chief financial
officer of Guarantor stating that such financial statements have been
prepared in accordance with generally accepted accounting principles
applied on a basis consistent with the accounting practices reflected in
the annual financial statements referred to in Article V hereof and whether
or not such officer has knowledge of the occurrence of any Default or Event
of Default hereunder and, if so, stating in reasonable detail the facts
with respect thereto;
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(b) as soon as available and in any event within 90 days after the end
of each fiscal quarter of Guarantor and Borrower, an unaudited/internal
consolidated balance sheet and consolidated statements of income and
retained earnings of Guarantor and Borrower as at the end of and for such
month and for the year to date period then ended, in reasonable detail and
stating in comparative form the figures for the corresponding date and
periods in the previous year, all prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the
accounting practices reflected in the financial statements referred to in
Article V hereof and certified by the chief financial officer of Guarantor,
subject to year-end audit adjustments; and accompanied by a certificate of
that officer stating (i) that such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
basis consistent with the accounting practices reflected in the financial
statements referred to in Article V hereof, (ii) whether or not such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder not theretofore reported and remedied and, if so, stating in
reasonable detail the facts with respect thereto, and (iii) all relevant
facts in reasonable detail to evidence, and the computations as to, whether
or not Guarantor and Borrower are in compliance with the financial
covenants contained in Section 7.08 hereof;
(c) immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or regulatory
agency affecting Borrower or Guarantor of the type described in Article
V(g) hereof or which seek a monetary recovery against Borrower in excess of
$100,000 or Guarantor in excess of $500,000;
(d) as promptly as practicable (but in any event not later than five
Business Days) after an officer of Borrower obtains actual knowledge of the
occurrence of any event that constitutes a Default or an Event of Default
hereunder, notice of such occurrence, together with a detailed statement by
a responsible officer of Borrower of the steps being taken by Borrower to
cure the effect of such Default or Event of Default;
(e) promptly upon their distribution, copies of all financial
statements, reports and proxy statements that Borrower or Guarantor shall
have sent to its stockholders;
(f) promptly after the amending thereof, copies of any and all
amendments to its certificate of incorporation, articles of organization or
bylaws;
(g) promptly upon actual knowledge thereof, notice of the violation by
Borrower of any law, rule or regulation;
(h) promptly upon actual knowledge thereof, notice of the change in
the rating by LACE Financial Corporation of Bank or any Substitute Bank;
(i) promptly upon actual knowledge thereof, notice of any material
adverse change in the financial or operating condition of Borrower;
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(j) at the time when audited financial statements are delivered
pursuant to the requirements of Section 7.01(a) hereof, projections of
Borrower's and Guarantor's business and financial results for the next
succeeding fiscal year, together with a balance sheet, income statement and
supporting facts and assumptions used to formulate such and projections;
and
(k) promptly after the amending thereof, financial covenants required
by Borrower's and/or Guarantor's working capital lender.
Section 7.02. Books and Records; Inspection and Examination. Borrower will
keep accurate books of record and account for itself pertaining to Borrower's
business and financial condition in which true and complete entries will be made
in accordance with generally accepted accounting principles consistently applied
and, upon reasonable request of Lender and three Business Days' prior written
notice, will permit any officer, employee, attorney or accountant for Lender to
audit, review, make extracts from, or copy any and all corporate and financial
books, records and properties of Borrower at all times during ordinary business
hours, and to discuss the affairs of Borrower with any of its directors,
officers, employees or agents. Borrower will permit Lender, or its employees,
accountants, attorneys or agents, to examine and copy any or all of its records
at any time during Borrower's business hours. Unless an Event of Default has
occurred and is continuing, the inspections and examinations referred to in this
Section shall be conducted not more than once per calendar year and shall be at
the expense of Lender.
Section 7.03. Compliance With Laws; Environmental Indemnity. Borrower will
comply with the requirements of applicable laws and regulations, the
noncompliance with which would materially and adversely affect its business or
its financial condition.
Section 7.04. Payment of Taxes and Other Claims. Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including, without limitation, the Project) or upon or against the
creation, perfection or continuance of the security interest created pursuant to
this Agreement, prior to the date on which penalties attach thereto, (b) all
federal, state and local taxes required to be withheld by it, and (c) all lawful
claims for labor, materials and supplies which, if unpaid, might by law become a
lien or charge upon any properties of Borrower; provided, that Borrower shall
not be required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings. Borrower will pay, as the same respectively come due, all taxes and
governmental charges of any kind whatsoever that may at any time be lawfully
assessed or levied against or with respect to the Project, as well as all gas,
water, steam, electricity, heat, power, telephone, utility and other charges
incurred in the operation, maintenance, use, occupancy and upkeep of the
Project.
Section 7.05. Preservation of Corporate Existence. Borrower will preserve
and maintain its corporate existence and all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business; and
shall conduct its business in an orderly, efficient and regular manner.
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Section 7.06. Performance by Lender. If Borrower at any time fails to
perform or observe any of the covenants or agreements contained in this
Agreement, and if such failure shall continue for a period of ten calendar days
after Lender gives Borrower written notice thereof, Lender may, but need not,
perform or observe such covenant on behalf and in the name, place and stead of
Borrower (or, at Lender's option, in Lender's name) and may, but need not, take
any and all other actions which Lender may reasonably deem necessary to cure or
correct such failure (including, without limitation, the payment of taxes, the
satisfaction of security interests, liens or encumbrances, the performance of
obligations owed to account debtors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments); and Borrower shall
thereupon pay to Lender on demand the amount of all moneys reasonably expended
and all costs and expenses (including reasonable attorneys' fees and legal
expenses) reasonably incurred by Lender in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
Lender, together with interest thereon from the date expended or incurred at the
lesser of 12% per annum or the highest rate permitted by law. To facilitate the
performance or observance by Lender of such covenants of Borrower, Borrower
hereby irrevocably appoints, effective upon the occurrence and during the
continuance of an Event of Default, Lender, or the delegate of Lender, acting
alone, as the attorney in fact of Borrower with the right (but not the duty)
from time to time to create, prepare, complete, execute, deliver, endorse or
file in the name and on behalf of Borrower any and all instruments, documents,
assignments, security agreements, financing statements, applications for
insurance and other agreements and writings required to be obtained, executed,
delivered or endorsed by Borrower under this Agreement.
Section 7.07. Management of Guarantor. Borrower hereby agrees, upon written
request of Lender after Leslie B. Lewis is at any time not the chief executive
officer of Guarantor or not otherwise actively involved in the management of
Guarantor (a "Management Change"), to provide to Lender a letter of credit in
form and substance and issued by a bank acceptable to Lender in Lender's sole
discretion in an amount equal to 50% of the outstanding amount of the Loan;
provided, however, that Lender will not request any such letter of credit until
90 days after a Management Change occurs; and, provided, further, the premium
for the privilege of prepayment used to calculate the Prepayment Amount pursuant
to Section 2.07(a) hereof shall be reduced by 100 basis points but in no event
to a percentage less than zero.
Section 7.08. Financial Covenants. (a) Guarantor, on a consolidated basis,
will maintain at all times its ratio of Debt (as defined below) to Tangible Net
Worth (as defined below) at not more than 1.70 to 1.00. "Debt" shall mean (i)
all items of indebtedness or liability which in accordance with generally
accepted accounting principles or federal tax law would be included in
determining total liabilities as shown on the liabilities side of a balance
sheet or otherwise classified as debt, and (ii) guaranties and endorsements
(other than for purposes of collection in the ordinary course of business) by
Guarantor and other contingent obligations of Guarantor in respect of, or to
purchase or otherwise acquire, indebtedness of others (other than for any member
of the consolidated group). "Tangible Net Worth" means the excess of:
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(A) the tangible assets of Guarantor, which, in accordance with
generally accepted accounting principles, are tangible assets, after
deducting adequate reserves in each case where, in accordance with
generally accepted accounting principles, a reserve is proper over
(B) all Debt of Guarantor;
provided, however, that (i) inventory shall be taken into account on the basis
of the cost (determined on a first-in, first-out basis) or current market value,
whichever is lower, (ii) in no event shall there be included as such tangible
assets patents, trademarks, trade names, copyrights, licenses, good will,
advances or loans to, or receivables from, directors, officers, employees or
affiliates, intangible assets, amounts relating to covenants not to compete,
pensions assets, deferred charges or treasury stock or any securities or Debt of
Guarantor or any other securities unless the same are readily marketable in the
United States of America or entitled to be used as a credit against federal
income tax liabilities, (iii) securities included as such tangible assets shall
be taken into account at their current market price or cost, whichever is lower,
and (iv) any write-up in the book value of any assets shall not be taken into
account.
(b) Guarantor, on a consolidated basis, will maintain at its fiscal year
end its Debt Service Coverage Ratio (as defined below) at not less than 1.20 to
1.00. "Debt Service Coverage Ratio" means the ratio of (i) Guarantor's Cash Flow
Available for Debt Service (as defined below) to (ii) Guarantor's Debt Service
(as defined below). "Cash Flow Available for Debt Service" of Guarantor means,
Guarantor's income before taxes and interest, plus depreciation, amortization
and other non-cash charges less the aggregate of (x) capital expenditures not
financed with long-term debt and (y) any taxes paid, all based upon the prior
twelve (12) month period. "Debt Service" of Guarantor means, the aggregate of
(i) interest expense of Guarantor for the prior twelve (12) months, and (ii) the
current portion of the long-term Debt of Guarantor for the prior twelve (12)
month period.
(c) Guarantor, on a consolidated basis, will maintain at all times its
Tangible Net Worth at not less than $12,000,000.
(d) Guarantor will maintain at all times its net working capital (as
determined in accordance with generally accepted accounting principles) at not
less than $3,500,000.
(e) If the financial covenants required by Borrower's and/or Guarantor's
working capital lender are at any time changed, Lender may in its discretion
require Borrower and Guarantor to comply with such changed financial covenants
for the benefit of Lender, and Borrower hereby agrees to amend this Section to
reflect such changed financial covenants.
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ARTICLE VIII
NEGATIVE COVENANTS OF BORROWER
So long as the Loan shall remain unpaid, Borrower agrees that:
Section 8.01. Sale of Assets. Borrower will not, and will not permit
Guarantor to, sell, lease, assign, transfer or otherwise dispose of all or
substantially all of its assets (whether in one transaction or in a series of
transactions); provided, however, that Borrower or Guarantor may enter into such
transaction if Borrower or Guarantor, as the case may be, is the surviving
entity, Lender receives a tax opinion in form and substance satisfactory to
Lender and no Default or Event of Default has occurred or would result from such
transaction. Borrower will not create, incur or suffer to exist any mortgage,
deed of trust, pledge, lien, security interest, assignment or transfer for
security upon or of any of the Equipment (as defined in the Equipment Loan
Agreement) (except for the security interest created pursuant to the Equipment
Loan Agreement) or any of its inventory, accounts receivables or cash. Guarantor
may create, incur or suffer to exist mortgages, deeds of trust, pledges, liens,
security interests and assignments or transfers for security upon all or any
part of its assets.
Section 8.02. Consolidation and Merger. Borrower will not, and will not
permit Guarantor to, consolidate with or merge into any person, or permit any
other person to merge into it, or acquire (in a transaction analogous in purpose
or effect to a consolidation or merger) all or substantially all of the assets
of any other person; provided, however, that Borrower or Guarantor may enter
into such transaction if Borrower or Guarantor, as the case may be, is the
surviving entity, Lender receives a tax opinion in form and substance
satisfactory to Lender and no Default or Event of Default has occurred or would
result from such transaction; and provided, further, that Guarantor may in all
events sell not more than 50% of the outstanding common stock of Borrower.
Section 8.03. Accounting. Borrower will not, and will not permit Guarantor
to, adopt, permit or consent to any material change in accounting principles
other than as required by generally accepted accounting principles. Borrower
will not, and will not permit Guarantor to, adopt, permit or consent to any
change in its fiscal year.
Section 8.04. Other Defaults. Borrower will not permit any breach, default
or event of default to occur under any note, loan agreement, indenture, lease,
mortgage, contract for deed, security agreement or other contractual obligation
binding upon Borrower beyond any applicable grace or cure period or any
judgment, decree, order or determination applicable to Borrower which is not
stayed or being diligently contested in good faith.
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ARTICLE IX
ASSIGNMENT, SUBLEASING AND SELLING
Section 9.01. Assignment by Lender. This Agreement, and the obligations of
Borrower to make payments hereunder, may be assigned and reassigned in whole or
in part to one or more assignees or subassignees by Lender at any time
subsequent to its execution, without the necessity of obtaining the consent of
Issuer or Borrower; provided, however, that no such assignment or reassignment
shall be effective unless and until (a) Issuer and Borrower shall have received
notice of the assignment or reassignment disclosing the name and address of the
assignee or subassignee and (b) in the event that such assignment or
reassignment is made to a bank or trust company as trustee for holders of
certificates representing interests in this Agreement, such bank or trust
company agrees to maintain, or cause to be maintained, a book-entry system by
which a record of the names and addresses of such holders as of any particular
time is kept and agrees, upon request of Issuer or Borrower, to furnish such
information to Issuer or Borrower; provided, further, that there shall not be
more than one person acting as lender or servicer hereunder at any one time; and
provided, finally, that no such assignment shall amend the terms hereof or
require Borrower to pay any fees or expenses in connection with such assignment.
Upon receipt of notice of assignment, Borrower will reflect in a book-entry the
assignee designated in such notice of assignment, and shall agree to make all
payments to the assignee designated in the notice of assignment, notwithstanding
any claim, defense, setoff or counterclaim whatsoever (whether arising from a
breach of this Agreement or otherwise) that Issuer and Borrower may from time to
time have against Lender or the assignee.
Section 9.02. No Sale or Assignment by Borrower. This Agreement and the
interest of Borrower in the Project may not be sold, assumed, assigned or
encumbered by Borrower.
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
Section 10.01. Events of Default. The following constitute "Events of
Default" under this Agreement:
(a) failure by Borrower to pay to Lender, as assignee of Issuer, when
due any Loan Payment or to pay any other payment required to be paid
hereunder and the continuation of such failure for a period of ten days;
(b) failure by Borrower to fully and timely perform any of its
obligations under Article VI of this Agreement or the failure of Bank or
any Substitute Bank to fully and timely honor any draft under the Letter of
Credit or any Substitute Letter of Credit, as the case may be;
(c) failure by Borrower or Issuer to observe and perform any other
covenant, condition or agreement contained herein, in the Escrow Agreement,
in the Tax
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Regulatory Agreement or in any other document or agreement executed in
connection herewith on its part to be observed or performed for a period of
30 days after written notice is given to Borrower or Issuer, as the case
may be, specifying such failure and requesting that it be remedied;
provided, however, that, if the failure stated in such notice cannot be
corrected within such 30-day period, Lender will not unreasonably withhold
its consent to an extension of such time if corrective action is instituted
by Borrower or Issuer, as the case may be, within the applicable period and
diligently pursued until the default is corrected;
(d) initiation by Issuer of a proceeding under any federal or state
bankruptcy or insolvency law seeking relief under such laws concerning the
indebtedness of Issuer;
(e) Borrower, Guarantor, Bank or any Substitute Bank shall be or
become insolvent, or admit in writing its inability to pay its or his debts
as they mature, or make an assignment for the benefit of creditors; or
Borrower, Guarantor, Bank or any Substitute Bank shall apply for or consent
to the appointment of any receiver, trustee or similar officer for it or
for all or any substantial part of its property; or such receiver, trustee
or similar officer shall be appointed without the application or consent of
Borrower, Guarantor, Bank or any Substitute Bank as the case may be; or
Borrower, Guarantor, Bank or any Substitute Bank shall institute (by
petition, application, answer, consent or otherwise) any bankruptcy,
insolvency, reorganization, arrangement, readjustment of debt, dissolution,
liquidation or similar proceeding relating to it under the laws of any
jurisdiction; or any such proceeding shall be instituted (by petition,
application or otherwise) against Borrower, Guarantor, Bank or any
Substitute Bank; or any judgment, writ, warrant of attachment or execution
or similar process shall be issued or levied against a substantial part of
the property of Borrower, Guarantor, Bank or any Substitute Bank;
(f) determination by Lender that any representation or warranty made
by Borrower, Issuer or Guarantor herein, in the Tax Regulatory Agreement,
in the Guaranty or in any other document executed in connection herewith
was untrue in any material respect when made;
(g) the occurrence of a default or an event of default under any
instrument, agreement or other document evidencing or relating to any
indebtedness or other monetary obligation of Borrower or Guarantor beyond
any applicable grace or cure period in an amount greater than $100,000 with
respect to Borrower or in an amount greater than $500,000 with respect to
Guarantor;
(h) Guarantor shall repudiate, purport to revoke or fail to perform
Guarantor's obligations under the Guaranty;
(i) Guarantor shall at any time own less than 50% of the outstanding
common stock of Borrower (Borrower hereby acknowledges that Lender has made
its decision to
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enter into the transactions contemplated hereby based in part upon the
management expertise of Guarantor and its ownership of the stock of
Borrower); or
(j) an Event of Default shall occur and continue under the Equipment
Loan Agreement.
Section 10.02. Remedies on Default. Whenever any Event of Default shall
have occurred and be continuing, Lender, as assignee of Issuer, shall have the
right, at its sole option without any further demand or notice, to take any one
or any combination of the following remedial steps to the extent that the same
are available to secured parties under Article 9 of the UCC in effect in the
State from time to time and which are otherwise accorded to Lender, as assignee
of Issuer, by applicable law:
(a) by notice to Issuer and Borrower, declare the entire unpaid
principal amount of the Loan then outstanding, all interest accrued and
unpaid thereon and all amounts payable under this Agreement to be forthwith
due and payable, whereupon the Loan, all such accrued interest and all such
amounts shall become and be forthwith due and payable, without presentment,
notice of dishonor, protest or further notice of any kind, all of which are
hereby expressly waived by Borrower;
(b) proceed by appropriate court action to enforce specific
performance by Issuer or Borrower of the applicable covenants of this
Agreement or to recover for the breach thereof, including the payment of
all amounts due from Borrower. Borrower shall pay or repay to Lender or
Issuer all costs of such action or court action, including, without
limitation, reasonable attorneys' fees;
(c) with or without notice to Borrower or Issuer submit one or more
drafts under the Letter of Credit, any Substitute Letter of Credit or any
letter of credit provided pursuant to Section 7.07 hereof for any amounts
due hereunder; and
(d) take whatever action at law or in equity may appear necessary or
desirable to enforce its rights under this Agreement. Borrower shall pay or
repay to Lender or Issuer all costs of such action or court action,
including, without limitation, reasonable attorneys' fees.
Notwithstanding any other remedy exercised hereunder, Borrower shall remain
obligated to pay to Lender any unpaid portion of the Prepayment Amount.
Section 10.03. No Remedy Exclusive. No remedy herein conferred upon or
reserved to Lender or Issuer is intended to be exclusive and every such remedy
shall be cumulative and shall be in addition to every other remedy given under
this Agreement or now or hereafter existing at law or in equity. No delay or
omission to exercise any right or power accruing upon any Event of Default shall
impair any such right or power or shall be construed to be a waiver thereof, but
any such right or power may be exercised from time to time and as often as may
be deemed expedient. In order to entitle Lender or Issuer to exercise any remedy
reserved to it in this
23
<PAGE>
Article, it shall not be necessary to give any notice other than such notice as
may be required by this Article. All remedies herein conferred upon or reserved
to Lender or Issuer shall survive the termination of this Agreement.
Section 10.04. Late Charge. Any Loan Payment not paid by Borrower on the
due date thereof shall, to the extent permissible by law, bear a late charge
equal to the lesser of three cents ($.03) per dollar of the delinquent amount or
the lawful maximum, and Borrower shall be obligated to pay the same immediately
upon receipt of Lender's written invoice therefor, but such late charge shall
not apply to any amounts accelerated hereunder or to any other Prepayment
Amounts.
ARTICLE XI
MISCELLANEOUS
Section 11.01. Costs and Expenses of Lender. Borrower shall pay to Lender,
in addition to the Loan Payments payable by Borrower hereunder, such amounts in
each year as shall be required by Lender in payment of any reasonable costs and
expenses incurred by Lender in connection with the enforcement of this Agreement
after the occurrence of an Event of Default, including (without limitation)
payment of all reasonable fees, costs and expenses and all administrative costs
of Lender in connection with this Agreement, expenses (including, without
limitation, attorneys' fees and disbursements), fees of auditors or attorneys,
insurance premiums not otherwise paid hereunder and all other direct and
necessary administrative costs of Lender or charges required to be paid by it in
order to comply with the terms of, or to enforce its rights under, this
Agreement. Such costs and expenses shall be billed to Borrower by Lender from
time to time, together with a statement certifying that the amount so billed has
been paid by Lender for one or more of the items above described, or that such
amount is then payable by Lender for such items. Amounts so billed shall be due
and payable by Borrower within 30 days after receipt of the bill by Borrower.
Section 11.02. Disclaimer of Warranties. LENDER AND ISSUER MAKE NO WARRANTY
OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE VALUE, DESIGN,
CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR FITNESS FOR
USE OF THE PROJECT, OR ANY OTHER WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED,
WITH RESPECT THERETO. In no event shall Lender or Issuer be liable for any loss
or damage in connection with or arising out of this Agreement, the Project or
the existence, furnishing, functioning or Borrower's use of any item or products
or services provided for in this Agreement.
Section 11.03. Notices. All notices, certificates, requests, demands and
other communications provided for hereunder or under the Escrow Agreement or the
Tax Regulatory Agreement shall be in writing and shall be (a) personally
delivered, (b) sent by first class United States mail, (c) sent by overnight
courier of national reputation, or (d) transmitted by telecopy, in each case
addressed to the party to whom notice is being given at its address as set forth
above and, if telecopied, transmitted to that party at its telecopier number set
forth above or, as to each party, at such other address or telecopier number as
may hereafter be designated by such party in
24
<PAGE>
a written notice to the other party complying as to delivery with the terms of
this Section. All such notices, requests, demands and other communications shall
be deemed to have been given on (a) the date received if personally delivered,
(b) three Business Days after deposited in the mail if delivered by mail, (c)
the date sent if sent by overnight courier, or (d) the date of transmission if
delivered by telecopy. If notice to Borrower of any intended disposition of the
Project or any other intended action is required by law in a particular
instance, such notice shall be deemed commercially reasonable if given (in the
manner specified in this Section) at least ten (10) Business Days prior to the
date of intended disposition or other action. A courtesy copy of all notices to
Borrower shall also be given to the following person; provided, however, that
the failure to provide such courtesy copy shall not affect the rights or
obligations of Lender, Issuer or Borrower:
Burton Winnick, Esq.
Gadsby & Hannah LLP
225 Franklin Street
Boston, Massachusetts 02110
Section 11.04. Further Assurance and Corrective Instruments. Issuer and
Borrower hereby agree that they will, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, such further
acts, instruments, conveyances, transfers and assurances, as Lender reasonably
deems necessary or advisable for the implementation, correction, confirmation or
perfection of this Agreement, the Escrow Agreement or the Tax Regulatory
Agreement and any rights of Lender hereunder or thereunder.
Section 11.05. Binding Effect; Time of the Essence. This Agreement shall
inure to the benefit of and shall be binding upon Lender, Issuer, Borrower and
their respective successors and assigns. Time is of the essence.
Section 11.06. Severability. In the event any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof.
Section 11.07. Amendments. To the extent permitted by law, the terms of
this Agreement shall not be waived, altered, modified, supplemented or amended
in any manner whatsoever except by written instrument signed by the parties
hereto, and then such waiver, consent, modification or change shall be effective
only in the specific instance and for the specific purpose given.
Issuer's consent to an amendment of the financial covenants contained in
Section 7.08 hereof shall not be required.
Section 11.08. Execution in Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute one and the same instrument, and any of the parties hereto may
execute this Agreement by signing any such
25
<PAGE>
counterpart, provided that only the original marked "Original: 1 of 6" on the
execution page thereof shall constitute chattel paper under the UCC.
Section 11.09. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State.
Section 11.10. Captions. The captions or headings in this Agreement are for
convenience only and in no way define, limit or describe the scope or intent of
any provisions or sections of this Agreement.
Section 11.11. Entire Agreement. This Agreement, the Tax Regulatory
Agreement, the Escrow Agreement and the exhibits hereto and thereto constitute
the entire agreement among Lender, Issuer, Borrower and Escrow Agent. There are
no understandings, agreements, representations or warranties, express or
implied, not specified herein or in such documents regarding this Agreement or
the Project financed hereby.
Section 11.12. Usury. It is the intention of the parties hereto to comply
with any applicable usury laws; accordingly, it is agreed that, notwithstanding
any provisions to the contrary in this Agreement, in no event shall this
Agreement require the payment or permit the collection of interest or any amount
in the nature of interest or fees in excess of the maximum permitted by
applicable law.
Section 11.13. Waiver of Jury Trial. LENDER, ISSUER AND BORROWER HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS AGREEMENT, ANY OF THE
RELATED DOCUMENTS, ANY DEALINGS AMONG LENDER, ISSUER OR BORROWER RELATING TO THE
SUBJECT MATTER OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY RELATED
TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED AMONG LENDER,
ISSUER AND BORROWER. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING
OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER
COMMON LAW AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE, MEANING THAT IT
MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO
ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
AGREEMENT, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY RELATED
TRANSACTIONS. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A
WRITTEN CONSENT TO A TRIAL BY THE COURT.
[REMAINDER OF PAGE INTENTIONALLY BLANK; EXECUTION PAGE FOLLOWS.]
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
their respective corporate names by their duly authorized officers, all as of
the date first written above.
Lender: GE CAPITAL PUBLIC FINANCE, INC.
By ______________________________________
Title ___________________________________
Issuer: ARKANSAS DEVELOPMENT FINANCE AUTHORITY
By ______________________________________
Title ___________________________________
Borrower: QUAIL PIPING PRODUCTS, INC.
By: /s/ Leslie B. Lewis
-------------------------------------
Title: Chairman
------------------------------------
ORIGINAL: ___ OF 6
[EXECUTION PAGE OF LOAN AGREEMENT (REAL ESTATE)]
GUARANTY AND NEGATIVE PLEDGE AGREEMENT
Dated as of November 1, 1998
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and to induce GE Capital Public Finance, Inc., a
Delaware corporation (herein, with its participants, successors and assigns,
"Lender"), at its option, to provide financing to or for the account of Arkansas
Development Finance Authority ("Authority") and Quail Piping Products, Inc.
("Borrower"), or to engage in any other transactions with Borrower and
Authority, the undersigned hereby: (a) absolutely and unconditionally guarantees
to Lender the full and prompt payment when due, whether at maturity or earlier
by reason of acceleration or otherwise, of any and all present and future debts,
liabilities and obligations owed by Borrower or Authority to Lender evidenced by
or arising out of the Loan Agreement (Equipment) dated as of November 1, 1997
and the Loan Agreement (Real Estate) dated as of November 1, 1997, both among
Lender, Authority and Borrower (the "Loan Agreements"), and any and all
extensions, renewals, modifications, supplements or amendments thereto or
thereof and any related agreements (whether such debt, liability or obligation
now exists or is hereafter created or incurred, and whether it is or may be
direct or indirect, due or to become due, absolute or contingent, primary or
secondary, liquidated or unliquidated, or joint, several or joint and several,
all such debts, liabilities and obligations being hereinafter collectively
referred to as the "Indebtedness"), (b) absolutely and unconditionally
guarantees to Lender the full and timely performance by Borrower of all of its
obligations under the Loan Agreements, and (c) so long as any Indebtedness shall
remain outstanding, agrees and covenants that it will at all times own not less
than 50% of the outstanding common stock of Borrower.
1. The undersigned represents and warrants to Lender that (a) the
undersigned is a corporation duly organized and existing in good standing and
has full power and authority to make and deliver this Guaranty and Negative
Pledge Agreement; (b) the execution, delivery and performance of this Guaranty
and Negative Pledge Agreement by the undersigned have been duly authorized by
all necessary action of its directors and do not and will not violate the
provisions of, or constitute a default under, any presently applicable law or
its articles of incorporation or bylaws or any agreement presently binding on
it; (c) this Guaranty and Negative Pledge Agreement has been duly executed and
delivered by the authorized officers of the undersigned and constitutes its
lawful, binding and legally enforceable obligation except to the extent limited
by bankruptcy, reorganization or other laws of general application relating to
or effecting the enforcement of creditors' rights; and (d) the authorization,
execution, delivery and performance of this Guaranty and Negative Pledge
Agreement do not require notification to, registration with, or consent or
approval by, any federal, state or local regulatory body or administrative
agency.
2. No act or thing need occur to establish the liability of the undersigned
hereunder, and no act or thing, except full payment and discharge of all
Indebtedness, shall in any way exonerate the undersigned hereunder or modify,
reduce, limit or release the liability of the
<PAGE>
undersigned hereunder. This is an absolute, unconditional and continuing
guaranty of payment of the Indebtedness.
3. The undersigned represents and warrants to Lender that the undersigned
has a direct and substantial economic interest in Borrower and expects to derive
substantial benefits therefrom and from any loans, credit transactions,
financial accommodations, discounts, purchases of property and other
transactions and events resulting in the creation of Indebtedness guaranteed
hereby, and that this Guaranty and Negative Pledge Agreement is given for a
corporate purpose. This Guaranty and Negative Pledge Agreement shall be
effective and enforceable by Lender without regard to the receipt, nature or
value of any such benefits.
4. If the undersigned shall be dissolved or shall be or become bankrupt or
insolvent (however defined), then Lender shall have the right to declare
immediately due and payable, and the undersigned shall forthwith pay to Lender,
the full amount of all Indebtedness whether due and payable or unmatured. If the
undersigned voluntarily commences or there is commenced involuntarily against
the undersigned a case under the United States Bankruptcy Code, the full amount
of all Indebtedness, whether due and payable or unmatured, shall be immediately
due and payable without demand or notice thereof.
5. The undersigned shall not exercise or enforce any right of contribution,
reimbursement, recourse or subrogation available to the undersigned as to any
Indebtedness, or against any person liable therefor, or as to any collateral
security therefor, unless and until all Indebtedness shall have been fully paid
and discharged.
6. The undersigned shall pay or reimburse Lender for all reasonable costs
and expenses (including reasonable attorneys' fees and legal expenses) incurred
by Lender in connection with the protection, defense or enforcement of this
Guaranty and Negative Pledge Agreement in any litigation or bankruptcy or
insolvency proceedings.
7. Lender shall not be obligated by reason of its acceptance of this
Guaranty and Negative Pledge Agreement to engage in any transactions with or for
Borrower or Authority except as provided in the Loan Agreements. Whether or not
any existing relationship between the undersigned and Borrower has been changed
or ended, Lender may enter into transactions resulting in the creation or
continuance of Indebtedness and may otherwise agree, consent to, or suffer the
creation or continuance of any Indebtedness, without any consent or approval by
the undersigned and without any prior or subsequent notice to the undersigned.
To the extent permitted by law, the liability of the undersigned shall not be
affected or impaired by any of the following acts or things (which Lender is
expressly authorized to do, omit or suffer from time to time, both before and
after revocation of this Guaranty and Negative Pledge Agreement, without consent
or approval by or notice to the undersigned): (a) any acceptance of collateral
security, guarantors, accommodation parties or sureties for any or all
Indebtedness; (b) one or more extensions or renewals of Indebtedness (whether or
not for longer than the original period) or any modification of the interest
rates, maturities or other contractual terms applicable to any Indebtedness; (c)
any waiver or indulgence granted to Borrower or Authority, any delay or lack of
diligence in the enforcement of Indebtedness, or any failure to institute
proceedings, file a
2
<PAGE>
claim, give any required notices or otherwise protect any Indebtedness; (d) any
full or partial release of, compromise or settlement with, or agreement not to
sue, Borrower, Authority or any guarantor or other person liable in respect of
any Indebtedness; (e) any release, surrender, cancellation or other discharge of
any evidence of Indebtedness or the acceptance of any instrument in renewal or
substitution therefor; (f) any failure to obtain collateral security (including
rights of setoff) for Indebtedness, or to see to the proper or sufficient
creation and perfection thereof, or to establish the priority thereof, or to
preserve, protect, insure, care for, exercise or enforce any collateral
security; or any modification, alteration, substitution, exchange, surrender,
cancellation, termination, release or other change, impairment, limitation, loss
or discharge of any collateral security; (g) any collection, sale, lease or
disposition of, or any other foreclosure or enforcement of or realization on,
any collateral security; (h) any assignment, pledge or other transfer of any
Indebtedness or any evidence thereof; (i) any manner, order or method of
application of any payments or credits upon Indebtedness; (j) any election by
Lender under Section 1111(b) of the United States Bankruptcy Code. The
undersigned waives any and all defenses and discharges available to a surety,
guarantor, or accommodation co-obligor.
8. To the extent permitted by law, the undersigned waives any and all
defenses, claims, setoffs, and discharges of Borrower or Authority, or any other
obligor, pertaining to Indebtedness, except the defense of discharge by payment
in full. Without limiting the generality of the foregoing, the undersigned shall
not assert, plead or enforce against Lender any defense of waiver, release,
discharge in bankruptcy, statute of limitations, res judicata, statute of
frauds, anti-deficiency statute, fraud, incapacity, minority, usury, illegality
or unenforceability which may be available to Borrower or Authority or any other
person liable in respect of any Indebtedness, or any setoff available against
Lender to Borrower or Authority or any other such person, whether or not on
account of a related transaction. The undersigned expressly agrees that the
undersigned shall be and remain liable for any deficiency remaining after
foreclosure of any mortgage or security interest securing Indebtedness, whether
or not the liability of Borrower or Authority or any other obligor for such
deficiency is discharged pursuant to statute or judicial decision. The liability
of the undersigned shall not be affected or impaired by any voluntary or
involuntary liquidation, dissolution, sale or other disposition of all or
substantially all the assets, marshalling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition or readjustment of, or other similar
event or proceeding affecting Borrower or Authority or any of their respective
assets. The undersigned shall not assert, plead or enforce against Lender any
claim, defense or setoff available to the undersigned against Borrower or
Authority.
9. The undersigned waives presentment, demand for payment, notice of
dishonor or nonpayment, and protest of any instrument evidencing Indebtedness.
Lender shall not be required first to resort for payment of the Indebtedness to
Borrower or Authority or other persons, or their properties, or first to
enforce, realize upon or exhaust any collateral security for Indebtedness,
before enforcing this Guaranty and Negative Pledge Agreement.
10. If any payment applied by Lender to Indebtedness is thereafter set
aside, recovered, rescinded or required to be returned for any reason
(including, without limitation, the bankruptcy, insolvency or reorganization of
Borrower or Authority or any other obligor), the
3
<PAGE>
Indebtedness to which such payment was applied shall for the purpose of this
Guaranty and Negative Pledge Agreement be deemed to have continued in existence,
notwithstanding such application, and this Guaranty and Negative Pledge
Agreement shall be enforceable as to such Indebtedness as fully as if such
application had never been made.
11. The liability of the undersigned under this Guaranty and Negative
Pledge Agreement is in addition to and shall be cumulative with all other
liabilities of the undersigned to Lender as guarantor, surety, endorser,
accommodation co-obligor or otherwise of any Indebtedness or obligation of
Borrower or Authority, without any limitation as to amount, unless the
instrument or agreement evidencing or creating such other liability specifically
provides to the contrary.
12. This Guaranty and Negative Pledge Agreement shall be effective upon
delivery to Lender, without further act, condition or acceptance by Lender,
shall be binding upon the undersigned and the successors and assigns of the
undersigned and shall inure to the benefit of Lender and its participants,
successors and assigns. Any invalidity or unenforceability of any provision or
application of this Guaranty and Negative Pledge Agreement shall not affect
other lawful provisions and application hereof, and to this end the provisions
of this Guaranty and Negative Pledge Agreement are declared to be severable.
This Guaranty and Negative Pledge Agreement may not be waived, modified,
amended, terminated, released or otherwise changed except by a writing signed by
the undersigned and Lender. This Guaranty and Negative Pledge Agreement shall be
governed by the laws of the State of Arkansas. The undersigned waives notice of
Lender's acceptance hereof and waives the right to trial by jury in any action
based on or pertaining to this Guaranty and Negative Pledge Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; EXECUTION PAGE
FOLLOWS.]
4
<PAGE>
IN WITNESS WHEREOF, this Guaranty and Negative Pledge Agreement has been
duly executed on behalf of the undersigned by its duly authorized officer as of
the day and year first above written.
ASAHI/AMERICA, INC.
By: /s/ Leslie B. Lewis
--------------------------
Its: President
--------------------------
STATE OF _______________)
)
COUNTY OF ______________)
The foregoing instrument was acknowledged before me this ____ day of
_________, 1998, by ___________________, the _______________________ of
Asahi/America, Inc., a Massachusetts corporation, on behalf of the corporation.
_______________________________________
Notary Public
[EXECUTION PAGE OF GUARANTY AND NEGATIVE PLEDGE AGREEMENT]
[ ] Asahi Engineered Products, Inc.
[ ] Quail Piping Products, Inc.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed form S-8
Registration Statements (Nos. 333-44705, 333-25333, 333-25335 and 333-25337).
/s/ Arthur Andersen LLP
----------------------------------
Boston, Massachusetts
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000906873
<NAME> ASAHI/AMERICA, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.0
<CASH> 916
<SECURITIES> 0
<RECEIVABLES> 4,476
<ALLOWANCES> 263
<INVENTORY> 9,336
<CURRENT-ASSETS> 15,076
<PP&E> 16,016
<DEPRECIATION> 4,262
<TOTAL-ASSETS> 32,049
<CURRENT-LIABILITIES> 8,307
<BONDS> 4,662
0
0
<COMMON> 13,603
<OTHER-SE> 4,997
<TOTAL-LIABILITY-AND-EQUITY> 32,049
<SALES> 37,934
<TOTAL-REVENUES> 37,934
<CGS> 23,828
<TOTAL-COSTS> 23,828
<OTHER-EXPENSES> 10,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201
<INCOME-PRETAX> 3,072
<INCOME-TAX> 1,290
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,782
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.53
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000906873
<NAME> ASAHI/AMERICA, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<EXCHANGE-RATE> 1.00 1.00
<CASH> 3,028 224
<SECURITIES> 0 0
<RECEIVABLES> 5,574 4,691
<ALLOWANCES> 283 245
<INVENTORY> 8,673 8,207
<CURRENT-ASSETS> 17,222 13,555
<PP&E> 13,153 9,906
<DEPRECIATION> 3,285 2,703
<TOTAL-ASSETS> 28,443 22,452
<CURRENT-LIABILITIES> 8,180 9,705
<BONDS> 3,760 3,833
0 0
0 0
<COMMON> 13,638 7,358
<OTHER-SE> 2,566 76
<TOTAL-LIABILITY-AND-EQUITY> 28,443 22,452
<SALES> 37,894 34,998
<TOTAL-REVENUES> 37,894 34,998
<CGS> 23,968 23,018
<TOTAL-COSTS> 23,968 23,018
<OTHER-EXPENSES> 9,747 8,642
<LOSS-PROVISION> 4 39
<INTEREST-EXPENSE> 196 713
<INCOME-PRETAX> 3,979 2,585
<INCOME-TAX> 1,541 1,000
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,438 1,585
<EPS-PRIMARY> 0.82 0.68
<EPS-DILUTED> 0.82 0.68
</TABLE>
