-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TQszS9BQhuUgyWk/fw6WxJRnp3rHz2TSmuB6JGEFbcXxR+kZhhLYbX/MIUZgYuAc PntxycgkJxC+2fZg73y4GA== 0000950117-99-002386.txt : 19991117 0000950117-99-002386.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950117-99-002386 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BHA GROUP INC CENTRAL INDEX KEY: 0000801128 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564] IRS NUMBER: 431416730 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-15045 FILM NUMBER: 99759022 BUSINESS ADDRESS: STREET 1: 8800 E 63RD ST CITY: KANSAS CITY STATE: MO ZIP: 64133 BUSINESS PHONE: 8163568400 MAIL ADDRESS: STREET 1: 8800 E 63RD STREET CITY: KANSAS CITY STATE: MO ZIP: 64133 10-K405 1 BHA GROUP HOLDINGS, INC. 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission File Number September 30, 1999 0-15045
BHA Group Holdings, Inc. -------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 43-1416730 - ---------------------------------------- -------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8800 East 63rd Street, Kansas City, Missouri 64133 - ----------------------------------------------------------- --------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (816) 356-8400 --------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of each class on Which Registered ------------------- --------------------- None - - - - -
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share ---------------------------------------------------------------- (Title of class) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --------- --------- Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ----- As of November 10, 1999, the number of shares outstanding of the Registrant's Common Stock was 6,907,512 shares. The aggregate market value of the voting stock held by non-affiliates* of the Registrant's Common Stock was $31,511,707, computed by reference to the closing price of $9.25 as reported to Registrant at which such stock was quoted by the NASDAQ National Market on November 10, 1999. The Registrant's definitive proxy statement for the annual meeting of stockholders to be held on February 22, 2000 (which will be filed within 120 days after the end of the fiscal year covered by the Form 10-K) is incorporated to Part III, items 10, 11, 12 and 13, by reference. *Excludes value of shares held by present officers, directors and principal stockholders of the Registrant. The determination of "affiliate" status for purposes of this Annual Report on Form 10-K shall not be deemed a determination as to whether a person is an affiliate of the Registrant for any other purpose. -1- The statements contained in this Report on Form 10-K that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. Forward-looking statements are included in the "Factors Affecting Earnings and Stock Price" section, "Management's Discussion and Analysis," and may be included in other sections throughout the report. The statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. The words "should," "believe," "anticipate," "expect," "see," and other expressions that indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the performance of newly established domestic and international operations, demand and price for the Company's products and services, and other factors. Certain of these factors are discussed throughout this report on Form 10-K. PART I ITEM 1 - BUSINESS BHA Group Holdings, Inc. (together with its domestic and international subsidiaries, the "Company" or "BHA") is a global filtration company. Its principal business is the design, manufacture and sale of replacement parts and the performance of rehabilitation conversion services for the types of industrial air pollution control ("APC") equipment known as "baghouses", "cartridge collectors" and "electrostatic precipitators". This equipment is used to eliminate particulate from the air by passing particulate laden gases through fabric filters or filter bags, in the case of baghouses, pleated media filter elements, in the case of cartridge collectors and between electrically charged collector plates, in the case of electrostatic precipitators. The Company's business also includes the maintenance, conversion and rebuilding of this equipment through a network of employees and independent contractors. The Company's products and services are marketed throughout North America, South America, Europe, the Near East, the Pacific Rim and China. While definitive industry statistics are not available, based upon Dun & Bradstreet reports and other financial information available to it, the Company believes it is a leader in worldwide sales of air pollution control replacement parts and services. The Company has also established BHA Technologies, Inc. ("BHA Technologies") as a wholly-owned subsidiary that supplies expanded polytetrafluoroethylene ("ePTFE") membrane products for use in its APC product lines. Through BHA Technologies, the Company plans to supply ePTFE membrane products to a new base of customers for use outside of air pollution control. DOMESTIC BUSINESS AND CORPORATE STRUCTURE The following outlines a chronology relating to the establishment of the Company's various domestic business units. The Company's international business units are described below in the section entitled "International Business." The Company was organized as an unincorporated division of Standard Havens, Inc. ("Standard Havens") in 1975 and was incorporated in Delaware as a wholly-owned subsidiary of Standard Havens in 1986. The Company became publicly-owned when it completed its -2- initial public offering of common stock in November 1986. Net proceeds from this public offering amounted to approximately $3.6 million, which was applied to outstanding bank debt. The Company completed a second public offering of common stock in February 1989. Net proceeds from that public offering (approximately $8.3 million) were used for working capital purposes and to finance several acquisitions. In April 1989, the Company formed PrecipTech, Inc. ("PrecipTech"), a Delaware corporation, as a wholly-owned subsidiary. PrecipTech, which had previously been a division of BHA, was formed for the purpose of conducting and expanding the Company's business as it relates to replacement parts, accessories and services for electrostatic precipitators. During 1989, BHA and PrecipTech completed several acquisitions in efforts to expand their product lines and services. In June 1989, BHA acquired the business of developing and manufacturing acoustic horns for use in both baghouses and electrostatic precipitators from Saracco Acoustic Sciences Corporation. Also in 1989, PrecipTech completed three acquisitions of privately held companies or their operating assets. Such acquisitions included ESP Specialties, Inc., a company that manufactured and sold replacement parts for electrostatic precipitators; Kinetic Controls, Inc., a company that manufactured and sold automatic voltage controllers for electrostatic precipitators; and Midwest Power Corporation, a company that manufactured and sold replacement parts and accessories and provided services for electrostatic precipitators. During 1994, the Company established BHA Technologies as a Delaware Corporation. This wholly-owned subsidiary was formed for the purpose of developing ePTFE membranes. BHA Technologies successfully developed its own ePTFE membrane, which it manufactures and markets for various applications both within and outside the Company's traditional air pollution control equipment markets. In the air pollution control market, ePTFE membrane is laminated using a thermal process to a fabric substrate, which is then converted into a replacement filter and marketed under the trade name BHA-TEX(R). The benefits of this product line to the customer include improved collection efficiency, increased throughput and lower operating costs. The ePTFE membranes are widely used outside of air pollution control applications. These applications include, but are not limited to, wet filtration, industrial, electrical insulation, medical and apparel. Some of the products and processes in these applications are currently under patent protection. In addition to supplying the Company's air pollution control businesses with ePTFE membranes for use on filter elements, BHA Technologies will evaluate the market niches and product opportunities available to pursue and develop custom products and services to meet the needs of this new base of customers. In November 1996, the Board of Directors approved certain changes to the Company's corporate structure. The Board determined that servicing the domestic APC customers of its corporate business through one company, instead of through various subsidiaries, would yield the greatest sales, marketing and operational efficiencies. To achieve this objective, three wholly-owned subsidiaries of the Company that were involved in various air pollution control businesses were merged into PrecipTech to form one company. On February 18, 1997, the shareholders of the Company approved an amendment to the Certificate of Incorporation of the Company to change PrecipTech's name to BHA Group, Inc. and the Company's name to BHA Group Holdings, Inc. -3- The company has been doing business internationally since 1982 and has expanded its presence throughout the world as seen in the chart below:
Date Company Name (1) Location - ---- ---------------- -------- September 1982 BHA Group GmbH Ahlen, Germany August 1994 BHA Group AG Klus/Balsthal, Switzerland March 1997 BHA Environmental Technology Co. Ltd. Shanghai, China April 1997 BHA Group International Pvt. Ltd. (2) Pune, India August 1997 BHA U.K. Limited Birmingham, United Kingdom November 1997 BHA Purfilter S.L. Barcelona, Spain March 1998 BHA Technologies AG Klus/Balsthal, Switzerland May 1998 BHA Group C.A. Valencia, Venezuela August 1998 BHA Group International Holdings B.V. Amsterdam, Netherlands November 1998 BHA do Brazil Ltda. Sao Paulo, Brazil December 1998 BHA Group Philippines, Inc. (2) Manila, Philippines June 1999 BHA Technologies K.K. Tokyo, Japan
1) Each company is a wholly-owned subsidiary of BHA Group Holdings, Inc. or one of its subsidiaries. 2) The Company's presence in the Philippines originated in 1997 and in India in 1994 as Representative and Liaison offices, respectively. INTERNATIONAL BUSINESSES The Company sells products and services in several geographical areas. Operations of the domestic business are based in the United States (U.S.). The domestic business provides products and services to the U.S. markets and exports to Canada, Latin America, the Near East, the Pacific Rim and China. The European business operations manufacture and sell products and services in Europe, the Middle East, and North Africa. The financial data for the Company's domestic and foreign businesses is disclosed in note 7 to the consolidated financial statements. EUROPE BHA GROUP GMBH BHA Group GmbH ("GmbH"), formerly Filtra GmbH, is a German corporation that operates from Ahlen, Germany as an air pollution control replacement parts marketer, selling products throughout Europe, the Middle East, and Northern Africa. Prior to September 1999, GmbH manufactured APC parts, however, such operations have been consolidated into the BHA Purfilter S.L. facility in Barcelona, Spain. BHA GROUP AG BHA Group AG, formerly SF Air Filtration AG, is a Swiss corporation that designs and produces high efficiency replacement cartridge filter elements. This wholly-owned subsidiary manufactures the pleated media filter elements in Klus/Balsthal, Switzerland and sells these products throughout Europe. BHA UK LIMITED BHA UK Limited sells industrial air pollution control parts and services to customers throughout the United Kingdom and supports product sales from the manufacturers in Spain and Switzerland helping the Company to expand its presence in Europe. -4- BHA PURFILTER S.L. BHA Purfilter S.L. ("Purfilter") is a Spanish corporation that manufactures and sells replacement filters for industrial air pollution equipment. Purfilter manufactures air pollution control replacement parts in Barcelona, Spain for the European market and provides a sales presence in Southern Europe. BHA TECHNOLOGIES AG BHA Technologies AG, a Swiss corporation, is a wholly-owned subsidiary of BHA Technologies that markets ePTFE membrane products for a wide variety of applications both within and outside of the air pollution control industry. BHA Technologies AG sells ePTFE membrane products throughout Europe and Asia. BHA GROUP INTERNATIONAL HOLDINGS B.V. BHA Group International Holdings B.V. is a holding corporation for the Company's international businesses. It is based in the Netherlands, which maintains an extensive tax treaty network throughout the world. LATIN AMERICA BHA GROUP C.A. BHA Group C.A. ("BHA Venezuela"), a wholly owned subsidiary of Purfilter, is a Venezuelan corporation that manufactures replacement filters for industrial air pollution equipment. BHA Venezuela currently manufactures the air pollution control equipment in Valencia, Venezuela and sells these products to surrounding countries of Latin America. BHA DO BRAZIL LTDA. BHA do Brazil Ltda. ("BHA Brazil") is a Brazilian corporation that warehouses and markets industrial air pollution control parts and services. BHA Brazil stores the air pollution control parts in Sao Paulo, Brazil and sells them to customers in Brazil and surrounding countries. ASIA BHA GROUP PHILIPPINES, INC. BHA Group Philippines, Inc. ("BHA Philippines") is located in Manila, Philippines and operates as BHA's Asia-Pacific regional sales office to support the export sales from the United States to customers in the Pacific Rim. BHA ENVIRONMENTAL TECHNOLOGY COMPANY, LTD. BHA Environmental Technology Company, Ltd. ("BHA China") is a corporation established in the People's Republic of China. BHA China assembles and sells APC products and provides after-sale services and relevant technical support to customers throughout China and surrounding regions. BHA GROUP INTERNATIONAL PRIVATE LIMITED BHA Group International Private Limited ("BHA India") is an Indian corporation that provides sales and service assistance to customers in India including support for exported product sales from the Company's manufacturing units in the United States. BHA India also develops software for use in the Company's electronic product lines that are sold throughout the world. -5- BHA TECHNOLOGIES K.K. BHA Technologies K.K. ("BHA Technologies Japan"), a Japanese corporation, is a wholly-owned subsidiary of BHA Technologies, Inc. that markets ePTFE membrane products for a wide variety of applications both within and outside the air pollution control industry. BHA Technologies Japan also provides support for BHA's non-ePTFE APC business in Japan. FACTORS AFFECTING EARNINGS AND STOCK PRICE COMPETITION - Based upon Dun & Bradstreet reports and other publicly available financial information, the Company believes that it is a global leader in the APC equipment aftermarket. A number of regional offices have been established in Asia and Latin America. As a result of this movement into the international market, the Company is facing increased competition from competitors in those specific markets, as well as existing competitors from the U.S. and Europe. Several of the Company's competitors are, or are part of, large integrated companies, which have much greater resources than the Company. The competition also includes several dozen small to mid-size filter bag manufacturers that compete in local and regional geographic markets. Generally, original equipment manufacturers in the U.S. have not effectively competed in the aftermarket for baghouses, but have been a significant factor in the aftermarket for electrostatic precipitators. The domestic utility market for electrostatic precipitators has been competitive, as this industry has been restructuring in response to deregulation. Over the last several years, competition has had a negative impact on the profitability of orders executed within this industry group. This overall slowdown has increased competition for industrial replacement parts and services. The Company's domestic electrostatic precipitator replacement parts and services ("ESP") business has become increasingly volatile in terms of volume and profitability. Revenues of the ESP business declined from $35 million in fiscal 1994 to $21 million in fiscal 1997 before rebounding to $26 million in fiscal 1998 and $37 million in fiscal 1999. Recent business has been bolstered by several large rebuilds. Competition remains intense in the ESP business based both upon price and service. During the fiscal year ended September 30, 1999 ("fiscal 1999"), the risks of the ESP business were highlighted in the Company's second quarter when BHA announced a $2.4 million charge for cost overruns on a large fixed-price rebuild project for a domestic electric utility contract. In contrast, during the fourth quarter of the fiscal year, BHA successfully executed several profitable ESP projects including two which were emergency rebuilds following industrial explosions. The Company expects the ESP business to continue to be volatile and believes that a downturn could have a material adverse effect on its business. Outside of the U.S., it is important to note that electrostatic precipitators are currently more prevalent than baghouses for use in air pollution control systems. The Company continues to position itself for additional growth in the international marketplace. EXPORT SALES - The Company's domestic APC business generates significant revenues through the sale of products and services in international markets, primarily Asia, the Pacific Rim and Latin America. During 1997, shortly after BHA established a sales and technical support infrastructure in Asia, the region was hit with an economic crisis. Although this market has been slow to recover, the Company has lowered its cost structure such that management believes current sales volume of $5 million to $6 million represents a break-even point for the Asia region. The markets of Latin America provided the Company with solid growth through most of the 1990's, however, in fiscal 1999, the Asian economic crisis spread to Latin America, resulting in a sales decline of approximately $3 million. Most of the decline was in the ESP -6- business, and thus, the Company re-deployed its resources to support the growth of its ESP sales in the U.S. Latin America and Asia are key markets for the Company and the ability of BHA to meet its ongoing financial targets will depend, in part, on the economic recovery in these regions. Any prolonged delay in the recovery of these markets for APC products and services could result in a change in the Company's strategy and its long-term growth targets. EUROPE - The profitability of BHA's European operations have declined in each of the past two years and this business segment incurred significant losses in fiscal 1999. With the consolidation of the Company's European fabric filter manufacturing into one facility during the past year, the Company has significantly reduced its manufacturing overhead costs. However, in order to achieve a reasonable return on its European investment, the Company will need to significantly increase its revenues by increasing its market share in this region. BHA TECHNOLOGIES - Through BHA Technologies, the Company has established a business to supply PTFE membrane products for use in applications outside of air pollution control. BHA Technologies remains in a startup phase in which its investment in research and development are not currently matched by an ongoing revenue stream. During fiscal 1999, BHA Technologies invested in marketing, product development, technology, and the sales infrastructure necessary to meet the anticipated demands of these new potential markets. As a result of these efforts, BHA Technologies has developed several lines of products that are being introduced to the marketplace. The original business plan for expanding BHA Technologies business to include products for non-APC applications (such as apparel, allergy and clean room products) was to develop and manufacture expanded PTFE membrane films which, depending on the customer application, would be laminated to a fabric. A significant investment in equipment and technology was made relating to the adhesive lamination process. BHA Technologies incurred $1.4 million of expense in fiscal 1999 in its efforts to commercialize the lamination equipment with the goal of being able to cost-effectively produce laminate product. The current target customer base for laminated product and the challenges associated with the lamination process have led management to conclude that using third party laminators will be a more cost-effective method for approaching the market for these products. As a result of this conclusion, the Company recognized a $1.7 million restructuring charge in the fourth quarter of fiscal 1999 to write such equipment down to its estimated net realizable value. BHA Technologies will continue its efforts relating to the development and sale of high quality expanded PTFE membrane films for sale to customers in applications outside of air pollution control. For the fiscal year ending September 30, 2000 ("fiscal 2000"), BHA Technologies is targeting a significantly lower loss, as it anticipates that revenue from non-APC products will partially offset its ongoing investments in marketing and product development. Additionally, BHA Technologies has reduced its cost structure as a result of the discontinuation of in-house adhesive lamination efforts. Factors affecting BHA Technologies' ability to achieve its fiscal 2000 sales and earnings targets include equipment delivery and start-up, product development issues, customer order timelines, and production schedules. Increased competition could also impact the fiscal 2000 plan. Although the Company believes that it has the resources and programs in place to meet its fiscal 2000 targets, failure to do so could have a material adverse impact on the fiscal 2000 operating results of the Company, as well as on the carrying value of the Company's investment in the property, plant, and equipment of BHA Technologies. -7- PRODUCTS AND SERVICES The Company believes it has the broadest product line in the air pollution control equipment aftermarket. This, combined with its proprietary telemarketing system, enables it to respond promptly to customer requests, thus providing it with a competitive advantage. The Company manufactures and sells a wide variety of filter bags, replacement parts and accessories for the industrial air pollution control equipment aftermarket. Filter bags are manufactured by the Company from fabric purchased in bulk from fabric manufacturers. The Company manufactures industry standard bags, as well as bags for customer specific applications. Most filter bags are produced from fiberglass, polyester, aramid, acrylic, and polypropylene fabrics. A market shift towards higher efficiency filtration has led to increased usage of filters that have ePTFE membrane applied to the fabric and other more specialized materials. The Company's wholly-owned subsidiary, BHA Technologies, manufactures the expanded PTFE membrane (BHA-TEX(R)) used on its filter bags and elements. The Company is one of the few filter bag suppliers that manufactures its own PTFE membrane (see "Business"), which it believes provides it a competitive advantage as it is able to control availability, raw material costs, quality and product development. Baghouse replacement parts include support cages for the filter bags, clamps, spring tensioning systems, continuous particulate monitoring systems and gaskets. Electrostatic precipitator replacement parts include collecting plates, wires, discharge electrodes, transformer/rectifiers, rappers and electronic controls. In addition to standard replacement parts, the Company continues to aggressively introduce new products and accessories that enhance the performance of a dust collection system. These new products include continued enhancements to the Company's electrical products for both baghouses and precipitators and the introduction of pleated media filter elements and evaporative gas cooling product lines. Internal product development continues to be supplemented with strategic acquisitions such as the Drayton Corporation's sound-off acoustic cleaner product line acquired in January 1999. By combining the Drayton horn line with the Company's other acoustic products, BHA now has the most comprehensive line of acoustic horns in the industry. Product profitability varies considerably over different product groups, with standard products typically providing a lower profit margin than replacement parts and accessories. The Company's business also includes the maintenance, conversion and rebuilding of industrial air pollution control equipment through a network of independent contractors and its own service crews. A comprehensive safety program enables both the Company and customer to control costs from a risk management perspective. Conversion and rebuilding services involve retrofitting a partial or entire baghouse or electrostatic precipitator to restore it to original operating parameters or improve overall performance. BHA is capable of supplying a variety of other services specifically fitted to its customers' requirements, including preventive maintenance, system/equipment analysis, inspections, supervision of customer personnel and training. Information gathered during preventive maintenance, analysis and inspections is stored in the Company's database for future reference, and thus is a valuable source of important customer information. In addition, knowledge gained in solving one customer's problems is stored in the Company's database and made available on-line -8- to the Company's salespeople to enable them to respond promptly to similar problems encountered by other customers. BHA believes it is one of the world leaders in providing these services. CUSTOMER BASE The Company's APC customer base is diverse both industrially and geographically, and includes customers in virtually all sectors of the industrial economy. International markets include Canada, Europe, Latin America, the Near East, the Pacific Rim and China. The Company's products and services are used in major industrial environments such as cement kilns, asphalt plants, steel and iron foundries, aluminum and copper smelters, rock and gypsum dryers, chemical plants, grain and food processing plants, refuse to energy plants, waste and hazardous waste incinerators and electric utilities, as well as many other areas. In recent years, there has been an emergence of multinational companies expanding their worldwide presence in BHA's traditional target industries. Management believes that this trend could have a positive impact on its international sales. The vast majority of the Company's baghouse sales represent small transactions with numerous customers. Precipitator replacement parts sales frequently accompany conversion or rebuild services. No customer accounted for more than 10% of the Company's annual sales during any of its last three fiscal years. The Company does not believe that it is dependent upon any single customer or group of customers and has no unusual geographical or industry concentrations of business or credit risk. SALES AND MARKETING One of the Company's principal competitive APC advantages is its proprietary telesales system, the core of which is a computer database containing detailed information on over 120,000 pieces of pollution control equipment (baghouses and electrostatic precipitators) at over 55,000 accounts. Because of the large number of different original equipment manufacturers and varying maintenance procedures, many pieces of customer equipment have unique features. Included in the Company's database is information on the location of the equipment; a phone contact for the individuals responsible for maintaining the equipment; the type of equipment (by manufacturer, design and unique attributes); when it was installed; what fabric, size and design filter bags are used; when the bags were last serviced; additional accessories that were installed; application and temperature requirements; as well as other detailed pieces of useful information about the equipment and the customer. This information has been gathered since the Company was established in 1975, and is continually updated following customer calls, site inspections and maintenance jobs. The ongoing population of the customer database is an important part of the Company's sales strategy. In recent years, a substantial portion of the growth in the customer database relates to the international marketplace and segments of the U.S. market where the Company's newer fine filtration products have application. The Company keeps information in a central computer database that is accessed on-line by its telesales representatives. The computer tracks customer calls and pending orders, which helps make efficient use of the representative's time. Each day, a list of the most important customer calls is provided to the representative. This list includes contracts and orders in negotiation, as -9- well as reminders for calls to customers that have not been serviced for some time. Once an order is taken, the information is routed to the operations area that uses the computer to generate invoices and contracts. Invoice and technical data about the filter bags, cages, precipitator replacement parts and accessories is sent via computer connection to the Company's manufacturing facilities. There the bags are sewn, the support cages and precipitator replacement parts are manufactured, and the accessories are consolidated for shipment. The order is packaged and sent to the customer according to a priority schedule. Each telesales representative is furnished with data to evaluate their performance and enable them to focus on high opportunity sales calls. Historical sales data is made available to each telesales representative showing (i) performance by the month and year toward targeted goals (broken down by product category) sales volume and profit margin, (ii) the sales history for each customer, as well as the sales potential for such customer, and (iii) a summary of each contact with each customer and its results, including notes of any useful information for further contacts. The Company believes that the system provides effective feedback to telesales personnel to meet their sales goals. In addition to its use on a customer-by-customer basis, the Company's telesales system and database is used to develop industry statistics and analyze market trends. Information is also extracted for marketing and advertising campaigns and new product evaluations. GOVERNMENT REGULATION AND INITIATIVES The Company is not subject to direct environmental protection regulation with respect to the manufacture or sale of its products other than regulations applicable to manufacturers generally. The Company's customers are required to meet national primary and secondary ambient air quality standards for specific pollutants, including particulate matter, which have been promulgated under the Clean Air Act, as amended (the "Act"). Title V, the cornerstone of the Act, establishes a national operating permit program. Title V requires appropriate and sufficient record keeping, monitoring and reporting requirements to assure compliance with the standards established by the permitting authorities. The states have primary responsibility for implementing these standards, and in some cases, have adopted standards which are more stringent than those adopted by the Environmental Protection Agency ("EPA") under the Act. Revisions to the Act have expanded the type of emissions monitored and provided the regulatory agencies more authority to enforce permits and issue fines. As provisions in the Act are implemented, the regulations and enforcement practices will force industry to take a more proactive approach toward the operation and maintenance practices of their facilities, which may have a positive impact on the Company. In November 1996, the EPA announced its intentions to promulgate new National Ambient Air Quality Standards (NAAQS) for the control of particulate matter ("PM"), which includes lead, ground-level ozone, sulfur dioxide, nitrogen dioxide, carbon monoxide and other fine particulate matter. Currently, the States do not monitor for small particulate (less than 2.5 microns), therefore very little data has been collected to determine which areas meet or do not meet the revised PM-fine standards. On December 1, 1996, the EPA proposed new and more stringent monitoring requirements for PM-2.5 in conjunction with the proposed NAAQS for fine particles. If the proposed regulations are put into effect, different versions of the PM-2.5 monitoring networks will be required in large metropolitan areas, small cities and rural areas, and each state will have to prepare a State Implementation Plan that documents its -10- approach to meeting the new NAAQS. The network of required monitors will be phased in over a three to four year period beginning in 1998. When considering the proposed regulations, the industries most likely to be impacted by the changing air quality standards are the utility, automotive, chemical, petroleum and manufacturing industries. The Company believes that the growing awareness of the importance for better air quality and the adoption of the proposed regulations are positive long-term indicators of the Company's growth potential. Further, the Company is not aware of any likely statutory changes that may have a negative impact on its business. Additionally, the Company manufactures and sells its products in Europe, Latin America, Canada, the Near East, the Pacific Rim and China. The Company's international customers, as do the domestic customers, operate in compliance with certain standards established and promulgated by the permitting authorities. BACKLOG On September 30, 1999, the backlog of orders for replacement parts and industrial services was $47.2 million compared to $51.5 million at September 30, 1998 and $40.8 million at September 30, 1997. The lower backlog at September 1999 is the result of large ESP projects that were in the September 1998 figures. The September 1999 backlog has increased as compared to the prior year for the Company's European business and its domestic fabric filter products. The Company believes that more than 75% of its backlog is shippable by September 30, 2000. EMPLOYEES As of September 30, 1999, the Company employed approximately 1,050 persons, none of whom are represented by labor unions. The Company restricts access to its database and customarily requires its employees having access to proprietary systems and information to execute confidentiality agreements and covenants not to compete. The Company believes that its relations with its employees are good. PATENTS, TRADEMARKS, COPYRIGHTS, AND PROPRIETARY INFORMATION The Company owns patents, trademarks, and proprietary information and has pending applications for patent, trademarks, and copyrights for parts, accessories, and training materials for industrial air pollution control equipment and non-air pollution control markets. The Company considers such patents, trademarks, and proprietary information and applications for patents, trademarks, and copyrights to be important. The business of the Company, however, is not dependent on such patents, trademarks, and proprietary information. Patents owned by the Company are enforceable from 2000 through 2016. -11- ITEM 2 - PROPERTIES CORPORATE HEADQUARTERS The Company owns the facility in Kansas City, Missouri, which serves as its Corporate Headquarters (approximately 66,000 square feet). The table below provides certain information with respects to the domestic and foreign properties owned and leased by the company.
Location Use Owned/Leased Square Feet - -------- --- ------------ ----------- Kansas City, Missouri Corporate Headquarters Owned 66,000 Lee's Summit, Missouri (7) Production/Warehouse Leased 37,500 Slater, Missouri (1) Production Owned 170,000 Slater, Missouri (7) Production Owned 28,000 Slater, Missouri (1) Warehouse Owned 10,000 Slater, Missouri (2) Leased to Supplier Owned 54,000 Salisbury, Missouri (1) Production Owned 20,000 Salisbury, Missouri (1) Production Owned 65,000 Folkston, Georgia (3) Production Owned 105,000 Newport News, Virginia (4) Production Leased 21,000 Baltimore, Maryland (5) Warehouse Leased 3,500 Covington, Kentucky (5) Warehouse Leased 5,000 St. Louis, Missouri (5) Warehouse Leased 4,300 Germany (6) Office/Warehouse Owned 30,000 Switzerland (1) Office/Production Leased 20,000 Philippines (6) Office Space Leased 1,000 China (6) Office/Production Leased 17,000 India (6) Office Space Leased 3,000 Brazil (6) Office/Warehouse Leased 5,100 Spain (1) Office/Production Leased 26,300 Venezuela (1) Office/Production Leased 12,000 Japan (6) Office Space Leased 1,000
1) Operations include the manufacture of traditional and pleated filter elements, spot welding of metal cages, and warehouse and assembly operations. 2) Leased to a raw material supplier of the Company. 3) Operations include the manufacture of parts and accessories for electrostatic precipitators. 4) Operations include the manufacture and assembly of computer based voltage control systems for electrostatic precipitators. 5) Warehouse and office space for the Company's field service crews. 6) Warehouse and office space for sales and service support in certain international markets. 7) Operations include the manufacture of ePTFE membranes. The facility is subject to a capital lease related to an industrial revenue bond obligation. The facilities and office space owned and leased by the Company are considered adequate for its present needs and, with the possible exception of the corporate headquarters, are suitable for any foreseeable expansion. -12- ITEM 3 - LEGAL PROCEEDINGS The Company is involved in no material legal proceedings other than ordinary litigation incidental to the Company's business. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of fiscal year ended September 30, 1999 to a vote of security holders through the solicitation of proxies or otherwise. -13- PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock is traded in the over-the-counter market and quoted under the symbol "BHAG" on the NASDAQ National Market ("NASDAQ"). The information set forth in response to Item 201 of Regulation S-K is included in this Form 10-K in Part II Item 8, Financial Statement, and Supplementary Data as Note 9, Quarterly Financial Data (Unaudited) ("Note 9"), and is incorporated by reference in partial response to this Item 5. The prices set forth in Note 9 do not include commissions and do not necessarily represent actual transactions. The closing price of the Company's common stock on the NASDAQ on September 30, 1999 was $9.67. HOLDERS As of November 10, 1999, there were 8,745,980 shares issued and 1,838,468 shares in treasury. At November 10, 1999, the Company had 6,907,512 shares outstanding that were owned by approximately 1,500 beneficial owners. DIVIDENDS During the years ended September 30, 1997, 1998 and 1999, the Company declared and paid quarterly dividends each year aggregating $.12 per share to shareholders (excluding the consideration of stock dividends). The Company's Board of Directors ("Board of Directors") has since declared a dividend of $.03 per share, payable on December 1, 1999, to shareholders of record on November 22, 1999. The Company does not have a formal policy for paying cash dividends on its stock. Future determinations concerning dividends will be made, at the discretion of the Board of Directors, based upon the Company's earnings, its capital requirements, its financial condition, restrictions placed against payment of dividends under any financing agreements and such other factors as the Board of Directors, at its discretion, may from time to time deem relevant. During 1998, the Company's Board of Directors declared a 10% stock dividend, payable June 11, 1998 to shareholders of record on May 26, 1998. Under the dividend, shareholders were issued .10 share of common stock for each share of common stock held as of the record date. A 10% stock dividend was also declared and paid in fiscal 1997. Future determinations concerning stock dividends will be made at the discretion of the Board of Directors. RECENT SALES OF UNREGISTERED SECURITIES The company has not sold any equity securities during the report period that were not registered under the Securities Exchange Act of 1933, as amended. TREASURY STOCK The Company has periodically repurchased shares of BHA Common Stock since an initial stock repurchase plan was authorized by the Board of Directors in 1994. In the aggregate, the Company has repurchased 1,596,960 shares out of a total of 2,000,000 shares authorized by the Board of Directors. During fiscal 1999, 319,500 shares were repurchased at an average price of $10.88. -14- ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth in the table below have been derived from the consolidated financial statements of the Company and related notes thereto. The selected income statement data for the years ended September 30, 1997, 1998 and 1999, and the selected balance sheet data as of September 30, 1998 and 1999, are derived from the consolidated financial statements of the Company and the related notes thereto, which have been audited by KPMG LLP, independent auditors and which are included in Item 8 in this Form 10-K. This data should be read in conjunction with and is qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 in this Form 10-K and the Company's audited consolidated financial statements, including the related notes and the independent auditors report thereon and the other financial information included in Item 8 in this Form 10-K.
Years Ended September 30, 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (In Thousands, Except per Share Data) Selected Income Statement Data Net Sales $ 114,723 $ 121,308 $ 130,599 $142,432 $155,725 Gross Margin 31,206 34,817 40,786 44,033 41,940 Operating Expense* 21,235 24,048 28,196 31,853 38,297 Interest Expense, Net 367 732 1,009 1,423 1,984 Earnings Before Income Taxes* 9,604 10,037 11,581 10,757 1,659 Net Earnings* $ 5,954 $ 6,707 $ 8,101 $ 7,332 $ 1,084 Basic Earnings per Share* $ .79 $ .92 $ 1.12 $ 1.02 $ .15 Weighted Average Shares Outstanding--Basic 7,547 7,275 7,226 7,171 7,028 Diluted Earnings per Share* $ .77 $ .90 $ 1.06 $ .97 $ .15 Weighted Average Shares Outstanding--Diluted 7,711 7,426 7,676 7,552 7,134 Selected Balance Sheet Data Working Capital $ 24,887 $ 28,451 $ 32,132 $ 42,223 $ 43,285 Total Assets 71,789 76,035 87,605 107,574 $108,148 Short-Term Debt Including Current Portion of Long-Term Debt and Capital Lease Obligations 757 595 62 3,988 2,922 Long-Term Debt (Less Current Portion) 9,899 8,244 12,415 23,029 20,345 Capital Lease Obligations - - - - 7,600 Shareholders' Equity 46,440 51,696 56,918 61,953 58,892 Cash Dividends Declared per Common Share $ .09 $ .10 $ .11 $ .12 $ .12
*Operating expenses for the year ended September 30, 1999 include $2,167,000 of restructuring charges. -15- ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For purposes of this "Management's Discussion and Analysis" as well as the segment reporting information included in Note 7 to the Audited Financial Statements, Domestic Air Pollution Control ("Domestic APC") represents all business for which the products or services are sold or managed from the United States. Generally, this includes revenues to customers in the U.S. and exports to customers in Canada, Latin America, and Asia. Europe APC represents all business for which the products or services are sold or managed primarily from Europe. Such revenues are typically generated in Europe and Northern Africa. BHA Technologies, a subsidiary engaged in the production and sale of ePTFE membrane for both APC and non-APC applications, represents BHA's third business segment. FISCAL 1999 COMPARED TO FISCAL 1998 Consolidated net sales for BHA during the year ended September 30, 1999 ("fiscal 1999") were $155.7 million compared to $142.4 million during the year ended September 30, 1998 ("fiscal 1998"), an increase of 9%. Domestic APC contributed the majority of the increase due to continued growth in sales of fine filtration products and an unusually strong year for sales of electrostatic precipitator ("ESP") replacement parts and services that resulted from a number of contracts for large rebuild projects. Primarily as a result of the growth in fine filtration, sales of fabric filter products and services in baghouse applications within the U.S. and Canada increased 7% to $79.0 million. Sales of electrostatic precipitator parts and services in the U.S. and Canada increased 42% to $37.6 million. These increases more than offset declines in export sales by the Domestic APC business segment. Economic difficulties in BHA's key Asian and Latin American markets contributed to a 19% decline in export sales to $17.2 million. Sales in Europe were essentially unchanged at $20.1 million. BHA Technologies increased its sales to third parties from $0.9 million to $1.8 million. GROSS MARGIN Consolidated gross margin was 26.9% of sales in fiscal 1999 compared to 30.9% of sales in 1998. The margins in fiscal 1999 were adversely impacted by several factors: (1) a cost overrun on a large fixed-price ESP rebuild project on which a loss of $2.4 million was recognized, (2) substantial experimentation and testing performed by BHA Technologies totaling $1.4 million related to adhesive lamination to develop non-APC products, and (3) inventory write-downs of $0.4 million attributable to the Company's consolidation of manufacturing operations in Europe. Excluding these three factors, gross margins were 29.6% in fiscal 1999. The balance of the decline in the gross margin percentage is largely the result of a decline in gross margins as a percentage of sales in Europe due to a combination of excess capacity and competition. -16- OPERATING EXPENSES Selling and advertising expense as a percentage of sales was 13.0% in fiscal 1999 and 12.2% of sales in fiscal 1998. The increased expense as a percentage of sales was the result of investments being made to develop new markets by BHA Technologies in non-APC businesses and additional personnel hired and trained during the year to pursue future APC sales in new domestic and international markets. General and administrative expense increased from $14.5 million to $15.9 million but remained constant at 10.2% of sales in both fiscal 1999 and 1998. Approximately $0.5 million of the increased cost was the result of higher reserves for doubtful receivables, primarily in Europe. Restructuring expenses in the amount of $2.2 million were recognized during fiscal 1999. A charge of $1.7 million was taken as a result of the decision by BHA Technologies to discontinue its in-house adhesive lamination efforts and to write down the related equipment to its net realizable value. Future efforts to sell ePTFE membrane for apparel and other uses involving adhesive lamination will either be outsourced or will be in the form of unlaminated film. Additionally, severance costs of $0.5 million was incurred relative to the consolidation of manufacturing operations in Europe. INTEREST EXPENSE Interest expense for fiscal 1999 and 1998 was $2.1 million and $1.4 million, respectively. The increase was attributable to an increase in average borrowings, including a capital lease. Such borrowings were used to fund increased working capital requirements, investments in capital equipment, and treasury stock repurchases. INCOME TAXES The effective income tax rate was 34.7% in fiscal 1999 compared to 31.8% in fiscal 1998. The increase was the result of tax benefits recorded relative to certain foreign losses at rates of less than 30% in fiscal 1999. NET EARNINGS Net earnings were $1.1 million ($0.15 per share) in fiscal 1999 and $7.3 million ($0.97 per share) in fiscal 1998. The decreased earnings is the result of restructuring charges and substantial operating losses incurred in Europe and by BHA Technologies together with the cost overrun on the ESP project discussed above. Weighted average common and common equivalent shares outstanding decreased by 0.4 million shares primarily due to treasury stock repurchases. OTHER The U.S. inflation rate grew at a moderate pace during 1999. BHA believes that its business is not affected by inflation, except to the extent the economy in general is affected. -17- FISCAL 1998 COMPARED TO FISCAL 1997 Consolidated net sales for BHA during fiscal 1998 were $142.4 million compared to $130.6 million during the year ended September 30, 1997 ("fiscal 1997"), a 9% improvement. The overall change included a 26% increase in sales of electrostatic precipitator replacement parts and services in the U.S. and Canada. The improvement in sales to $26.4 million was due to an increase in major project work in both the electric utility and industrial markets. Sales of fabric filter products and services in baghouse applications in the U.S. and Canada increased 3% to $74.1 million during fiscal 1998 as sales of BHA's fine filtration products showed continued growth. Export sales from the U.S. in fiscal 1998 were $21.4 million which was consistent with the prior year. Fiscal 1998 sales in Europe were $20.5 million representing a 25% increase over the prior year. The fiscal 1998 results included the sales of Purfilter in Spain which was acquired during that year. Sales in Europe, exclusive of Purfilter, increased 10% over fiscal 1997. GROSS MARGIN Consolidated gross margin as a percentage of sales was 30.9% and 31.2% during fiscal 1998 and 1997, respectively. During fiscal 1998, BHA's U.S. sales of fabric filter products and services generated an improved gross margin percentage due to a sales mix favoring its fine filtration product lines. The increase was offset by an overall lower blended gross margin percentage in the rest of its business caused by the combination of an increase in sales of lower gross margin ESP replacement parts and services in the U.S., a decrease in higher gross margin sales to customers in Asia and a decrease in the gross margin percentage on sales in Europe. OPERATING EXPENSE Selling and advertising expense as a percentage of sales was 12.2% and 11.4% for fiscal 1998 and 1997, respectively. The increase during fiscal 1998 was largely attributable to higher selling expense relating to BHA Technologies' efforts in pursuing opportunities outside of air pollution control. General and administrative expense as a percentage of sales was 10.2% in both fiscal 1998 and 1997. INTEREST EXPENSE Interest expense for fiscal 1998 and 1997 was $1.4 million and $1.0 million, respectively. The increase was attributable to an increase in bank borrowings during fiscal 1998 to fund acquisitions, capital expenditures and treasury share repurchase. INCOME TAXES The effective income tax rates were 31.8% and 30.1% in fiscal 1998 and 1997, respectively. The increase was attributable to a decrease in research and experimentation tax credits earned during fiscal 1998 as compared to the prior year. -18- NET EARNINGS Net earnings were $7.3 million ($0.97 per share) in fiscal 1998 and $8.1 million ($1.06 per share) in fiscal 1997. The decrease in net earnings was attributable to a decline in profits relating to BHA's international APC businesses and operating losses incurred in BHA Technologies. Weighted average common and equivalent shares outstanding decreased by 0.1 million shares due to treasury stock repurchases. LIQUIDITY AND CAPITAL RESOURCES Net working capital was $43.3 million at September 30, 1999 compared to $42.2 million at September 30, 1998. The current ratio was 3.3 in 1999 compared to a current ratio of 3.1 in 1998. Cash provided by operating activities was $9.2 million during fiscal 1999 while cash used by operating activities was $3.9 million in 1998. In fiscal 1997, $10.6 million in cash was provided by operating activities. The positive cash flow provided by operating activities in fiscal 1999 reflects a modest $1.1 million increase in working capital to support the $13.3 million increase in sales. The large use of cash in fiscal 1998 was the result of a substantial increase in accounts receivable and inventory during that year. Investing activities have resulted in a net use of cash during each of the past three years. Capital expenditures were $5.8 million, $8.3 million, and $10.5 million in fiscal 1999, 1998, and 1997, respectively. Capital expenditures over the past three years have been used to expand capacity for ePTFE membrane, invest in improved information systems, and develop new products and increased manufacturing capacity for BHA's APC products. Additional investments in recent years include the acquisitions of product rights relative to Drayton's sound-off acoustic cleaner product line in 1999 and acquisitions of APC businesses in Spain and Venezuela in 1998. During fiscal 1999, net cash provided by financing activities was approximately $0.1 million as cash generated from operations was sufficient to support the Company's investing activities. Incremental borrowings of $3.9 million were largely used to repurchase BHA stock. In fiscal 1998, the Company incurred $14.4 million in incremental borrowings in order to fund the operating and investing activities as well as repurchase $1.8 million of BHA stock. During fiscal 1997, net cash provided by financing activities of $0.3 million included a net increase in bank borrowings of approximately $3.6 million of which $2.7 million was used to repurchase BHA stock. At September 30, 1999, BHA had unused lines of credit of $17.5 million. During the year, BHA refinanced most of its borrowings resulting in a year end debt structure that includes commitments for: an $18.0 million revolving credit facility maturing on October 1, 2002; a $15.0 million amortizing term loan with a final maturity in 2006; a $2.5 million term loan with a maturity in June 2000; German term loan and revolving credit facilities totaling the U.S. equivalent of $4.1 million and maturing in 2003; and a capital lease related to an industrial revenue bond transaction for $8.0 million with annual sinking fund payments and a final maturity in 2018. -19- The domestic term loans and revolving credit facility include financial covenants regarding minimum net worth, minimum fixed charge coverage ratios, and maximum borrowing to EBITDA ratios. The Company was in compliance with all such covenants at September 30, 1999. With the exception of the capital lease transaction, no assets of the Company are pledged to secure any indebtedness. BHA believes that cash flows from operations and available credit lines will be sufficient to meet its capital needs for the foreseeable future. YEAR 2000 The Company has established a task force to address and assess Year 2000 compliance for the Company's computer system and software applications, its facilities throughout the world, the products it sells that include date-sensitive microprocessors, and suppliers providing the Company with goods and services. THE STATE OF READINESS OF THE COMPANY During the past several years, the Company has replaced its significant computer software applications through normal system upgrades. These computer systems include personal computers, mid-range computer systems, and worldwide network applications. All of the new systems are, according to the software vendors, Year 2000 compliant to support the proper processing of date-sensitive transactions. Internal testing of all of the Company's critical computer systems and software applications have been completed. Corrective actions remaining generally consist of installing "Y2K patches" to be provided by personal computer software vendors. The task force has also finalized its review of inventory lists of all machinery, office equipment, and building equipment that utilize microprocessors at the Company's facilities around the world. The Company has identified all Year 2000-compliance issues which the Company believes could have a material impact on the business and has completed final system testing and all remediation believed to be significant. The Company has a number of products that have date-sensitive microprocessors. The task force has identified those products that have Year 2000 compliance issues and proactively notified the customers to whom these products have been sold, providing recommendations regarding actions to be taken by the customer. The task force has prepared a list of significant suppliers of goods and services whose Year 2000 compliance could potentially impact the Company's business. The Company has proactively addressed and evaluated Year 2000 compliance with these suppliers, determining the impact on the Company's business and developing necessary contingency plans. The Company will continue to monitor the impact of any changes in key suppliers' announcements regarding Year 2000 readiness. -20- THE COSTS OF YEAR 2000 COMPLIANCE The costs incurred to upgrade the Company's computer systems and software applications were normal, planned system upgrades. In 1996, the Company made the decision to consolidate its business into one entity for operating purposes. This consolidation process included an upgrade to the Company's primary mid-range legacy computer systems. The Company believes that all Year 2000 issues were addressed and corrected at that time. The Company completed its personal computer rollout during 1998. The rollout was part of an overall strategy to standardize on a single platform using a current level of technology. Based on representations received from vendors, the Company believes that all new equipment and software purchased is Year 2000 compliant. The costs associated with the Year 2000 compliance of the Company's equipment was not material. The company believes that the costs associated with any potential non-compliance of the Company's products for Year 2000 are mitigated by the Terms and Conditions under which these products were sold. The Company's Terms and Conditions do not include any representations or warranties regarding Year 2000 compliance and exclude any liability for incidental or consequential damages including those which could arise out of a Year 2000 issue. The Company does not anticipate that the costs associated with Year 2000 relating to its products will be material. The costs associated with the Year 2000 compliance of the Company's suppliers of goods and services are not expected to be material. These plans will include procuring additional quantities of inventory from certain vendors during the fourth quarter of calendar 1999, but such incremental inventories, which will be temporary, are not expected to exceed $2.0 million. The Company does not separately track the internal costs incurred relating to Year 2000 compliance since theses costs are principally payroll and related costs for the task force and Management Information Systems department. THE RISKS OF YEAR 2000 NON-COMPLIANCE TO THE COMPANY The task force believes that the most significant risk that relates to Year 2000 compliance may be the state of readiness of the Company's significant suppliers of goods and services, especially those outside of the U.S. Although the Company has taken a proactive approach to communicate with its suppliers, the Company's relationship with these suppliers cannot ensure their Year 2000 compliance or their ability to continue to provide the necessary goods and services to the Company. Although the Company has completed the evaluation and testing of all of its business systems, products, and vendor relationships, the Year 2000 readiness is largely dependent upon numerous entities outside of the direct control of BHA. The Company can make no guarantee that such factors will not have a material adverse impact on the Company or its operations. -21- THE YEAR 2000 CONTINGENCY PLANS OF THE COMPANY The task force believes that its contingency plans are substantially complete, however, due to the inter-relationship of numerous entities throughout the world, management recognizes that new issues could develop that would require a change in such plans. The Company will continue to monitor events domestically as well as internationally. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" is effective for BHA's fiscal year 2001. The statement establishes accounting and reporting standards for derivative instruments and all hedging activities. This statement will not have any impact on BHA's results of operations as all derivative instruments are designated as hedges against foreign currency exposures. FORWARD LOOKING INFORMATION This report contains forward-looking statements that reflect BHA's current views with respect to future events and financial performance. The statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. The words "should," "believe," "anticipate," "expect," and other expressions that indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, competition, the performance of newly established domestic and international operations, demand and price for BHA's products and services, and other factors. You should consult the section entitled "Factors Affecting Earnings and Stock Price". ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FORWARD EXCHANGE CONTRACTS BHA periodically enters into forward exchange contracts in order to fix the currency exchange rate related to intercompany transactions with its foreign subsidiaries. Changes in the value of these instruments due to currency movements offset the foreign exchange gains and losses of the corresponding intercompany transactions. At September 30, 1999 and 1998, the aggregate amount of such forward exchange contracts was approximately $2,400,000 and $1,950,000, respectively. The fair value of the outstanding forward exchange contracts approximates the aggregate amount outstanding at September 30, 1999. -22- ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors of BHA Group Holdings, Inc.: We have audited the accompanying consolidated balance sheets of BHA Group Holdings, Inc. and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of earnings, shareholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended September 30, 1999. These consolidated financial statements are the responsibility of BHA'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 BHA Group Holdings, Inc., and subsidiaries at September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1999 in conformity with generally accepted accounting principles. [KPMG LLP GRAPHIC] November 10, 1999 Kansas City, Missouri -23- BHA GROUP HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, 1999 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 877 $ 193 Accounts receivable, less allowance for doubtful receivables of $1,238 in 1999 and $1,139 in 1998 28,356 31,338 Inventories (note 1) 28,043 27,363 Income taxes receivable 319 -- Prepaid expenses 1,989 1,828 Deferred Income taxes (note 4) 2,360 1,850 --------------- --------------- TOTAL CURRENT ASSETS 61,944 62,572 --------------- --------------- Property, plant and equipment, at cost: Land and improvements 1,344 1,344 Buildings and improvements 22,692 24,241 Machinery and equipment 38,984 35,947 Office furniture, fixtures and equipment 4,654 4,149 --------------- --------------- 67,674 65,681 Less accumulated depreciation and amortization 32,770 29,125 --------------- --------------- NET PROPERTY, PLANT AND EQUIPMENT 34,904 36,556 --------------- --------------- Intangible and other assets, less accumulated amortization (note 3) 5,748 2,699 Excess of cost over net assets of businesses acquired, less accumulated amortization 5,552 5,747 --------------- --------------- $108,148 $ 107,574 =============== ===============
See accompanying notes to consolidated financial statements. -24- BHA GROUP HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, 1999 1998 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term (note 3) $ 2,522 $ 3,988 Current lease obligations (note 3) 400 -- Accounts payable 8,881 8,896 Accrued compensation and employee benefit costs 2,547 3,695 Accrued expenses and other current liabilities 2,895 2,271 Reserve for warranty and product service 1,414 1,140 Income taxes payable -- 359 --------------- ---------------- TOTAL CURRENT LIABILITIES 18,659 20,349 --------------- ---------------- Deferred income taxes (note 4) 1,715 2,116 Long-term debt, excluding current installments (note 3) 20,345 23,029 Long-term lease obligations, excluding current installments (note 3) 7,600 Other Long-Term Liabilities 937 127 Shareholders' equity (note 5): Common Stock $.01 par value. Authorized 20,000,000 shares: Issued 8,745,980 and 8,666,353 shares, respectively 87 87 Additional paid-in capital 61,792 61,310 Retained earnings 23,219 22,983 Accumulated other comprehensive income (899) (293) Unearned compensation (note 5) (4) (108) Less cost of 1,838,468 and 1,527,856 shares, respectively, of common stock in treasury (25,303) (22,026) --------------- ---------------- TOTAL SHAREHOLDERS' EQUITY 58,892 61,953 =============== ================ Commitments and contingent liabilities (note 6) $ 108,148 $ 107,574 =============== ================
See accompanying notes to consolidated financial statements. -25- BHA GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER 30 1999 1998 1997 ---- ---- ---- Net sales $ 155,725 $ 142,432 $ 130,599 Cost of sales 113,785 98,399 89,813 ----------------- ----------------- ----------------- GROSS MARGIN 41,940 44,033 40,786 ----------------- ----------------- ----------------- Operating expenses: Selling and advertising expense 20,212 17,385 14,888 General and administrative expense 15,918 14,468 13,308 Restructuring expense (note 7) 2,167 -- -- ----------------- ----------------- ----------------- TOTAL OPERATING EXPENSES 38,297 31,853 28,196 ----------------- ----------------- ----------------- OPERATING INCOME 3,643 12,180 12,590 Interest expense (2,069) (1,449) (1,048) Other income, net 85 26 39 ----------------- ----------------- ----------------- EARNINGS BEFORE INCOME TAXES 1,659 10,757 11,581 ----------------- ----------------- ----------------- Income taxes (note 4): Current 1,321 4,419 3,214 Deferred (746) (994) 266 ----------------- ----------------- ----------------- TOTAL INCOME TAXES 575 3,425 3,480 ----------------- ----------------- ----------------- NET EARNINGS $ 1,084 $ 7,332 $ 8,101 ================= ================= ================= Basic earnings per common share .15 1.02 1.12 Diluted earnings per common share .15 .97 1.06
See accompanying notes to consolidated financial statements. -26- BHA GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 1998 1997 ---- ---- ---- COMMON STOCK: Balance at beginning of year $ 87 $ 78 $ 71 Issuance of 79,627 shares of common stock in 1999, 41,008 shares in 1998 and 34,490 shares in 1997 -- 1 -- Issuance of 787,556 shares in 1998 and 712,088 shares in 1997 for 10% stock dividend -- 8 7 --------------- ---------------- ----------------- BALANCE AT END OF YEAR 87 87 78 --------------- ---------------- ----------------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year 61,310 47,607 33,392 Excess over par value of common stock issued 653 588 433 Stock issued from treasury for stock option exercises (303) (1,189) (165) Income tax benefit from stock option exercise 132 628 157 Issuance of 10% stock dividend -- 13,676 13,790 --------------- ---------------- ----------------- BALANCE AT END OF YEAR 61,792 61,310 47,607 --------------- ---------------- ----------------- RETAINED EARNINGS: Balance at beginning of year 22,983 27,773 31,963 Net earnings 1,084 7,332 8,101 Payment of cash dividends on common stock (848) (806) (740) Issuance of 10% stock dividend -- (11,316) (11,551) --------------- ---------------- ----------------- BALANCE AT END OF YEAR 23,219 22,983 27,773 --------------- ---------------- ----------------- ACCUMULATED OTHER COMPREHENSIVE INCOME: Balance at beginning of year (293) (148) (138) Equity adjustment from foreign currency translation (606) (145) (10) --------------- ---------------- ----------------- BALANCE AT END OF YEAR (899) (293) (148) --------------- ---------------- ----------------- UNEARNED COMPENSATION (NOTE 5): Balance at beginning of year (108) (211) (315) Recognition of compensation expense 104 103 104 --------------- ---------------- ----------------- BALANCE AT END OF YEAR (4) (108) (211) --------------- ---------------- ----------------- TREASURY STOCK: Balance at beginning of year (22,026) (18,181) (13,277) Acquisition of 319,500, 113,770 and 149,990 shares in 1999, 1998 and 1997, respectively (3,476) (1,783) (2,669) Issuance of 8,888 shares in 1999, 57,399 shares in 1998 and 8,534 shares in 1997 for stock option exercises, net 199 306 11 Issuance of 136,275 treasury shares in 1998 and 115,967 treasury shares in 1997 for 10% stock dividend -- (2,368) (2,246) --------------- ---------------- ----------------- BALANCE AT END OF YEAR (25,303) (22,026) (18,181) =============== ================ ================= TOTAL SHAREHOLDERS' EQUITY 58,892 $ 61,953 $ 56,918 =============== ================ =================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 1998 1997 ---- ---- ---- Net earnings $ 1,084 $ 7,332 $ 8,101 Other comprehensive income: Foreign currency translation adjustment (606) (145) (10) --------------- ---------------- ----------------- Comprehensive income 478 7,187 8,091 =============== ================ =================
See accompanying notes to consolidated financial statements. -27- BHA GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $1,084 $ 7,332 $ 8,101 Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Depreciation and amortization 6,052 5,478 4,490 Non-cash restructuring charges 1,713 -- -- Provision for deferred income taxes (911) (1,469) 266 Changes in assets and liabilities: Accounts receivable 2,982 (8,590) (2,583) Inventories (680) (7,003) (1,578) Prepaid expenses (161) (568) (145) Income taxes (546) 1,505 (926) Accounts payable (14) (86) 2,577 Accrued expenses and other current liabilities (351) (470) 429 ---------- ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 9,168 (3,871) 10,631 ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (5,836) (8,313) (10,523) Net assets of businesses acquired, excluding cash -- (1,221) -- Acquisition of product rights (718) -- -- Change in other assets (1,399) (104) (82) ---------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (7,953) (9,638) (10,605) ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 653 317 195 Payment of cash dividends on common stock (848) (806) (740) Purchase of treasury stock (3,476) (1,783) (2,669) Stock option exercise - net payments (104) (883) (154) Proceeds from long-term obligations 25,997 -- 7,500 Repayments of long-term obligations (5,064) (88) (1,708) Borrowings (repayments) on lines of credit, net (17,083) 14,500 (2,154) ---------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 75 11,257 270 ---------- ----------- ----------- Effect of exchange rate changes (606) (145) (10) ---------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 684 (2,397) 286 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 193 2,590 2,304 ---------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 877 $ 193 $ 2,590 ========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 2,058 $ 1,530 $ 1,025 Income taxes $ 2,032 $ 3,543 $ 4,297 Supplemental disclosure of non-cash investing and financing activities: Accrual of additional purchase price $ 800 -- -- Issuance of common stock to directors, officers and employees $ 105 $ 272 $ 238
See accompanying notes to consolidated financial statements. -28- BHA Group Holdings, Inc. Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRESENTATION The consolidated financial statements include the accounts of BHA Group Holdings, Inc. (BHA) and its wholly-owned foreign and domestic subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION BHA recognizes revenue at the time products are shipped or services are performed. USES OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES BHA values its inventory at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Components of inventories at September 30, 1999 and 1998 were as follows:
($ IN THOUSANDS) 1999 1998 ----------------- ---------------- Raw materials $ 16,173 $ 17,036 Work-in-process 2,150 1,174 Finished goods 9,720 9,153 ================= ================ TOTAL 28,043 $ 27,363 ================= ================
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Major renewals and betterments are charged to the property accounts; replacements, maintenance and repairs that do not improve or extend the life of the respective assets are charged to expense as incurred. DEPRECIATION AND AMORTIZATION Depreciation and amortization of property, plant and equipment are computed on the straight-line method using estimated useful lives by major asset class as follows: Buildings and improvements 30 years Machinery and equipment 4-8 years Office furniture, fixtures and equipment 3-10 years -29- INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. No provision is made for income taxes on undistributed earnings of the foreign subsidiaries because such earnings are considered permanently invested in the foreign subsidiaries. WARRANTY AND PRODUCT SERVICE BHA provides a reserve for estimated warranty and product service claims based on historical experience and consideration of changes in products and technology. FOREIGN CURRENCY TRANSLATION Financial statements of BHA's foreign subsidiaries are translated into U.S. dollars at current and average exchange rates. Translation gains and losses are included in other comprehensive income. Transaction gains and losses resulting from fluctuations in exchange rates between the functional currency (U.S. dollars) and the currency in which a foreign currency transaction is denominated are included in net earnings. Transaction gains included in the consolidated statements of earnings for 1999, 1998 and 1997 amounted to $71,000, $141,000 and $93,000, respectively. FORWARD EXCHANGE CONTRACTS BHA periodically enters into forward exchange contracts in order to fix the currency exchange rate related to intercompany transactions with its foreign subsidiaries. Changes in the value of these instruments due to currency movements offset the foreign exchange gains and losses of the corresponding intercompany transactions. At September 30, 1999 and 1998, the aggregate amount of such forward exchange contracts was approximately $2,400,000 and $1,950,000, respectively. The fair value of the outstanding forward exchange contracts approximates the aggregate amount outstanding at September 30, 1999. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" which establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Statement of Comprehensive Income. The adoption of Statement No. 130 had no impact on net earnings or stockholders' equity of the Company. TREASURY STOCK Since June 1994, the Board of Directors of BHA have periodically approved the purchase of up to 2,000,000 shares of the Company's common stock. The purchases of common stock are recorded at cost on the date of purchase. Issuance of common stock from the treasury is recorded at the average cost of common stock held in the treasury. -30- EARNINGS PER COMMON SHARE Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed based upon the weighted average number of common shares and dilutive common equivalent shares outstanding. Stock options, which are common stock equivalents, have a dilutive effect on earnings per share in all periods presented and are therefore included in the computation of diluted earnings per share. Stock options are described in Note 5. A reconciliation of the numerators and the denominators of the basic and diluted earnings per-share computations is as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA.) 1999 1998 1997 ---------------------------------- ---------------------------------- -------------------------------- Net Earnings Shares Per-Share Net Earnings Shares Per-Share Net Earnings Shares Per-Share (Numerator) (Denom.) Amt. (Numerator) (Denom.) Amt. (Numerator) (Denom.) Amt. ----------- -------- --------- ------------ -------- --------- ------------ -------- --------- Basic earnings per share: Earnings available to common shareholders $1,084 7,028 $ 0.15 $7,332 7,171 $ 1.02 $8,101 7,226 $ 1.12 Effect of dilutive securities--stock options -- 106 -- 381 -- 450 Diluted earnings per share: Earnings available to common shareholders and assumed conversion $1,084 7,134 $ 0.15 $7,332 7,552 $ 0.97 $8,101 7,676 $ 1.06 ================================== ================================= ==================================
Options to purchase 571,688 shares of common stock at prices ranging from $12.02 to $16.82 per share were outstanding at the end of 1999 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. In 1998 and 1997, options to purchase 8,800 shares and 0 shares, respectively, were similarly excluded from the calculation. COST IN EXCESS OF NET ASSETS ACQUIRED AND INTANGIBLE ASSETS Cost in excess of net assets acquired is being amortized over periods ranging from thirty to forty years, and is presented in the accompanying consolidated balance sheets net of accumulated amortization of $1,360,000 and $1,165,000 at September 30, 1999 and 1998, respectively. Intangible assets are being amortized over periods ranging from five to seventeen years and are presented in the accompanying consolidated balance sheets net of accumulated amortization of $5,833,000 and $5,482,000 at September 30, 1999 and 1998, respectively. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. -31- STATEMENTS OF CASH FLOWS For purposes of the consolidated statements of cash flows, BHA considers overnight invested cash and investments in marketable securities, with maturities of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments. The fair value of long-term obligations are estimated by discounting future cash flows using current market rates. The carrying amounts of long-term debt and lease obligations approximate fair value at September 30, 1999. 2. ACQUISITIONS In January 1999, the Company acquired certain assets, including patents, trademarks, and other intangibles related to Drayton Corporation's Sound-Off Acoustic Cleaner product line. The purchase price consists of a cash payment of $700,000 plus additional contingent payments to be made over the next five years based upon revenues of the product line. The Company recorded additional purchase price of $800,000 at the date of acquisition based on their assessment of the likelihood of attaining such additional revenues. The total purchase price of $1,500,000 is being amortized on a straight-line basis over ten years. During fiscal 1998, the Company acquired 100% of the outstanding stock of Purificacion y Filtracion, S.L. (BHA Purfilter) located in Barcelona, Spain and Industrial Filtrantes Purfilter C.A. (BHA Venezuela) located in Puerto Ordaz, Venezuela for a combined purchase price of approximately $1,400,000. These acquisitions were accounted for as purchases, with each purchase price allocated to the assets acquired based upon estimated fair values as of the dates of the acquisitions. The excess of the purchase price over the net assets acquired is being amortized on a straight-line basis over thirty years. The proforma effect of these acquisitions are not material to the Company. 3. NOTES PAYABLE TO BANKS, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Notes Payable to Banks and Long-Term Debt A summary of notes payable to banks and long-term debt at September 30, 1999 and 1998 are as follows:
($ IN THOUSANDS) 1999 1998 ----------- ------------ Unsecured domestic line of credit with variable interest rate $ 1,120 $19,300 Unsecured foreign line of credit with variable interest rate 803 -- Notes payable to a domestic bank with variable interest rate 15,000 -- Notes payable to a domestic bank with fixed interest rates of 5.00% and 7.02% 2,500 7,500 Notes payable to a foreign bank with a fixed interest rate of 4.75% 2,997 -- Other notes payable 447 217 Less current installments (2,522) (3,988) =========== ============ LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS $20,345 23,029 =========== ============
-32- BHA has a domestic unsecured bank line of credit of $18,000,000 for working capital purposes and other corporate matters. This line of credit bears interest at variable rates based on either the prime rate or LIBOR and expires in October 2002. This facility is a revolving credit agreement in which BHA pays a 0.25% commitment fee on the unused portion. At September 30, 1999, $1,120,000 was outstanding under this domestic bank line of credit at an interest rate of 7.25%. BHA also maintains a foreign unsecured bank line of credit of DM 2,500,000 (approximately $1,367,000 at September 30, 1999) for working capital purposes in Europe. This line of credit bears interest at variable rates based on the German prime rate and expires in fiscal 2002. At September 30, 1999, DM 1,340,000 (approximately $732,000) was outstanding under this foreign bank line of credit at an interest rate of 4.1%. BHA's foreign subsidiary located in Switzerland maintains a line of credit with a foreign bank in the amount of CHF 200,000 (approximately $133,000 at September 30, 1999). As of September 30, 1999 and 1998, there were no borrowings outstanding under this line of credit. In September 1999, BHA entered into a $15 million unsecured term loan, the proceeds of which were used to repay existing long-term debt and provide for general corporate matters. This term loan has a variable interest rate based on LIBOR (6.23% at September 30, 1999) and matures in October 2006. Quarterly principal payments of $625,000 begin in October 2000. In October 1998, BHA's German subsidiary entered into a DM 5,000,000 term loan (approximately $2,733,999 at September 30, 1999) with a German bank. The proceeds of the loan were used for working capital purposes. This term loan has a fixed rate of 4.75% and is due in full at maturity in December 2003. BHA also has a $2.5 million unsecured term loan which was renewed during fiscal year 1999 with an interest rate of 5.0% and matures in June 2000. The term loans and domestic bank line of credit require BHA, among other things, to maintain minimum levels of net worth, minimum fixed charge coverage, minimum current ratio, and maximum debt to cash flow ratio. BHA was in compliance with all covenants at September 30, 1999. At September 30, 1999, $9,500,000 of retained earnings were available for cash dividends. -33- Capital Lease Obligations In December 1998, BHA Technologies, Inc., a wholly-owned subsidiary, entered into a sale-leaseback transaction with the City of Lee's Summit, Missouri. In connection with this lease, the city issued tax-exempt Industrial Development Revenue Bonds ("Bonds") totaling $8,000,000 and placed the proceeds in a trust to fund future capital expenditures at the Lee's Summit manufacturing facility. BHA Technologies is obligated, through its lease, for the repayment of these bonds over the next 20 years. Annual lease payments of $400,000 begin in December 1999. The interest rate on the tax-exempt Bonds is variable based on a weekly published index that is approximately 67% of LIBOR (3.50% as of September 30, 1999). As of September 30, 1999, BHA Technologies has $1.2 million in restricted cash held in trust for the exclusive use for qualified capital expenditures in Lee's Summit. The restricted cash is included in Intangible and Other Assets at September 30, 1999. Scheduled payments on long-term debt, including capital lease obligations, for the next five fiscal years are as follows:
$ IN THOUSANDS ------------------ 2000 $ 2,922 2001 3,325 2002 4,823 2003 2,900 2004 5,897 Thereafter 11,000 ================== $ 30,867 ==================
4. INCOME TAXES The components of total income tax expense for the years ended September 30, 1999, 1998 and 1997 are as follows:
($ IN THOUSANDS) 1999 1998 1997 ------------- ------------ -------------- Current income tax expense (benefit): Federal $ 1,621 $ 3,716 $ 2,260 Foreign (552) 160 548 State and local 252 543 406 Deferred income tax expense (benefit): Federal (683) (893) 250 State (63) (101) 16 ------------- ------------ -------------- $ 575 $ 3,425 $ 3,480 ============= ============ ==============
-34- The effective tax rate differs from the expected tax rate for the respective years as follows:
1999 1998 1997 ------------- ------------- -------------- Expected income tax expense 34.0% 34.0% 34.0% State income taxes, net 7.5 2.7 2.3 Difference in tax rates of foreign subsidiaries 14.1 (2.2) (3.6) Research and experimentation credits (12.1) (1.7) (3.4) Other, net (8.8) (1.0) .8 ------------- ------------- -------------- EFFECTIVE INCOME TAX RATE 34.7% 31.8% 30.1% ============= ============= ==============
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1999 and 1998 are presented as follows:
($ IN THOUSANDS) 1999 1998 ---------------- ---------------- Deferred tax assets: Reserves and accruals not currently deductible $ 1,947 $ 1,641 Inventories 296 234 Other, net 329 165 ---------------- ---------------- Total gross deferred tax assets $ 2,572 2,040 ---------------- ---------------- Deferred tax liabilities: Intangible and other assets 570 621 Property, plant and equipment 1,084 813 Prepaid expenses 206 244 Deferred compensation 39 92 Other, net 28 536 ---------------- ---------------- Total gross deferred tax liabilities 1,927 2,306 ---------------- ---------------- NET DEFERRED TAX (ASSET)/LIABILITY $ (645) $ 266 ================ ================
At September 30, 1999 and 1998, deferred tax assets and liabilities are classified in the accompanying consolidated balance sheets as follows:
($ IN THOUSANDS) 1999 1998 ----------------- ---------------- Current deferred income tax asset $ 2,360 $ 1,850 Non-current deferred income tax liability 1,715 2,116 ================= ================ NET DEFERRED INCOME TAX ASSET/(LIABILITY) $ 645 $ (266) ================= ================
BHA has not recorded a valuation allowance relating to deferred tax assets, as taxable temporary differences are expected to be offset by deductible temporary differences and future taxable income. BHA has not provided deferred taxes on the cumulative undistributed earnings of its foreign subsidiaries, which approximate $1,627,000, $2,702,000 and $2,142,000 at September 30, 1999, 1998, and 1997, respectively, as management considers these earnings to be permanently invested. Net earnings (losses) of these foreign subsidiaries were approximately $(3,449,000), $359,000 and $1,058,000 for the years ended September 30, 1999, 1998, and 1997, respectively. -35- 5. INCENTIVE STOCK PLAN BHA has an incentive stock plan for key employees, officers and directors. The plan provides for 2,221,084 shares of common stock (as adjusted for the dilutive effect of stock dividends) available for issuance of stock options, restricted stock and payment to outside directors in lieu of cash. Stock options are granted at a price equal to the fair market value of BHA Common Stock at the date of grant for terms of up to ten years. During 1995, BHA awarded 45,000 shares of restricted stock, under the incentive stock plan, to certain employees. The market value of the awards at the date of issuance has been recognized as compensation expense ratably over the five-year vesting period ending in fiscal 1999. BHA accounts for its stock-based employee compensation plans pursuant to Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 establishes a fair value-based method of accounting. BHA has chosen to adopt the pro-forma disclosure requirements of SFAS 123, and continue to record stock compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) which is permitted under SFAS 123. Under APB 25 compensation expense is recorded on the date of grant for stock options granted only if the current market price of the underlying stock exceeds the exercise price. A summary of transactions in the incentive stock plan is as follows:
1999 1998 1997 WEIGHTED- WEIGHTED- WEIGHTED- NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE ---------------------------- ------------------------------ ------------------------------ Outstanding at beginning 1,087,057 $10.63 1,099,431 $ 8.83 1,158,193 $ 8.71 of year Granted 312,800 13.37 251,140 16.02 6,050 15.23 Expired (3,492) 9.86 -- -- -- -- Canceled (200,312) 12.67 -- -- (11,647) 9.58 Exercised (118,903) 7.90 (263,514) 8.26 (53,165) 6.84 -------------------------------------------------------------------------------------------- Outstanding at end of year 1,077,150 $11.35 1,087,057 $ 10.63 1,099,431 $ 8.83 ============================ ============================== ============================== Exercisable at end of yr. 505,462 $ 8.27 773,045 $ 8.93 891,935 $ 8.85 ============================ ============================== ============================== OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------------- -------------------------------------- NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED- RANGE OF EXERCISE OUTSTANDING AVG. CONTRACTED AVG. EXERCISE EXERCISABLE AVERAGE PRICES AT 9/30/99 LIFE IN YRS. PRICE AT 9/30/99 EXERCISE PRICE ------------------- ----------------- ----------------- ----------------- ------------------ ------------------- $6.20 - 9.58 505,462 4.9 $ 8.27 505,462 $ 8.27 $12.02 - 16.82 571,688 7.7 $14.07 -- -- ================= ================== 1,077,150 505,462 ================= ==================
-36- The per share weighted-average fair value of stock options granted during 1999, 1998, and 1997 was $5.36, $5.20 and $5.44, respectively, on the date of grant using the Black Scholes option-pricing model with the following assumptions: expected dividend yield of 1.15% for 1999, .80% for 1998, and 1.00% for 1997; weighted average risk-free interest rate of 5.90% for 1999, 4.73% for 1998, and 6.10% for 1997; expected volatility factor of 29.38%, 19.0% and 18.9% for 1999, 1998, and 1997, respectively; and a weighted-average expected life of eight years. Since BHA applies APB 25 in accounting for its incentive stock plan, no compensation expense has been recognized for stock options in net earnings. Stock-based compensation expense, if recorded under SFAS 123 would have reduced net earnings by $738,000 or $.10 per diluted share in 1999, $470,000 or $.06 per diluted share in 1998, and $12,000 in 1997 with no effect on earnings per share. Compensation expense for options granted prior to October 1, 1995 is not considered. The full impact of calculating compensation expense for stock options under SFAS 123 is not reflected in the proforma net earnings amounts above since compensation expense is reflected over the option's vesting period of four years for all options. 6. COMMITMENTS AND CONTINGENT LIABILITIES EMPLOYEE BENEFIT PLANS BHA has a noncontributory Employee Stock Ownership Plan (ESOP) which includes substantially all domestic employees who are not covered by collective bargaining agreements. BHA, with approval of its Board of Directors, makes discretionary contributions to the ESOP. Benefits become vested according to years of service. Contributions charged to operating expense were $435,000, $884,000, and $1,175,000 for the years ended September 30, 1999, 1998, and 1997, respectively. BHA's eligible domestic employees participate in a voluntary 401(k) employee benefit plan (401(k) Plan). The 401(k) Plan covers eligible employees not covered by a collective bargaining agreement. The 401(k) Plan provides that 100% of a participant's contribution will be matched by BHA subject to a maximum contribution which is determined annually at the discretion of the Board of Directors. BHA matching contributions become vested based on years of service. BHA made matching contributions of $330,000, $270,000, and $253,000 for the years ended September 30, 1999, 1998, and 1997, respectively. LEASES A summary of noncancelable, long-term operating lease commitments on office facilities and equipment follows:
YEARS ENDING SEPTEMBER 30, $ IN THOUSANDS -------------------------- -------------- 2000 $ 1,969 2001 936 2002 364 2003 310 2004 76 Thereafter 178
-37- It is expected that in the normal course of business, expiring leases will be renewed or replaced by similar leases on other properties. Total rental expense on noncancelable, long-term operating leases amounted to approximately $2,780,000, $2,210,000 and $1,036,000 for the years ended September 30, 1999, 1998, and 1997, respectively. LETTERS OF CREDIT The terms of certain contracts require that BHA issue standby letters of credit to assure performance. Open standby letters of credit amounted to $92,000 and $57,000 at September 30, 1999 and 1998, respectively. LITIGATION In the normal course of business, BHA is party to certain actions arising out of various allegations of product or professional liability. BHA has insurance coverage for substantially all such actions, subject to coverage limitations and deductibles for each claim. In the opinion of management, the amount of loss, if any, from the final outcome of these actions will not have a material adverse impact on the consolidated financial statements. 7. RESTRUCTURING The Company recognized restructuring expenses in the amount of $2,167,000 on a pretax basis during the fourth quarter of fiscal 1999. A charge of $1,713,000 was taken as a result of the decision by BHA Technologies to discontinue its in-house adhesive lamination efforts. The charge primarily related to the write-down of lamination equipment to its net realizable value. Future efforts to sell PTFE membrane for apparel and other uses involving adhesive lamination will either be outsourced or will be in the form of unlaminated film. Additionally, severance cost of $454,000 was expensed and paid during the fourth quarter relative to the consolidation of manufacturing operations in Europe. In June, the Company announced a decision to combine its European fabric filter manufacturing into one facility located in Spain. As part of this consolidation, the manufacturing facility in Germany was closed effective September 30, 1999. In addition, cost of sales includes Unusual Charges of $4,200,000 consisting of (1) a cost overrun on a large fixed-price ESP rebuild project on which a loss of $2,400,000 was recognized, (2) substantial experimentation and testing performed by BHA Technologies totaling $1,400,000 related to adhesive lamination to develop products for non-APC markets and (3) inventory write-downs of $400,000 attributable to the Company's consolidation of manufacturing operations in Europe. 8. BUSINESS SEGMENTS SEGMENT REPORTING Effective September 30, 1999, BHA adopted Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information," (SFAS No. 131). SFAS No. 131 requires reporting of segment information that is consistent with the way in which management operates the Company. The disclosure requirements of SFAS No. 131 have been presented for each of the years ended September 30, 1999, 1998 and 1997. -38- BHA reports its operations as three business segments, Domestic Air Pollution Control (Domestic APC), Europe Air Pollution Control (Europe APC), and BHA Technologies. Domestic APC consists of the air pollution control products and services sold or managed from the United States. Such sales include shipments and services throughout North America, Latin America, Asia, and the Pacific Rim as such revenues are derived from BHA's U.S. based management group. The Europe APC segment represents sales of products and services managed from BHA's European manufacturing, distribution, and sales offices. BHA Europe generally services customers throughout Europe, as well as in Northern Africa. BHA Technologies supplies ePTFE membrane products to BHA's APC business and is also developing a market for such products outside of air pollution control. The accounting policies for the segments are the same as those described in the summary of significant accounting policies. BHA manages these segments as strategic business units. Europe APC represents a distinct business unit as it maintains its own manufacturing, sales, marketing, and project management resources. Sales to other international locations are included in the Domestic APC business segment, as most or all of the key manufacturing, engineering, and sales support functions are performed from the United States. BHA Technologies operates as a distinct entity due to its unique technologies, as well as the marketing of products unrelated to air pollution control. Reportable segment data for the years ended September 30, 1999, 1998, and 1997 were as follows: NET SALES
($ IN THOUSANDS) 1999 1998 1997 ------------------ ----------------- ----------------- Domestic APC $133,846 $121,254 $114,004 Europe APC 20,076 20,226 16,431 BHA Technologies 1,803 952 164 ------------------ ----------------- ----------------- TOTAL $155,725 $142,432 $130,599 ================== ================= =================
Net sales represent revenues from sales to unaffiliated customers. INTEREST EXPENSE
($ IN THOUSANDS) 1999 1998 1997 ------------------ ----------------- ----------------- Domestic APC $1,014 $ 878 $ 999 Europe APC 369 196 -- BHA Technologies 686 375 49 ------------------ ----------------- ----------------- TOTAL $2,069 $ 1,449 $ 1,048 ================== ================= =================
EARNINGS (LOSS) BEFORE INCOME TAXES
($ IN THOUSANDS) 1999 1998 1997 ------------------ ----------------- ----------------- Domestic APC $10,925 $11,050 $ 9,333 Europe APC (2,744) 436 1,441 BHA Technologies (6,522) (729) 807 ------------------ ----------------- ----------------- TOTAL $ 1,659 $10,757 $11,581 ================== ================= =================
-39- The aggregate amount of all corporate expenses is allocated to the three business segments based upon the judgement of management. The pretax loss for Europe APC includes restructuring charges of $0.5 million related to the closure of German manufacturing operations in fiscal 1999. The pretax loss for BHA Technologies includes a restructuring charge in the amount of $1.7 million related to the discontinuation of its adhesive lamination efforts in 1999. Additionally, the Unusual Charges recognized in fiscal 1999 as discussed in Note 7 are included in the preceding summary and reduced pre-tax earnings of the segments by: Domestic APC, $2,400,000; Europe APC, $400,000; and BHA Technologies, $1,400,000. ASSETS
($ IN THOUSANDS) 1999 1998 1997 ------------------ ----------------- ----------------- Domestic APC $ 66,829 $ 69,380 $61,186 Europe APC 16,234 15,486 9,704 BHA Technologies 14,153 12,252 6,928 Corporate 10,932 10,456 9,787 ------------------ ----------------- ----------------- TOTAL $108,148 $107,574 $87,605 ================== ================= =================
DEPRECIATION AND AMORTIZATION
($ IN THOUSANDS) 1999 1998 1997 ------------------ ----------------- ----------------- Domestic APC $3,100 $3,142 $2,711 Europe APC 690 530 308 BHA Technologies 843 408 286 Corporate 1,419 1,398 1,185 ------------------ ----------------- ----------------- TOTAL $6,052 $5,478 $4,490 ================== ================= =================
CAPITAL EXPENDITURES
($ IN THOUSANDS) 1999 1998 1997 ------------------ ----------------- ----------------- Domestic APC $1,493 $1,766 $2,135 Europe APC 665 1,235 1,941 BHA Technologies 2,600 4,031 3,254 Corporate 1,078 1,281 3,193 ------------------ ----------------- ----------------- TOTAL $5,836 $8,313 $10,523 ================== ================= =================
Certain corporate assets including intangibles and computer equipment are not allocated to specific business segments and are thus included in the above tables of assets, depreciation and amortization, and capital expenditures as "Corporate." GEOGRAPHIC INFORMATION BY COUNTRY The following table presents revenues by country based on the location of the use of the product or service. No single country, other than the United States, comprised more than 10% of BHA's net sales. -40- NET SALES
($ IN THOUSANDS) 1999 1998 1997 ------------------ ----------------- ----------------- United States $113,475 $ 98,694 $ 89,202 All Other Countries 42,250 43,738 41,397 ------------------ ----------------- ----------------- TOTAL $155,725 $142,432 $130,599 ================== ================= =================
The following table presents all noncurrent assets by country based on the location of the asset. No single country, other than the United States, comprised more than 10% of the Company's long-lived assets. LONG-LIVED ASSETS
($ IN THOUSANDS) 1999 1998 1997 ------------------ ----------------- ----------------- United States $39,177 $38,037 $33,437 All Other Countries 7,027 6,965 6,711 ------------------ ----------------- ----------------- TOTAL $46,204 $45,002 $40,148 ================== ================= =================
9. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data are as follows:
THREE MONTHS ENDED DEC. 31 MARCH 31 JUNE 30 SEPT. 30 --------------- ------------------ --------------- ---------------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 Net sales 35,228 40,331 38,943 41,223 Gross margin 10,689 9,380 10,588 11,283 Net earnings (loss) * 1,316 (155) 597 (674) Diluted earnings (loss) per share .18 (.02) .08 (.10) Common Stock Price Range, High $14.25 $13.63 $10.50 $10.00 Low $10.25 $ 9.13 $ 8.00 $ 7.88 1998 Net sales $30,022 $38,881 $35,917 $37,612 Gross margin 9,710 11.672 11,179 11,472 Net earnings 1,390 2,100 1,895 1,947 Diluted earnings per share .18 .28 .25 .26 Common Stock Price Range, High $17.96 $17.96 $19.00 $16.50 Low $15.68 $15.78 $15.25 $11.75
* Net earnings reflect Restructuring Expenses of $2,167,000 ($1,416,000 after tax) in the September 1999 quarter. Net earnings for fiscal 1999 also reflect Unusual Charges (see Note 7) of $250,000 ($163,000 after tax) in the December 1998 quarter, $2,750,000 ($1,800,000 after tax) in the March 1999 quarter, $740,000 ($483,000 after tax) in the June 1999 quarter, and $500,000 ($327,000 after tax) in the September 1999 quarter. -41- BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
Charged to Beginning Costs and Ending Balance Expenses Deductions Balance Allowance for doubtful receivables: Year ended September 30, 1999 $ 1,139 837 738 1,238 =============== =============== =============== ============== Year ended September 30, 1998 $ 965 254 80 1,139 =============== =============== =============== ============== Year ended September 30, 1997 $ 932 385 352 965 =============== =============== =============== ============== Reserve for Warranty and Product Service Year ended September 30, 1999 $ 1,140 1,533 1,259 1,414 =============== =============== =============== ============== Year ended September 30, 1998 $ 915 1,629 1,404 1,140 =============== =============== =============== ============== Year ended September 30, 1997 $ 970 1,715 1,770 915 =============== =============== =============== ==============
-42- ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with the Company's principal accountants, which require disclosure pursuant to this item. PART III Part III (Items 10, 11, 12 and 13) is omitted by the Company in accordance with General Instruction G to Form 10-K. The Company intends to file with the Commission a definitive proxy statement pursuant to Regulation 14A not later than 120 days following the close of its fiscal year ending September 30, 1999, which is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements: See accompanying Index to Consolidated Financial Statements and Schedules. (a) (2) Financial Statement Schedules: See accompanying Index to Consolidated Financial Statements and Schedules. All schedules not listed have been omitted because they are not applicable or the information has been otherwise supplied in the Registrant's Financial Statements and Schedules. (a) (3) Exhibits: (3a) Certificate of Incorporation, as amended (7). (3b) By-Laws, as amended (6). (10a) BHA Group, Inc. 1986 Stock Option Plan as amended, including form of Option Agreement (2). (10b) Second Amendment to the BHA Group, Inc. 1986 Stock Option Plan (3). (10c) Employee Stock Ownership Plan of BHA (1). (10d) 401(K) Plan of BHA (1). (10e) Employment Agreement dated September 1, 1993 between BHA Group, Inc. and Lamson Rheinfrank, Jr. (4). (10f) Employment Agreement dated September 1, 1993 between BHA Group, Inc. and James E. Lund (4). (10g) Employment Agreement dated September 1, 1993 between BHA Group, Inc. and James J. Thome (4). (10h) Employment Agreement dated January 1, 1995 between BHA Group, Inc. and James C. Shay (6). -43- (10i) Rights Agreement dated as of December 13, 1995, between BHA Group, Inc., and Boatmen's Trust Company, including Form of Rights Certificate (Exhibit A) and Summary of Rights to Purchase Common Stock (Exhibit B) (5). (10j) $15,000,000 Term Loan Agreement between BHA Group Holdings, Inc. and Commerce Bank N.A. dated as of September 20, 1999 (8). (10k) $18,000,000 Revolving Credit Agreement between BHA Group Holdings, Inc. and Bank of America, N.A. dated as of September 30, 1999 (8). (11) Computation of earnings per common share (8). (21) Subsidiaries of the Registrant (8). (23) Independent Auditors' Consent (8). (27) Financial Data Schedule - Article 5 (8). (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the quarter ended September 30, 1999. (c) Exhibits: See (a) (3) above. (d) Financial Statement Schedules: See (a) (2) above. NOTES TO INDEX (1) Filed as an exhibit to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-8644) which exhibit is incorporated herein by reference. (2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1990, which exhibit is incorporated herein by reference. (3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992, which exhibit is incorporated herein by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993, which exhibit is incorporated herein by reference. (5) Filed as an exhibit to the Company Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 1995, which exhibit is incorporated herein by reference. (6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, which exhibit is incorporated herein by reference. (7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996, which exhibit is incorporated herein by reference. (8) Filed as an exhibit hereto. -44- 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. BHA GROUP HOLDINGS, INC. Dated: November 16, 1999 By: /s/ James E. Lund ---------------------------------- James E. Lund, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated. Dated: November 16, 1999 By: /s/ James E. Lund ---------------------------------------- James E. Lund, President Principal Executive Officer and Director Dated: November 16, 1999 By: /s/ Lamson Rheinfrank, Jr. ---------------------------------------- Lamson Rheinfrank, Jr. Chairman of the Board Dated: November 16, 1999 By: /s/ Don H. Alexander ---------------------------------------- Don H. Alexander Director Dated: November 16, 1999 By: /s/ Robert Freeland ---------------------------------------- Robert Freeland Director Dated: November 16, 1999 By: /s/ Thomas A. McDonnell ---------------------------------------- Thomas A. McDonnell Director Dated: November 16, 1999 By: /s/ James J. Thome ---------------------------------------- James J. Thome Executive Vice President, Principal Operating Officer and Director Dated: November 16, 1999 By: /s/ Richard C. Green, Jr. ---------------------------------------- Richard C. Green, Jr. Director Dated: November 16, 1999 By: /s/ James C. Shay ---------------------------------------- James C. Shay Senior Vice President, Finance and Administration, Principal Financial & Accounting Officer -45- BHA Group Holdings, Inc. Exhibit Index
EXHIBIT NO. DESCRIPTION 10j Term Loan Agreement 10k Credit Agreement 11 Computation of Per Share Earnings 21 Subsidiaries of BHA Group Holdings, Inc. 23 Independent Auditors' Report 27 Financial Data Schedule - Article 5
-46- EX-10 2 EXHIBIT 10J TERM LOAN AGREEMENT THIS TERM LOAN AGREEMENT ("AGREEMENT") is made and entered into as of the 20th day of September, 1999, by and between BHA Group Holdings, Inc., a Delaware corporation ("BORROWER") and Commerce Bank, N.A. (Kansas City, Missouri), a national banking association ("BANK"); In consideration of the mutual benefits accruing to each of the parties, the receipt and sufficiency of which are hereby acknowledged, and in further consideration of the mutual performance of this Agreement, the parties hereto agree as follows: ARTICLE I LOAN 1.01. DEFINITIONS. For purposes of this Agreement, certain terms used herein shall be defined as follows: (a) "COMMERCE PRIME RATE" shall mean the per annum rate of interest established as such from time to time by Bank, and no representation is made that the Prime Rate is the lowest, the best or a favored rate of interest; the rate of interest charged shall change with, and be effective on, the date of each change in the Prime Rate. (b) "EBITDA" shall mean the sum of Borrower's: (i) net income, plus (ii) interest expense, plus (iii) income tax expense, plus (iv) depreciation and amortization expense, (v) plus or minus a loss/gain on sale of assets and as a result of other non-recurring items. For purposes of this definition, the non-recurring items described in subclause (v) shall specifically include the add back of the approximately $2,400,000 charge with respect to the Georgia Power project and the approximately $1,500,000 charge with respect to restructure of Borrower's international operations. (c) "FIXED CHARGE" shall mean the sum of all scheduled payments of principal and/or interest on Total Funded Debt of Borrower. (d) "LEVERAGE RATIO" shall mean the ratio of Total Funded Debt to EBITDA. (e) "LIBOR RATE" shall mean (i) from the date hereof through the first Principal Payment Date, the thirty-day London Interbank Offered Rate, and (ii) commencing on the first Principal Payment Date and continuing thereafter, the ninety-day London Interbank Offered Rate, each as quoted in the Money Rates section of The Wall Street Journal, the Knight-Ridder News Service, or such other news service used by Bank, on the business day immediately preceding the date of the applicable borrowing (or the business day immediately preceding the date of any adjustment date, as applicable). (f) "TANGIBLE NET WORTH" shall mean Borrower's consolidated net worth, as determined in accordance with generally accepted accounting principles applied on an accrual basis, less, without duplication and taking into consideration the effects of consolidation: (i) Accounts and notes receivable due Borrower from any shareholder or any director or officer of Borrower; (ii) Accounts or notes receivable from any non-consolidated Affiliate of Borrower; (iii) Accounts or notes receivable from employees of Borrower to Borrower; provided, however, that the items listed in this subpart (iii) shall only be subtracted from Tangible Net Worth to the extent the aggregate amount of such items exceeds $100,000; (iv) Goodwill and organizational costs; and (v) Any other assets which Bank reasonably deems intangible. (g) "TOTAL FUNDED DEBT" shall mean the sum of: (i) outstanding borrowings under the Loan, plus (ii) the face amount of issued and outstanding standby or commercial letters of credit, except to the extent such issued and outstanding standby letters of credit are secured by or secure indebtedness already included within this defined term, plus (iii) the aggregate outstanding principal balance of all other obligations for borrowed money, plus (iv) guarantees, less monies advanced on Chapter 100 bonds but not yet spent on the applicable project. (h) "PERMITTED INDEBTEDNESS" shall mean the indebtedness which falls within the indebtedness permitted in Section 5.01 (b). (i) "PRINCIPAL PAYMENT DATE" shall mean the first day of each fiscal quarter, commencing on the first day of the first fiscal quarter following the first anniversary hereof. 1.02. AMOUNT. Subject to the terms of this Agreement, Bank agrees to lend to Borrower (the "LOAN") the sum of Fifteen Million Dollars ($15,000,000) (the "LOAN AMOUNT"). 2 The proceeds of the Loan will first be used to repay all sums due from Borrower to Bank in connection with Borrower's existing Fifteen Million Dollar ($15,000,000) revolving line of credit at Bank, and the balance of the proceeds, if any, shall be used to pay down any other outstanding bank debt. 1.03. TERM NOTE. On the date of closing Borrower will execute and deliver its promissory note to Bank, in form and substance satisfactory to Bank, and in the principal amount of the Loan (the "TERM NOTE"). 1.04. INTEREST. (a) Accrued interest on the Loan shall be calculated on the actual number of days outstanding based on a year consisting of 360 days. Interest after or during the continuation of any Event of Default under Section 7.01 shall be at a rate equal to the Commerce Prime Rate plus two percent (2.0%), but not exceeding the maximum rate permitted by applicable law (the "DEFAULT RATE"). (b) Commencing on the date hereof, and continuing until the first Principal Payment Date, the interest rate shall be adjusted on the first day of each calendar month based upon the then applicable LIBOR Rate. Commencing on the first Principal Payment Date, the interest rate shall be subject to adjustment based upon the applicable LIBOR Rate and the Borrower's Leverage Ratio as herein provided. (c) From the date hereof up to the first Principal Payment Date, the Loan shall bear interest at a per annum variable rate equal to the LIBOR Rate plus eighty-five (85) basis points, payable in monthly installments in arrears on the first of each calendar month. (d) Commencing on the first Principal Payment Date, the interest rate borne by the Loan shall be subject to adjustment (and thereafter subject to readjustment) based upon Borrower's Leverage Ratio, as defined herein, for the immediately preceding fiscal quarter, as set forth below:
Leverage Ratio Interest Rate -------------- ------------- greater than 2.75:1 LIBOR Rate plus 115 basis points 2.75:1 to 2.01:1 LIBOR Rate plus 100 basis points 2.00:1 to 1.25:1 LIBOR Rate plus 85 basis points less than 1.24:1 LIBOR Rate plus 75 basis points
The Borrower's Leverage Ratio shall be determined by reference to Borrower's Compliance Certificates, required under Section 4.02 hereof. The interest adjustment shall be effective upon the first day of the first month following Bank's receipt of Borrower's Compliance Certificate for the preceding fiscal quarter and subsequent interest adjustments shall similarly be effective on the first day of the first month following Bank's receipt of the applicable Compliance Certificate. 3 1.05. PRINCIPAL. Commencing on the first Principal Payment Date, and continuing on each Principal Payment Date thereafter, principal shall be due in advance in twenty-four (24) equal quarterly installments of Six Hundred Twenty Five Thousand Dollars ($625,000) each. 1.06. AUTOMATIC PAYMENT. Borrower hereby authorizes Bank automatically to deduct from Borrower's Account, number 2340340 (the "ACCOUNT"), the amount of any Loan payment hereunder, whether interest, principal or other amounts due hereunder. If the funds in the Account are insufficient to cover any such payment, Bank shall not be obligated to advance funds to cover such payment. At any time and for any reason, either Bank or Borrower may voluntarily terminate such automatic payments, effective upon written notice from one to the other. 1.07. FACILITY FEE. A non-refundable facility fee equal to one percent (1.0%) of the Loan Amount shall be due and payable on the date of execution of this Agreement to Bank by Borrower. Additionally, a facility fee equal to one tenth of one percent (0.10%) of the Loan Amount shall be deemed earned and non-refundable on the date of execution hereof and will be due and payable on the first Principal Payment Date, or on such earlier date on which the entire Loan becomes due and payable in full. 1.08. SWAP OPTION. At any time upon prior written notice, Borrower may elect to convert all, but not less than all, of the Loan from a variable interest rate loan to a fixed interest rate loan. Borrower shall give written notice to Bank of its election to convert the Loan, and such notice shall specify the date on which Borrower wishes the fixed rate of interest determined. Bank shall use its best efforts to determine the fixed rate of interest on the date specified in Borrower's notice but Bank shall have no less than five (5) Business Days following receipt of Borrower's notice in which to quote the fixed interest rate to Borrower. Should Borrower elect to convert the Loan to the rate quoted by Bank, Bank will implement such conversion by entering into a swap contract (the "SWAP CONTRACT") pursuant to the terms of the 1992 International Swap Dealer's Association Master Loan and Appendices. The fixed interest rate may only become effective on a regularly scheduled interest payment date or a Principal Payment Date. The Swap Contract shall bear whatever interest rate is available at such time. Borrower shall pay all fees and expenses of Bank in connection with the Swap Contract, including Bank's reasonable administrative fees to cover its services in implementing the Swap Contract. In addition, should Borrower wish to prepay the Loan following such conversion to a fixed rate, Borrower shall pay any and all fees, costs and expenses incurred by Bank in connection with such prepayment, including, if necessary, implementation of a second Swap Contract to ensure that Bank suffers no loss or detriment arising out of Borrower's election to convert the Loan to a fixed interest rate as herein provided. 1.09. PREPAYMENT. Provided Borrower has not elected to fix the interest rate of the Loan pursuant to Section 1.08, Borrower may prepay the Loan, in part or in full, at any time without the payment of a prepayment fee. Partial prepayments shall be applied to principal in inverse order of maturity, and shall not affect the regularly scheduled payments provided for herein. 4 ARTICLE II REPRESENTATIONS AND WARRANTIES In borrowing hereunder, Borrower represents and warrants to Bank (which representations and warranties will survive the delivery of the Term Note and shall continue so long as any sums remain outstanding under the Loan Documents) that: 2.01. BORROWER'S AFFILIATES. Borrower has eight (8) wholly-owned subsidiaries, BHA Group, Inc., BHA International, Inc., BHA Purifilter S.L., BHA Group Ltd., BHA Group International Holdings, B.V., BHA Group GmbH, BHA Group International, Inc. and BHA Technologies, Inc., and other indirectly wholly-owned subsidiaries. Each of the foregoing subsidiaries and any future subsidiaries, whether wholly-owned or not, are herein collectively referred to as "AFFILIATES". 2.02. CORPORATE STANDING. Borrower is a corporation duly organized and in good standing under the laws of the State of Delaware. Borrower is qualified to do business as a foreign corporation in Missouri and is in good standing under the laws of Missouri. Borrower and each Affiliate has the power to own its property and to carry on its business and is qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes such qualification necessary. 2.03. AUTHORITY. Borrower has the full power and authority to execute and deliver this Agreement, the Term Note, and the other instruments referred to herein or therein which Borrower is required to execute (the foregoing sometimes hereinafter collectively referred to as the "LOAN DOCUMENTS"), and the same constitute the binding and enforceable obligations of Borrower in accordance with their terms. 2.04. LITIGATION. There are no actions, suits or proceedings pending or, to the knowledge of Borrower, threatened, or any basis therefor, against or affecting Borrower or any Affiliate, at law or in equity, in any court or before any governmental department or agency, which may result in any material adverse change in the properties, assets, business or condition, financial or otherwise, of Borrower or the ability of Borrower to perform the obligations under the other Loan Documents. 2.05. NO VIOLATION OR BREACH. The execution, delivery and performance by Borrower of the Loan Documents does not and will not conflict with, or constitute a violation, breach or default under the provisions of (a) the articles of incorporation or bylaws of Borrower or any Affiliate, or (b) the provisions of any existing mortgage, indenture, contract or any other agreement binding on Borrower or any Affiliate or affecting their respective properties. 2.06. TITLE AND LIENS. Borrower and each Affiliate has good, valid and marketable title of record to all of its property and assets, both tangible and intangible, all of which is owned free and clear of all mortgages, liens, pledges, charges and other security interests 5 and encumbrances, except as provided in this Agreement or disclosed to Bank in writing prior to the date of this Agreement. 2.07. TAXES. Borrower and each Affiliate has filed all federal, state and other tax and similar returns and has paid or provided for the payment of all taxes and assessments due thereunder through the date of this Agreement, including, without limitation, all withholding, FICA and franchise taxes. 2.08. ADVANCES. Borrower's request for the advancement of the Loan amount shall be deemed to be a representation and warranty of Borrower that: (a) all representations and warranties are true and correct as of the date of each advance; (b) no default or Event of Default then exists or would result from such advance; (c) there has been no material adverse change in the financial condition or prospects of Borrower, its Affiliates, or their respective businesses; (d) the use of the proceeds does not contravene, violate or conflict with any law, rule or regulation of any court of law or other governmental authority; and (e) all legal proceedings and other matters in connection with the authorization, legality, validity and enforceability of the Loan Documents shall be satisfactory to Bank. 2.09. OTHER STATEMENTS. All statements by Borrower or any Affiliate contained in any certificate, statement, document or other instrument delivered by or on behalf of Borrower or any Affiliate at any time pursuant to the Loan Documents shall constitute representations and warranties made by Borrower hereunder. 2.10. REGULATION U. No part of the proceeds of the Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or to reduce or retire any indebtedness incurred for any such purpose. If requested by Bank, Borrower will furnish to Bank a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U to the foregoing effect. 2.11. HAZARDOUS SUBSTANCES. To the Borrower's actual knowledge, and except as disclosed to Bank in a memorandum dated August 27, 1999 relating to a facility of Borrower's Affiliate located in Slater, Missouri, the Real Property (hereinafter defined) has never been used for either a sanitary landfill or as a disposal site for waste, petroleum products, pesticides, PCBs, or toxic or hazardous substances or materials of any kind (the foregoing being collectively referred to as "HAZARDOUS SUBSTANCES") and no Hazardous Substances or underground storage tanks have been deposited or are located in, under or upon the Real Property and no such part of 6 the Real Property is presently contaminated by Hazardous Substances including asbestos. Bank, its agents and representatives shall have the right to inspect the Real Property upon the occurrence of any Event of Default (as hereinafter defined). To Borrower's actual knowledge, and except as disclosed in writing to Bank, no parcel adjacent to the Real Property has ever been used for either a sanitary landfill or as a disposal site for Hazardous Substances, and no Hazardous Substances or underground storage tanks have been deposited or are located in, under or upon any parcel adjacent to the Real Property, and no part of any parcel adjacent to the Real Property is presently contaminated by Hazardous Substances. Borrower represents and warrants that neither it nor any Affiliate has received, or has, actual notice of any violation of any environmental laws or regulations with respect to the Real Property. Borrower represents and warrants that no Hazardous Substances shall be used or stored in, under or upon the Real Property, except Hazardous Substances in such quantities and of such types as are commonly and customarily used in the operation, cleaning and maintenance of the Real Property (subject, however, to compliance with applicable environmental laws, statutes and regulations). Borrower covenants and agrees to execute and deliver to Bank an Environmental Indemnification Agreement in form and substance mutually acceptable to Bank and Borrower, if requested by Bank. The term "REAL PROPERTY" shall mean any real property, including buildings and improvements located thereon, now, previously or hereafter owned or occupied by Borrower or any Affiliate. 2.12 ERISA. Each Benefit Plan, as defined herein, maintained by or to which contributions are made by Borrower or any Affiliate, is in compliance with ERISA, and neither Borrower nor any Affiliate has received any notice that a Benefit Plan is not in compliance with ERISA. Neither Borrower nor any Affiliate has incurred any material liability to the Pension Benefit Guaranty Corporation. No Termination Event as defined in ERISA has occurred. There are no unfunded vested accrued benefits under any Benefit Plan. The term "BENEFIT PLAN" as used herein, means an employee benefit plan as defined in Section 3(35) of ERISA in respect of which Borrower or any affiliate is, or within the immediately preceding six (6) years was an "EMPLOYER" as defined in Section 3(5) of ERISA, including such plans as may be established after the date hereof. ARTICLE III SECURITY The Loan shall be unsecured. 7 ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants and agrees that during the term of this Agreement and so long as any sums remain outstanding under the Loan Documents, Borrower and its Affiliates will duly perform and observe each and all of the covenants and agreements hereinafter set forth: 4.01. BOOKS AND RECORDS; INSPECTIONS. Maintain proper books and records, and account for financial transactions in accordance with generally accepted accounting practices, consistently applied, and permit Bank's officers and/or its authorized representatives or accountants to visit and inspect Borrower's offices and properties, examine its books and records, and discuss its accounts and business with its respective officers, employees, accountants and auditors, all at reasonable times upon reasonable notice. 4.02. FINANCIAL REPORTING. Deliver to Bank financial information in such form and detail and at such times as are satisfactory to Bank, including, without limitation: (a) Borrower's quarterly consolidating (i) financial statements (to include but not be limited to balance sheet and statement of income and expenses), and (ii) certificates signed by Borrower's chief financial officer or treasurer certifying Borrower's continuing compliance with all affirmative covenants, negative covenants and financial covenants contained in the Loan Documents (collectively, the "COVENANTS") and the continuing accuracy of all representations and warranties made in the Loan Documents (collectively, the "REPRESENTATIONS") (the certificates regarding compliance with the Covenants and the accuracy of the Representations herein collectively the "COMPLIANCE CERTIFICATES"), within forty-five (45) days of the end of each quarter. The Compliance Certificates shall be in the form attached hereto as EXHIBIT A, with such changes and modifications as Bank may reasonably require. (b) Borrower's audited financial statement as of the end of each fiscal year and Borrower's internally-prepared annual consolidating balance sheet and profit and loss statement and Compliance Certificates, as described above, and Borrower's annual budgets and forecasts in such detail as Bank may reasonably request, within one hundred twenty (120) days of the end of the fiscal year; and (c) such other financial information concerning Borrower and its Affiliates as Bank may reasonably require from time to time. All financial statements required hereunder shall be complete and correct in all material respects and shall be prepared in reasonable detail. 4.03. PAYMENT OF DEBTS, TAXES AND CLAIMS. Promptly pay and discharge prior to delinquency all debts, accounts, liabilities, taxes, assessments and other governmental charges or levies imposed upon, or due from, Borrower and any Affiliate, as well as all claims of any kind 8 (including claims for labor, materials and supplies) which, if unpaid, might by law become a lien or charge upon any of its property, except that nothing herein contained shall be interpreted to require the payment of any such debt, account, liability, tax, assessment or charge so long as its validity is being contested in good faith by appropriate legal proceedings and against which, if requested by Bank, reserves satisfactory to Bank have been made therefor. 4.04. INSURANCE. Maintain adequate property damage, casualty loss and liability insurance with responsible insurance companies on such of its properties and in such amounts consistent with Borrower's current practice or as is customarily maintained by similar businesses. 4.05. PROPERTY MAINTENANCE. Keep its properties in good repair, working order, and condition and from time to time make any needful and proper repairs, renewals, replacements, extensions, additions, and improvements thereto so that the business of Borrower will be conducted at all times in accordance with prudent business management. 4.06. CORPORATE EXISTENCE; COMPLIANCE WITH LAWS. Take or cause to be taken such action as from time to time may be necessary to maintain its organizational existence as a corporation qualified to conduct business in the State of Missouri and use due diligence to comply with all laws pertaining to the business or property of Borrower or any Affiliate, or any part thereof, and with all other lawful government requirements relating to their business and property. 4.07. LITIGATION; ADVERSE EVENTS. Promptly inform Bank in writing of (i) the commencement of any material action, suit, proceeding or investigation against Borrower or any Affiliate; (ii) the making of any material counterclaim against Borrower or any Affiliate; or (iii) the granting or presence of any liens against any of Borrower's or an Affiliate's property; (iv) of any other condition, event or act which comes to Borrower's attention that would or might prejudice Bank's rights under the Loan Documents; and (v) the filing by any person, firm or entity of a Schedule 13D, 13G or 14D-1 under the provisions of the Securities Exchange Act of 1934 or any similar provisions of such or subsequent laws (the "ACT") which reflects that such person, firm or entity has acquired securities of Borrower with the purpose or effect of changing the control of Borrower as contemplated under Regulation 13D-G promulgated under the Act. 4.08. NOTIFICATION. Notify Bank immediately if it becomes aware of the occurrence of any Event of Default (as defined under Article VII hereof) or of any fact, condition, or event that, only with the giving of notice or passage of time or both, would become an Event of Default, or if it becomes aware of a material adverse change in the business prospects, financial condition (including, without limitation, proceedings in bankruptcy, insolvency, reorganization, or the appointment of a receiver or trustee), or results of operations of Borrower or any Affiliate, or the failure of Borrower to observe any of its undertakings under the Loan Documents. 9 ARTICLE V NEGATIVE COVENANTS 5.01. NEGATIVE COVENANTS. From and after the date hereof, and so long as this Agreement remains in effect, or as long as any sums remain outstanding under the Loan Documents, Borrower shall not, without the prior written consent of Bank: (a) make any advances to Borrower's Affiliates, including without limiting the generality of the foregoing, BHA Technologies, Inc., in excess of Four Million Dollars ($4,000,000) in the aggregate among all Borrower's Affiliates; (b) incur any indebtedness or permit any Affiliate to incur any indebtedness of any kind whatsoever, other than (i) indebtedness under the Loan Documents; (ii) indebtedness of Borrower or an Affiliate on terms approved in advance by Bank in its reasonable discretion and Bank hereby approves Borrower's indebtedness to Bank of America in the maximum amount of Eighteen Million Dollars ($18,000,000); (iii) operating leases, the expenditures for which in any fiscal year do not exceed Three Million Five Hundred Thousand Dollars ($3,500,000) in the aggregate among Borrower and its Affiliates; (iv) capital lease obligations which do not exceed Three Million Dollars ($3,000,000) at any time in the aggregate among Borrower and its Affiliates; and (v) purchase money indebtedness the outstanding balance of which does not exceed Three Million Dollars ($3,000,000) at any time in the aggregate among Borrower and its Affiliates; (c) undertake, undergo or permit any Change of Control, as such term is defined herein. The term "Change of Control" as used with respect to Borrower, shall be deemed to occur if (i) the board of directors of Borrower approves a sale of all or substantially all of the assets of Borrower or provides a positive recommendation with respect to any tender offer or approves the terms of any merger, which, in either event, will result in the persons who are the shareholders of Borrower immediately prior to the consummation of such transaction owning less than 50% of the voting securities of Borrower or the resulting entity into which Borrower is merged (if Borrower is not the surviving entity in such merger) upon consummation of such transaction; or (ii) any person, firm or entity, or group of persons, firms or entities acting in concert, acquires in excess of 25% of the voting securities of Borrower; (d) make any investment in any line of business outside of Borrower's primary line of business of the development, manufacturing and marketing of filtration devices for industrial air pollution control equipment and services related thereto or outside any Affiliate's primary line of business; 10 (e) incur any Change in Management, as such term is defined herein. A "CHANGE IN MANAGEMENT" shall be deemed to occur if the Chief Executive Officer and the Chief Operating Officer, as of the date hereof, cease to be employees of Borrower. (f) (i) sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates inconsistent with current practices conducted by Borrower and its Affiliates, except that the Borrower or any Affiliate may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions which, taken as a whole, are not less favorable to the Borrower or any Affiliate than would prevail in an arm's-length transaction with unrelated third parties; (ii) Notwithstanding the foregoing, Borrower shall be permitted to make acquisitions without the prior written consent of Bank, provided that: (A) the target company is in the same line of business as Borrower; (B) the cash portion of the purchase price for any one acquisition does not exceed $15,000,000; (C) the aggregate purchase price of all such acquisitions does not exceed 25% of Capital Funds, as defined herein; (D) no later than 30 business days prior to the consummation of the acquisition, Borrower has provided Bank with pro forma financial statements giving effect to the acquisition which demonstrate continued compliance with the Covenants and Representations contained herein; (E) Borrower or an Affiliate is the surviving entity; and (F) the acquisition would not result in an event of default under the Credit Agreement. As used herein, the term "CAPITAL FUNDS" shall mean Borrower's stockholders' equity as defined in accordance with generally accepted accounting principles as of the end of the fiscal quarter preceding the date of closing of the acquisition; and (g) grant or permit a security interest in or a lien or encumbrance on any of its assets without Bank's prior written consent, except in respect of Permitted Indebtedness. ARTICLE VI FINANCIAL COVENANTS 6.01. FINANCIAL COVENANTS. So long as this Agreement remains in effect, or as long as any sums remain outstanding under the Loan Documents, Borrower hereby covenants that it and, where applicable, its Affiliates, shall continuously comply with the following financial covenants, all of which are calculated on a consolidated basis: (a) The ratio of: (i) Total Funded Debt to (ii) EBITDA, measured as of the last day of each fiscal quarter using EBITDA for the four fiscal quarters then ended, may not exceed the ratio set forth below in the following table: Period --------------------------------------- 11
From and Including Up until Ratio ------------------ -------- ----- 07/01/99 12/31/01 4.00:1 12/31/01 12/31/02 3.75:1 12/31/02 12/31/03 3.50:1 12/31/03 and thereafter 3.25:1
(b) Borrower's Tangible Net Worth, measured as of the last day of each fiscal quarter, shall not fall below the amount set forth below in the following table:
Period -------------------------------------- From and Including Up until Amount ------------------ -------- ------ 07/01/99 12/31/01 $40,000,000 12/31/01 12/31/02 $44,000,000 12/31/02 12/31/03 $47,000,000 12/31/03 12/31/04 $50,000,000 12/31/04 12/31/05 $53,000,000 12/31/05 12/31/06 $56,000,000 12/31/06 and thereafter $59,000,000
(c) The ratio of Borrower's (i) EBITDA to (ii) Fixed Charge, measured as of the last day of each fiscal quarter using EBITDA and Fixed Charge for the four fiscal quarters then ended, shall not fall below 1.50:1 at any time. ARTICLE VII DEFAULT 7.01. EVENTS OF DEFAULT. The occurrence of one or more of the following events ("EVENTS OF DEFAULT") shall constitute a "DEFAULT" by Borrower hereunder: (a) nonpayment of interest or principal hereunder when payment is due as herein provided; or (b) any representation or warranty made by Borrower herein or in any writing furnished in connection with or pursuant to the Loan Documents shall prove to be false in any material respect as of the date on which it is made; or (c) a material breach by Borrower or any Affiliate in the performance or observance of any agreement, term, covenant or condition contained herein (other than in (a) above), and such breach shall not have been remedied within thirty (30) days after written notice thereof shall have been given by Bank to Borrower or such Affiliate, provided, however, if Borrower or such Affiliate has commenced to remedy such breach, and continues to diligently pursue such remedy, the time period to remedy such breach 12 shall be extended for an additional period of time, not to exceed sixty (60) days, necessary for Borrower or such Affiliate to complete the remedy of such breach; or (d) any report, certificate, financial statement or other instrument furnished in connection with this Agreement shall prove to be false or misleading in any material respect; or (e) default in the performance of the obligations of the Borrower or any Affiliate on any other note, agreement (including but not limited to security agreements), or obligations owed by Borrower or any Affiliate to Bank; or (f) any default by Borrower or any Affiliate under any other contract for borrowed money in an amount (either individually or in the aggregate with other defaults) of $100,000 or more and which entitles the obligee to accelerate the maturity thereof, or any failure by Borrower or any Affiliate to pay any indebtedness when due, whether by acceleration or otherwise; or (g) commencement by Borrower or any Affiliate of a voluntary case under the Bankruptcy Act of 1986 or similar law, federal or state, whether now or hereafter existing; or a trustee or receiver shall be appointed for Borrower or any Affiliate or all or a substantial part of their properties in any involuntary proceeding, or any court shall have taken any jurisdiction of all or a substantial part of the properties of Borrower or any Affiliate in any involuntary proceeding for the reorganization, dissolution, liquidation or winding up of the business of Borrower or any Affiliate and such trustee or receiver shall not be discharged or such jurisdiction relinquished or vacated or stayed on appeal or otherwise within thirty (30) days; or Borrower or any Affiliate shall file a petition or answer consenting to or acquiescing in a petition against it in bankruptcy or under any chapter of the Bankruptcy Act of 1986 or any similar law, state or federal, whether now or hereafter existing, or such petition filed against Borrower shall be approved and not vacated or stayed within thirty (30) days; or Borrower or any Affiliate shall become insolvent, or shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due, or shall consent to the appointment of a receiver or trustee or liquidator of all its properties or a substantial part thereof, or shall have failed within thirty (30) days to pay a bond or otherwise discharge any judgment or attachment which is not stayed on appeal or otherwise being contested in good faith; or (h) Borrower or any Affiliate suffers any judgment in excess of $750,000.00, writ of attachment or execution or similar process to be issued or levied against all or a substantial part of its property and which is not released, stayed, bonded, insured or vacated within thirty (30) days; or (i) any material adverse change in the financial condition of Borrower or any Affiliate, or the nature of Borrower's or any Affiliate's business, the result of which causes Bank to deem itself insecure. 13 7.02. REMEDIES. Upon an Event of Default, Bank may resort to any and all security and to any remedy existing at law or in equity for the collection of the Term Note according to its tenor and enforcement of the covenants and provisions hereof, including without limiting the generality of the foregoing, all costs, penalties and expenses owed to the Bank hereunder, including those relating to any applicable Swap Contract, and Bank's resort to any remedy shall not prevent the concurrent or subsequent employment of any other remedy. In addition to the remedies provided herein, in the event the Term Note is due and payable or upon an Event of Default, the Bank shall have the right of setoff, without demand or notice to anyone, against the funds of Borrower or any Affiliate on deposit with it. 7.03. EXPENSES OF COLLECTION. All reasonable costs, expenses and liabilities incurred by Bank in collecting or attempting to collect on the Term Note, including costs and expenses, and all reasonable attorneys' fees in connection with such matters, and specifically including any costs, charges, penalties, administrative charges and fees associated with any applicable Swap Contract, shall constitute a demand obligation of Borrower and shall bear interest from the date of expenditure until paid at the per annum rate equal to the Default Rate. 7.04. WAIVER. Any waiver of an Event of Default by Bank shall not extend to or affect any subsequent Event of Default. No failure or delay by Bank in exercising any right hereunder shall operate as a waiver, nor shall any single or partial exercise of any right preclude the exercise of any other right hereunder. ARTICLE VIII CLOSING Bank will not be obligated to make the Loan until it has received from Borrower fully executed copies of all documents required by this Agreement and any other documents, instruments and reports as Bank may reasonably require. ARTICLE IX MISCELLANEOUS 9.01. PAYMENT ON HOLIDAYS. Whenever any payment to be made pursuant to the Loan Documents shall be stated to be due on a public holiday, Saturday or Sunday, such payment may be made on the next succeeding business day of Bank and such extension of time shall in such case be included in computing interest, if any, in connection with such payment. 9.02. WAIVERS. No omission or delay by Bank in exercising any right, power or privilege under the Loan Documents, will impair such right, power or privilege or be construed to be a waiver of any Event of Default or acquiescence therein and any single or partial exercise of any right, power or privilege will not preclude other or further exercise of any other right, power or privilege and no waiver will be valid unless in writing and signed by Bank and then only to the 14 extent specified. All remedies herein by law afforded will be cumulative and will be available to Bank until payment in full of all sums due under the Loan Documents. No omission or delay by the Borrower in exercising any right, power or privilege under this Agreement, the Term Note or any other agreement executed in connection herewith, will impair such right, power or privilege or be construed to be a waiver or acquiescence therein and any single or partial exercise of any right, power or privilege will not preclude other or further exercise of any other right, power or privilege and no waiver will be valid unless in writing and signed by Borrower and then only to the extent specified. All remedies herein by law afforded will be cumulative. 9.03. BINDING EFFECT. This Agreement shall continue until payment in full of all sums due under the Loan Documents and shall be binding upon Borrower and its successors and assigns and shall be binding upon and inure to the benefit of Bank, its successors and assigns. 9.04. NOTICES. All notices, requests or demands required or permitted by this Agreement shall be given to, or made upon, the respective parties hereto by depositing the same in the United States mail, postage prepaid, or by overnight (next day) courier, charges prepaid, to the following addresses: Commerce Bank, N.A. 1000 Walnut Street P.O. Box 419248 Kansas City, Missouri 64141-6248 Attention: Peter W. Shriver BHA Group Holdings, Inc. 8800 East 63rd Street Kansas City, Missouri 64133 Attention: James C. Shay 9.05. AMENDMENTS. Borrower and Bank may from time to time enter into written agreements supplemental hereto for the purpose of modifying or adding any provision to this Agreement or changing the rights and privileges of Bank or Borrower hereunder. Any such supplemental agreement shall be binding upon Borrower and Bank and their respective successors and assigns. 9.06. HEADINGS. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 9.07. SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. 15 9.08. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Missouri. 9.09. COUNTERPART AGREEMENTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. 9.10. STATUTORY NOTICE. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU (BORROWER) AND US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. BY SIGNING BELOW, YOU AND WE AGREE THAT THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN US. - ---------------------------------------------------------------- THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written. BHA GROUP HOLDINGS, INC. By: ________________________________ James C. Shay Chief Financial Officer COMMERCE BANK, N.A. (KANSAS CITY, MISSOURI) By: ________________________________ Title: _____________________________ 17 EXHIBIT A FORM OF COMPLIANCE CERTIFICATE 18 EX-10 3 EXHIBIT 10K CREDIT AGREEMENT Dated as of September 30, 1999 Borrower BHA GROUP HOLDINGS, INC. Guarantors BHA GROUP, INC. BHA TECHNOLOGIES, INC. Lender BANK OF AMERICA, N.A. $18,000,000 Revolving Line of Credit Termination Date: October 1, 2002 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS.................................................................................... ARTICLE 2 REVOLVING LINE OF CREDIT....................................................................... 2.1 AGREEMENT TO LEND...................................................................... 2.2 REVOLVING NOTE......................................................................... ARTICLE 3 OTHER CREDIT FACILITIES........................................................................ 3.1 LETTERS OF CREDIT...................................................................... 3.2 CONVERSION OF REVOLVING LOANS.......................................................... ARTICLE 4 TYPES OF LOANS; DISBURSEMENTS; INTEREST; PAYMENTS........................................................ 4.1 TYPES OF LOANS......................................................................... 4.2 LOAN DISBURSEMENT PROCEDURES........................................................... 4.3 INTEREST............................................................................... 4.4 OPTIONAL AND MANDATORY PAYMENTS........................................................ 4.5 PAYMENTS............................................................................... 4.6 DIRECT DEBIT AND PRE-BILLING........................................................... 4.7 MINIMUM AMOUNTS........................................................................ 4.8 CERTAIN REQUESTS AND NOTICES........................................................... ARTICLE 5 GUARANTIES; FEES; COLLATERAL................................................................... 5.1 GUARANTIES............................................................................. 5.2 UNUSED COMMITMENT AND LETTER OF CREDIT FEES............................................ 5.3 ADDITIONAL EURODOLLAR RATE LOAN COSTS.................................................. 5.4 COLLATERAL............................................................................. ARTICLE 6 CONDITIONS TO MAKING LOANS..................................................................... 6.1 DELIVERY OF LOAN DOCUMENTS............................................................. 6.2 PROPER PROCEEDINGS; CHARTER DOCUMENTS.................................................. 6.3 LEGAL OPINIONS......................................................................... 6.4 NO ADVERSE CHANGES; REPRESENTATIONS; NO DEFAULT........................................ 6.5 NO MATERIAL IMPAIRMENT................................................................. 6.6 REQUIRED CONSENTS AND APPROVALS........................................................ 6.7 LEGALITY............................................................................... 6.8 GENERAL................................................................................ ARTICLE 7 REPRESENTATIONS AND WARRANTIES................................................................. 7.1 CORPORATE EXISTENCE AND STANDING....................................................... 7.2 AUTHORIZATION AND VALIDITY............................................................. 7.3 NO CONFLICT; GOVERNMENTAL CONSENT...................................................... 7.4 COMPLIANCE WITH LAWS; ENVIRONMENTAL AND SAFETY MATTERS................................. 7.5 FINANCIAL STATEMENTS................................................................... 7.6 OWNERSHIP OF PROPERTIES; COLLATERAL LIENS.............................................. 7.7 SUBSIDIARIES........................................................................... 7.8 LITIGATION.............................................................................
7.9 MATERIAL AGREEMENTS; LABOR MATTERS..................................................... 7.10 INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT............................. 7.11 TAXES.................................................................................. 7.12 ACCURACY OF INFORMATION................................................................ 7.13 EMPLOYEE BENEFIT PLANS................................................................. 7.14 NO UNDISCLOSED DIVIDEND RESTRICTIONS................................................... 7.15 ABSENCE OF DEFAULT OR EVENT OF DEFAULT................................................. 7.16 DISCLOSURE............................................................................. 7.17 SOLVENCY............................................................................... 7.18 MARGIN REGULATIONS..................................................................... 7.19 COPYRIGHTS, PATENTS AND OTHER RIGHTS................................................... 7.20 YEAR 2000 COMPLIANCE................................................................... ARTICLE 8 AFFIRMATIVE COVENANTS.......................................................................... 8.1 CONDUCT OF BUSINESS AND MAINTENANCE OF PROPERTIES..................................... 8.2 INSURANCE.............................................................................. 8.3 COMPLIANCE WITH LAWS AND TAXES......................................................... 8.4 FINANCIAL STATEMENTS, REPORTS, ETC..................................................... 8.5 OTHER NOTICES.......................................................................... 8.6 ACCESS TO PROPERTIES AND INSPECTIONS................................................... 8.7 USE OF PROCEEDS........................................................................ 8.8 YEAR 2000 COMPLIANCE................................................................... 8.9 PAYMENT OF CLAIMS...................................................................... ARTICLE 9 FINANCIAL COVENANTS............................................................................ 9.1 MINIMUM CONSOLIDATED TANGIBLE NET WORTH................................................ 9.2 CONSOLIDATED FUNDED DEBT/EBITDA RATIO.................................................. 9.3 CONSOLIDATED FIXED CHARGE COVERAGE RATIO............................................... 9.4 MINIMUM CONSOLIDATED EBITDA............................................................ 9.5 CONSOLIDATED CURRENT RATIO............................................................. ARTICLE 10 NEGATIVE COVENANTS............................................................................ 10.1 INDEBTEDNESS........................................................................... 10.2 LIENS.................................................................................. 10.3 SALE AND LEASE-BACK TRANSACTIONS....................................................... 10.4 MERGERS, TRANSFERS OF ASSETS, ACQUISITIONS............................................. 10.5 TRANSACTIONS WITH AFFILIATES........................................................... 10.6 SUBSIDIARY DIVIDEND RESTRICTIONS....................................................... 10.7 USE OF PROCEEDS........................................................................ 10.8 LOANS, ADVANCES AND INVESTMENTS........................................................ 10.9 NEGATIVE PLEDGE........................................................................ 10.10 LIQUIDATION OR CHANGE IN BUSINESS...................................................... ARTICLE 11 EVENTS OF DEFAULT............................................................................. 11.1 EVENTS OF DEFAULT...................................................................... 11.2 RIGHTS AND REMEDIES.................................................................... ARTICLE 12 MISCELLANEOUS................................................................................. 12.1 NOTICES................................................................................ 12.2 SURVIVAL OF AGREEMENT..................................................................
12.3 BINDING EFFECT......................................................................... 12.4 SUCCESSORS AND ASSIGNS; PARTICIPATIONS................................................. 12.5 EXPENSES; INDEMNITY.................................................................... 12.6 RIGHT OF SETOFF........................................................................ 12.7 APPLICABLE LAW......................................................................... 12.8 WAIVERS; AMENDMENT..................................................................... 12.9 INTEREST RATE LIMITATION............................................................... 12.10 ENTIRE AGREEMENT....................................................................... 12.11 SEVERABILITY........................................................................... 12.12 COUNTERPARTS........................................................................... 12.13 HEADINGS............................................................................... 12.14 JURISDICTION; CONSENT TO SERVICE OF PROCESS............................................ 12.15 TERMS GENERALLY........................................................................ 12.16 ARBITRATION............................................................................
LIST OF EXHIBITS: Exhibit 1 - Definitions Exhibit 2.2 - Revolving Note Exhibit 4.8-A - Notice of Borrowing, Prepayment or Termination or Reduction of Commitment Exhibit 4.8-B - Notice of Continuation or Conversion Exhibit 5.1 - Loan Guaranty Exhibit 8.4 - Compliance Certificate LIST OF SCHEDULES: Schedule 7.4 - Environmental Matters Schedule 7.7 - Subsidiaries of Borrower Schedule 7.9 - Material Contracts Schedule 10.1 - Existing Indebtedness Schedule 10.2 - Existing Liens Schedule 10.8 - Loans, Advances and Investments CREDIT AGREEMENT THIS CREDIT AGREEMENT is made as of the 30th day of September, 1999, by and among BHA GROUP HOLDINGS, INC., a Delaware corporation ("BORROWER"), BHA GROUP, INC., a Delaware corporation, and BHA TECHNOLOGIES, INC., a Delaware corporation (each a "GUARANTOR" and together "GUARANTORS"), and BANK OF AMERICA, N.A., a national banking association (the "BANK"). WHEREAS, Borrower has applied to the Bank for a three-year unsecured revolving line of credit in the amount of $18,000,000; and WHEREAS, Borrower has applied to the Bank to make available, on the request of Borrower, letters of credit to be applied against the amount available under the revolving line of credit; and WHEREAS, the Bank has agreed to make such credit and loans available to Borrower upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties agree as follows: ARTICLE 1 DEFINITIONS Certain terms used in this Agreement are defined herein. Certain other terms are defined in Exhibit 1 attached hereto and incorporated herein by this reference. ARTICLE 2 REVOLVING LINE OF CREDIT 2.1 Agreement to Lend. (1) The Bank agrees, on the terms and subject to the conditions set forth in this Agreement, to make loans (each a "REVOLVING LOAN") to Borrower from time to time beginning on the Closing Date and ending on the Revolving Credit Termination Date, in such amounts as Borrower shall request as provided in Section 4.8 hereof and to treat each draw under any Letter of Credit as a Revolving Loan as provided in Section 3.1 below; provided, however, that the Bank shall have no obligation to make a requested Revolving Loan if, after the making of such Revolving Loan, (i) the aggregate unpaid principal balance of all Revolving Loans, together with the aggregate undrawn amount under all outstanding Letters of Credit, would exceed the Revolving Credit Commitment; (ii) a Default or Event of Default has occurred and is continuing; or (iii) the Loan requested is a Eurodollar Rate Loan and the requested Eurodollar Rate election would cause more than five (5) Eurodollar Rate Loans to be outstanding. Borrower may terminate or reduce the unused portion of the Revolving Credit Commitment at any time by giving notice to the Bank as provided in Section 4.8 below, provided that any partial reduction shall be in an amount of at least $1,000,000. Revolving Loans shall be used to pay existing indebtedness to the Bank, for working capital, for Acquisitions up to an aggregate of $3,000,000 during the term of this Agreement, to purchase or redeem its own stock and for other corporate purposes. (2) If the aggregate principal indebtedness of Borrower under the Revolving Note (as defined below), plus the aggregate undrawn amount under all outstanding Letters of Credit, at any time exceeds the Revolving Credit Commitment, Borrower shall immediately, without demand or notice, pay principal under the Revolving Note so that the aggregate principal amount outstanding thereunder, plus the aggregate undrawn amount under all outstanding Letters of Credit, does not exceed the Revolving Credit Commitment. 2.2 Revolving Note. The Revolving Loans shall be evidenced by and repaid in accordance with a Revolving Credit Note executed by Borrower, in the form of Exhibit 2.2 hereto, dated as of the Closing Date, and payable to the order of the Bank. Such note and any and all amendments, extensions, modifications, renewals, reaffirmations, restatements, replacements and substitutions thereof and therefor are herein referred to as the "REVOLVING NOTE." Interest shall accrue on the unpaid principal balance of the Revolving Note outstanding from time to time at a rate or rates determined as provided in Section 4.3 below. The Revolving Note shall be paid in full on the Revolving Credit Termination Date. ARTICLE 3 OTHER CREDIT FACILITIES 3.1 Letters of Credit. From time to time after the date hereof until the Revolving Credit Termination Date, Borrower may apply to the Bank to issue or extend the expiration date of one or more standby letters of credit for the account of Borrower (all such letters of credit, together with all letters of credit issued by the Bank for the account of Borrower outstanding on the date of this Agreement and all renewals and extensions of any thereof, "LETTERS OF CREDIT"), each of which: (1) shall be for a stated amount which, together with the aggregate undrawn amount then outstanding under all Letters of Credit and the principal amount then outstanding of all Revolving Loans, does not exceed the Revolving Credit Commitment; (2) shall, by its terms, not exceed a term of one year and shall expire not later than the Revolving Credit Termination Date; (3) shall require payment by Borrower of fees as described in Section 5.2 hereof (such fees are not, however, applicable to any Letters of Credit outstanding prior to the date of this Agreement but they are applicable to any renewals or extensions thereof); and (4) shall be issued, to the extent applicable, pursuant to the Bank's then-current standard form of application for letters of credit. 2 Borrower authorizes and directs the Bank to cause the repayment of each draw under the Letters of Credit to be made immediately by charging such repayment against the Revolving Note as a Prime Rate Loan. 3.2 CONVERSION OF REVOLVING LOANS. Borrow may convert all or any portion of the outstanding Revolving Loans to a loan with a fixed rate of interest pursuant to an interest rate swap agreement or other similar agreement that has terms and conditions acceptable to the Bank. The effective fixed rate offered by the Bank will be based upon market conditions on the date of the closing of any swap. Borrower may, at any time, prepay all or any portion of such a converted loan, without premium or penalty; if Borrower prepays any such loan, Borrower shall pay all fees and expenses associated with unwinding any interest rate swap. ARTICLE 4 TYPES OF LOANS; DISBURSEMENTS; INTEREST; PAYMENTS 4.1 Types of Loans. The Loans made on each Disbursement Date may, subject to the terms and conditions of this Agreement, be Prime Rate Loans or Eurodollar Rate Loans (each being referred to as a "type" of Loan) as specified in the applicable request for borrowing referred to in Section 4.8 hereof, and Borrower may convert Loans of one type into Loans of the other type or continue Loans of one type as Loans of the same type, at any time or from time to time, provided that if any Eurodollar Rate Loan is converted on any day other than the last day of the Interest Period for such Loan, Borrower shall pay all applicable fees and amounts described in Section 5.3 below. 4.2 Loan Disbursement Procedures. (1) Loans shall be disbursed by the Bank upon request by Borrower from time to time on or after the Closing Date, in such amounts as is requested as provided in Section 4.8 below or as provided in Section 3.1 above, subject to the limitations on the Bank's obligations to make Loans as set forth in Section 2.1 hereof. Subject to the terms of this Agreement, Borrower may borrow, repay and reborrow Revolving Loans at any time prior to the Revolving Credit Termination Date. Each request for a Loan shall be delivered to the Bank in writing or by telex or facsimile transmission in the manner provided in Section 12.1 hereof, or as otherwise agreed by the Bank, not later than 1:00 p.m., Kansas City, Missouri time, on the date on which Borrower desires disbursement of the Loan, which date shall be a Business Day and shall be specified in the request (a "DISBURSEMENT DATE"). The Bank may rely and act upon any such request which is received from a person believed by the Bank in good faith to be authorized to make such request on behalf of Borrower. The Bank shall record in its records all Loans made by the Bank to Borrower pursuant to this Agreement and all payments made on the Loans. 4.3 Interest. 3 (1) Borrower shall pay to the Bank interest on the unpaid principal amount of each Revolving Loan for the period commencing on and including the date of such Loan to but excluding the date such Loan is paid in full, at the following rates per annum: (i) during any period while such Loan is a Prime Rate Loan, the Prime Rate (as in effect from time to time) less 1%; and (ii) during any period while such Loan is a Eurodollar Rate Loan, for each Interest Period relating thereto, the Eurodollar Rate for such Interest Period plus the Applicable Margin in effect on the Disbursement Date, the date of conversion or the date of continuation, as applicable and as adjusted as provided in this Agreement. The "APPLICABLE MARGIN" will be .85% from the date of this Agreement to and including September 30, 2000. Thereafter, the "APPLICABLE MARGIN" will be calculated and adjusted, as shown below, on the first day of the month following the receipt by the Bank of each quarterly Compliance Certificate; any change in the "APPLICABLE MARGIN" shall be effective with respect to Interest Periods beginning on or after each such date. The interest rate with respect to each outstanding Eurodollar Rate Loan shall not change during any Interest Period. On and after October 1, 2000, the Applicable Margin will be as follows:
CONSOLIDATED APPLICABLE MARGIN ON AND AFTER FUNDED DEBT/EBITDA RATIO 10/1/00 ------------------------ ------- >3.25:1.00 1.35% >=2.75:1.00 and <=3.25:1.00 1.15% >=2.01:1.00 and <=2.74:1.00 1.00% >=1.25:1.00 and <=2.00:1.00 .85% >= .75:1.00 and <=1.24:1.00 .75% <.75:1.00 .65%
(2) Notwithstanding the provisions of Section 4.3 (a) above, Borrower shall pay interest at the Default Rate on any principal of any Loan and on any interest or other amount payable by Borrower hereunder or under the Note (i) that is not paid in full when due (whether at maturity, by acceleration or otherwise), for the period commencing on and including the due date thereof until the same is paid in full and (ii) upon and during the continuance of any failure to comply with or violation of any of the financial covenants set forth in Article 10 of this Agreement as shown on and as of the last day of a fiscal quarter as reflected on any Compliance Certificate. (3) Accrued interest on each Loan shall be payable (i) in the case of a Prime Rate Loan, on the last Business Day of each calendar quarter, and (ii) in the case of a Eurodollar Rate Loan, on the last day of each Interest Period therefor; provided that interest payable at the Default Rate shall be payable, to the extent applicable, from time to time on demand of the Bank. 4 (4) The Bank shall, as part of its interest statements, notify Borrower of any change in the Prime Rate and of the Eurodollar Rates in effect and shall, on the request of Borrower at any time, notify Borrower of the Eurodollar Rate or Rates then in effect. (5) In the event that Borrower fails to select the type of Loan or the duration of any Interest Period for any Eurodollar Rate Loan within the time period and otherwise as provided in Section 4.8, such Loan (if outstanding as a Eurodollar Rate Loan) will be automatically converted into a Prime Rate Loan on the last day of the then current Interest Period for such Loan or (if outstanding as a Prime Rate Loan) will remain as, or will be made as, a Prime Rate Loan. 4.4 Optional and Mandatory Payments. Borrower shall have the right to prepay the Loans in whole or in part at any time without premium or penalty, subject to giving the Bank prior notice in accordance with the provisions of Section 4.8 hereof, provided that (i) each such partial prepayment shall be in the aggregate principal amount of not less than $100,000 with respect to Prime Rate Loans and $500,000 with respect to Eurodollar Rate Loans, and (ii) if any prepayment of a Eurodollar Rate Loan is made on any day other than the last day of the Interest Period therefor, it may be prepaid only upon three (3) Business Days prior notice to the Bank and Borrower shall pay to the Bank any applicable fees and amounts described in Section 5.3(a) below. Amounts prepaid in respect of Loans under this Section 4.4 may be reborrowed subject to the terms and conditions hereof. Borrower shall make mandatory principal payments on the Loans as provided in Section 2.1(b) above. 4.5 Payments. Except as otherwise provided herein and subject to Section 4.8 below, all payments of principal, interest, Fees, taxes, charges, expenses and other items payable by Borrower hereunder and under the Note shall be made in U.S. dollars and shall be credited on the date of receipt by the Bank if received by the Bank at its principal office in Kansas City, Missouri, in immediately available funds, prior to 1:00 p.m., Kansas City, Missouri time, on a Business Day. Payments made in funds which are not immediately available shall be credited only when the funds are collected by the Bank, and payments received (whether from Borrower in immediately available funds or through the collection of funds which were not immediately available at the time payment was tendered by Borrower) after 1:00 p.m. will be credited on the next Business Day. The Bank reserves the right to apply all payments received by it from Borrower and designated or authorized to be applied to a Note first to any Fees and other charges then due to the Bank, then to accrued interest on such Note and then to reduction of the principal balance of such Note, or such other order as the Bank may determine in its sole discretion. The Bank shall also record in its records, in accordance with customary accounting practice, all interest, Fees, taxes, charges, expenses and other items properly chargeable to Borrower with respect to the Loans, all payments received by the Bank for application to the Obligations, and all other appropriate debits and credits. The Bank's records shall constitute prima facie evidence of the amount of Obligations outstanding from time to time. 4.6 Direct Debit and Pre-Billing. 5 (a) Borrower agrees that Bank will debit deposit account number 020100039303 or such other of Borrower's accounts with the Bank as designated in writing by either Borrower (the "DESIGNATED ACCOUNT") on the date each payment of principal, interest and all other Obligations, including the fees described in Section 5.2 and fees, amounts and costs described in Section 5.3, become due (the "DUE DATE"). If the Due Date is not a Business Day, the Designated Account will be debited on the next Business Day. (b) Approximately 10 days prior to each Due Date, Bank will mail to Borrower a statement of the amounts that will be due on that Due Date (the "BILLED AMOUNT"). The calculation will be made on the assumption that no new extensions of credit or payments will be made between the date of the billing statement and the Due Date and that there will be no changes in the applicable interest rate. (c) Bank will debit the Designated Account for the Billed Amount, regardless of the actual amount due on that date (the "ACCRUED AMOUNT"). If the Billed Amount debited to the Designated Account differs from the Accrued Amount, the discrepancy will be treated as follows: (i) If the Billed Amount is less than the Accrued Amount, the Billed Amount for the following Due Date will be increased by the amount of the discrepancy. Borrower will not be in default and an Event of Default will not occur by reason of any such discrepancy. (ii) If the Billed Amount is more than the Accrued Amount, the Billed Amount for the following Due Date will be decreased by the amount of the discrepancy. Regardless of any such discrepancy, interest will continue to accrue based on the actual amount of principal outstanding without compounding. Bank will not pay Borrower interest on any overpayment. (d) Borrower will maintain sufficient funds in the Designated Account to cover each debit. If there are insufficient funds in the Designated Account on the date Bank enters any debit authorized by this Agreement, the debit will be reversed. (e) Borrower may terminate this direct debit arrangement at any time by sending written notice to Bank. 4.7 Minimum Amounts. Each borrowing or conversion of Prime Rate Loans shall be in an amount of at least $100,000 and each borrowing, conversion or continuation of Eurodollar Rate Loans shall be in an amount of $500,000 or a multiple of $100,000 in excess thereof. 4.8 Certain Requests and Notices. Borrower will request borrowings and give notice to the Bank of all terminations or reductions of Commitments, conversions, continuations and prepayments of Loans and the duration of Interest Periods, such requests and notices to be substantially in the form of Exhibits 4.8-A and 4.8-B hereto. Each such notice shall be irrevocable and shall be effective only if received by the Bank not later than 6 1:00 p.m. Kansas City time (i) on the Business Day prior to the effective date of the requested termination or reduction of a Commitment, (ii) on the same date if it is a notice of a borrowing or prepayment of a Prime Rate Loan (except that if such date is not a Business Date, then on the next Business Day), or (iii) three (3) Business Days prior to the requested effective date for a borrowing or prepayment of, conversion into or continuation as a Eurodollar Rate Loan or any selection of Interest Period for a Eurodollar Rate Loan. For purposes of calculating the number of Business Days, the date the notice is received shall be included if received not later than 1:00 p.m. Kansas City time and excluded if received after 1:00 p.m. Kansas City time. ARTICLE 5 GUARANTIES; FEES; COLLATERAL 5.1 Guaranties. At the Closing, the Guarantors are each delivering to Bank a Guaranty Agreement in substantially the form of Exhibit 5.1. If Borrower or any Subsidiary acquires or creates any subsidiary after the Closing Date or if the Bank so requests with respect to any Subsidiary, Borrower shall cause each such newly acquired or created Subsidiary and each such other Subsidiary to become a Guarantor by causing it to deliver to the Bank (i) a Guaranty Agreement executed by the Subsidiary in substantially the form attached hereto as Exhibit 5.1 with such additional matters included therein as may be required by the Bank (whether delivered at the Closing or thereafter, each, a "LOAN GUARANTY"), (ii) if requested by Bank, an opinion of such Subsidiary's counsel, satisfactory in form and substance to the Bank, as to the enforceability of such Loan Guaranty and other matters required by the Bank; such opinion shall be substantially the same as the opinion delivered with respect to the initial Guarantors on the Closing Date, with such additional matters included therein as may be required by the Bank and shall include, if requested by the Bank, the opinion of counsel from the Subsidiary's jurisdictions of organization and operation, and (iii) copies of such Subsidiary's charter documents, certified by the appropriate public official, and of its bylaws, certified by its secretary. 5.2 Unused Commitment and Letter of Credit Fees. Borrower agrees to pay a quarterly unused commitment fee equal to .25% of the unused Revolving Credit Commitment; such fees shall be calculated daily. In making such calculations, the unused Revolving Credit Commitment shall be reduced by the undrawn amount of each outstanding Letter of Credit. Borrower shall pay the unused Commitment fees with respect to each quarter within 15 days after the end of such quarter. Borrower agrees to pay an initial issuance fee on the date that each standby Letter of Credit is issued in an amount equal to .125% of the amount of such Letter of Credit and to pay the Bank's then standard fee for any renewals and extensions of any Letter of Credit. Borrower also agrees to pay a fee in an amount equal to the Applicable Margin rate per annum times the undrawn amount of all outstanding Letters of Credit; such fee will be calculated and paid on last business day of each fiscal quarter and shall be subject, after October 1, 2000, to appropriate adjustment after the Bank's receipt of Borrower's Compliance Certificate respecting such quarter. 7 All fees shall be calculated on a 360-day year basis, if applicable. 5.3 Additional Eurodollar Rate Loan Costs. (1) Borrower shall pay to the Bank from time to time, upon request of the Bank, (i) such amounts as the Bank may determine to be necessary to compensate it for any Additional Eurodollar Rate Loan Costs respecting Regulatory Changes and (ii) an administrative fee of $300 plus such amounts as the Bank may determine to be necessary to compensate it for any loss, cost or expense which the Bank incurs (including, without limitation, any loss, cost or expense incurred by reason of the liquidation or re-employment of deposits, but excluding loss of anticipated profits) that is attributable to (A) any payment, prepayment or conversion of a Eurodollar Rate Loan made by either Borrower for any reason on a date other than the last day of an Interest Period for such Loan or (B) any failure by either Borrower for any reason (including, without limitation, the failure of any condition specified in Article 6 hereof to be satisfied) to borrow, continue or convert a Eurodollar Rate Loan on the date therefor specified in the request for borrowing or notice given pursuant to Section 4.8 hereof. Such compensation may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by the Bank) which would have accrued to the Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. The covenants of Borrower set forth in this Section 5.3 shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. The Bank will notify Borrower of any event which will entitle the Bank to compensation pursuant to this Section 5.3 as promptly as practicable after the Bank determines to require such compensation and will furnish Borrower with a certificate setting forth in reasonable detail the basis and amount of such compensation. (2) Determinations by the Bank of the effect of any Regulatory Change on its rate of return or cost of maintaining the Eurodollar Rate Loans, on its obligation to make Eurodollar Rate Loans or on amounts receivable by it in respect of the Eurodollar Rate Loans and determinations of the amounts required to compensate such Bank under this Section 5.3 shall be conclusive, provided that such determinations are made on a reasonable basis and are set forth in reasonable detail in the certificates referred to in Section 5.3(a) above. (3) Anything herein to the contrary notwithstanding, if it becomes unlawful for the Bank to honor its obligation to make or maintain Eurodollar Rate Loans hereunder or if, on or prior to the determination of any Eurodollar Rate for any Interest Period, the Bank determines (which determination shall be conclusive) that quotations of 8 interest rates for the relevant deposits referred to in the definition of "Eurodollar Rate" in Exhibit 1 hereto are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Eurodollar Rate Loans, then the Bank shall give Borrower prompt notice thereof, and, so long as such condition remains in effect, the Bank shall be under no obligation to make additional Eurodollar Rate Loans, to continue Eurodollar Rate Loans or to convert Prime Rate Loans into Eurodollar Rate Loans, and Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Rate Loans, either prepay such Loans or convert such Loans into Prime Rate Loans. 5.4 COLLATERAL. The Note will be unsecured. All assets of Borrower, Guarantors and other Subsidiaries will be subject to the negative pledge set forth in Section 10.9 below. ARTICLE 6 CONDITIONS TO MAKING LOANS The Bank's obligation hereunder to make the Loans, extend credit and enter into transactions referred to in Article 3 shall be subject to the satisfaction of the following conditions on or prior to the Closing Date and, in the case of the conditions set forth in Sections 6.4, 6.5, 6.6, 6.7 and 6.8, as of each Disbursement Date and each date a Letter of Credit is issued, renewed or extended: 6.1 Delivery of Loan Documents. Borrower and Guarantors shall have executed, as applicable, this Agreement, the Note, the Guaranties, any UCC financing statements relating thereto requested by the Bank and any other Loan Documents, all of which shall be in form and substance satisfactory to the Bank and its counsel, and delivered them to the Bank. 6.2 Proper Proceedings; Charter Documents. Borrower and each Guarantor shall have taken all corporate proceedings necessary to authorize the Loan Documents and the transactions contemplated hereby. Borrower and Guarantors shall have delivered to the Bank certificates, dated the Closing Date and signed by their respective Secretaries, satisfactory to the Bank, respecting such proceedings and the incumbency of the officers executing the Loan Documents. Borrower shall have and each Guarantor shall have delivered to the Bank copies of its charter documents, including all amendments thereto, certified by the appropriate officer, and copies of its bylaws, including all amendments thereto, certified by the appropriate officer. 6.3 Legal Opinions. The Bank shall have received opinions from counsel to Borrower and Guarantors, dated as of the Closing Date, satisfactory to the Bank. 6.4 No Adverse Changes; Representations; No Default. Since the date hereof, there shall have been no material adverse change in the business, operations, financial condition or prospects of Borrower or any Subsidiary. The representations and warranties contained in Article 7 hereof with respect to Borrower and the Subsidiaries (including entities 9 becoming Subsidiaries as a result of an Acquisition) shall be true and correct as though made on and as of the Closing Date or such Disbursement Date or such date of issuance, renewal or extension of a Letter of Credit, as the case may be, except that the representations and warranties set forth in the first sentence of Section 7.4(b), Section 7.7 and the second sentence of Section 7.9 (which relate to disclosure schedules 7.4, 7.7 and 7.9) are not required by this Section 6.4 to be made as of any Disbursement Date or date of issuance, renewal or extension of a Letter of Credit. No Default or Event of Default shall have occurred and be continuing. The Bank shall have received certifications of Borrower in form satisfactory to the Bank and dated the Closing Date or the date of the request for borrowing or for issuing, renewing or extending a Letter of Credit, as applicable, certifying as to each matter set forth in this Section 6.4, which certifications may be included in the notice of borrowing described in Section 4.8 hereof. 6.5 No Material Impairment. The Bank shall have determined that the prospect of payment of the Loans has not been materially impaired. 6.6 Required Consents and Approvals. All consents, approvals and authorizations of any Governmental Authority or any other Person with respect to the execution and performance of the Loan Documents, the consummation of the transactions contemplated hereby or the making of the Loans hereunder shall have been obtained and shall be in full force and effect. 6.7 Legality. The making of any Loan shall not subject the Bank to any penalty or special tax, shall not be prohibited by any law or governmental order or regulations applicable to the Bank or to Borrower and shall not violate any voluntary credit restraint program of the executive branch of the government of the United States or any other Governmental Authority, and all necessary consents, approvals and authorizations of any Governmental Authority to or of such Loan shall have been obtained. 6.8 General. All instruments and legal and corporate proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to the Bank and its counsel, and the Bank shall have received copies of all other documents, including records of corporate proceedings and opinions of counsel, which the Bank may have requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities, and such other conditions shall have been fulfilled as may have been requested by the Bank. ARTICLE 7 REPRESENTATIONS AND WARRANTIES Borrower, with respect to itself and with respect to each of the Subsidiaries, and each of Guarantors, with respect to itself, represent and warrant to the Bank that: 10 7.1 Corporate Existence and Standing. Borrower is and each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to own its property and to carry on its business in each jurisdiction where the failure to so qualify would have a material adverse effect on its business, properties, assets, operations or condition (financial or otherwise). 7.2 Authorization and Validity. Borrower has and each Guarantor has the corporate power and authority and legal right to execute and deliver the Loan Documents to which it is a party and to perform its obligations thereunder. Such execution and delivery have been duly authorized by proper proceedings, and the Loan Documents constitute the legal, valid and binding obligations of Borrower and the Guarantors, enforceable against them in accordance with their respective terms. 7.3 No Conflict; Governmental Consent. The execution, delivery and performance of the Loan Documents will not violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on Borrower or any Subsidiaries, any provision of their respective articles or certificate of incorporation, by-laws or other charter document, or the provisions of any indenture, instrument or other written or oral agreement to which Borrower or any Subsidiary is a party or is subject or by which Borrower or any Subsidiary or any of their property is bound, or conflict therewith or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on any of their property pursuant to the terms of any such indenture, instrument or agreement. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any Governmental Authority is required to authorize or is required in connection with the execution, delivery and performance of or the enforceability of any of the Loan Documents. 7.4 Compliance with Laws; Environmental and Safety Matters. (1) Borrower has and each Subsidiary has complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or Governmental Authority having jurisdiction over the conduct of its businesses or the ownership of its respective properties except to the extent that such non-compliance will not have a material adverse effect on the financial condition or business operations of Borrower, on a consolidated or unconsolidated basis, or of either Guarantor. (2) Borrower and the Subsidiaries have each, except as disclosed in Schedule 7.4 hereto and to Borrower's and Guarantors' actual knowledge, complied with all federal, national, state, local and other statutes, ordinances, orders, judgments, rulings and regulations relating to environmental pollution, environmental regulation or control, or employee health or safety, except to the extent that such non-compliance will not have a material adverse effect on their respective financial conditions or business operations; they have not received any written notice of any failure so to comply except as disclosed in Schedule 7.4 hereto; and their facilities do not treat, store or dispose of any hazardous wastes, hazardous substances, hazardous materials, toxic substances, toxic pollutants or substances ("HAZARDOUS MATERIALS") similarly denominated, as those terms or similar terms are used in 11 RCRA, CERCLA, the Hazardous Materials Transportation Act, the Toxic Substances Control Act, the Clean Air Act, the Clean Water Act, the Occupational Safety and Health Act or any other state, local or federal applicable law, ordinance, rule or regulation relating to environmental pollution, environmental regulation or control or employee health and safety ("ENVIRONMENTAL LAWS") in a quantity or manner that requires a permit, registration, or another notification or authorization from a Governmental Authority except for the treatment, storage, or disposal of Hazardous Materials in a quantity or manner which, if in non-compliance with Environmental Laws, would not have a material adverse effect on their respective financial conditions or business operations except as disclosed in Schedule 7.4 hereto. The conduct of the business and the condition of the property of Borrower and each of the Subsidiaries do not violate any Environmental Laws or any judicial interpretation thereof relating primarily to the environment or Hazardous Materials. Neither Borrower nor any Subsidiary is aware of any events, conditions or circumstances involving environmental pollution or contamination or employee health or safety that could reasonably be expected to result in material liability on the part of Borrower or any Subsidiary. 7.5 Financial Statements. Borrower has heretofore furnished to the Bank its (a) consolidated balance sheet and related consolidated statements of earnings and cash flows as of and for the fiscal year ended September 30, 1998, and (b) an unaudited consolidated balance sheet and unaudited statements of earnings and cash flows as of and for quarter ended June 30, 1999. Such financial statements fairly state the consolidated financial condition and results of operations of Borrower and the Subsidiaries as of such dates and for such periods. Neither Borrower nor any of the Subsidiaries had on said date any material (on a consolidated basis) contingent liabilities, material (on a consolidated basis) liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said balance sheet or the notes thereto as at said date. Such financial statements were prepared in accordance with GAAP applied on a consistent basis. Since June 30, 1999, no material adverse change has occurred in the business, properties, financial condition, prospects or results of operations of Borrower (on a consolidated or unconsolidated basis) or of either Guarantor. 7.6 Ownership of Properties; Collateral Liens. Borrower has and each Subsidiary has good title, free and clear of all Liens (other than those permitted by Section 10.2 hereof), to all of the properties and assets reflected in its financial statements as owned by it, and its interest in all other properties and assets in or to which it has an interest as a lessee, licensee or otherwise is free and clear of all Liens (other than those permitted under Section 10.2 hereof). 7.7 Subsidiaries. Neither Borrower nor any Subsidiary has any subsidiaries except as disclosed in Schedule 7.7. Except as described in Schedule 7.7, all of the issued and outstanding shares of capital stock or other ownership interests of each Subsidiary, have been duly authorized and issued to Borrower or to a Subsidiary and are fully paid and non-assessable, free and clear of all liens, restrictions and rights. 12 7.8 Litigation. All litigation, arbitration, mediation, governmental investigations, proceedings or inquiries before any Governmental Authority, arbitrator or mediator that are pending or, to the knowledge of any of its officers, threatened against or affecting Borrower or any Subsidiary (other than those covered by insurance, but only to the extent so covered) are not reasonably expected to exceed, in the aggregate, $750,000. 7.9 Material Agreements; Labor Matters. Any agreement or instrument of either Borrower or any Subsidiary that has or is likely to have a material effect on the assets, prospects, business, operations, financial condition, liabilities or capitalization of Borrower or Guarantor as a separate company or of Borrower on a consolidated basis is referred to in this Section 7.9 as a "MATERIAL CONTRACT." As of the date hereof, all of the Material Contracts are listed on Schedule 7.9 hereto. Neither Borrower nor any Guarantor is in default under any Material Contract in any manner that could materially and adversely affect its assets, prospects, business, operations, financial condition, liabilities or capitalization of or in any manner that could jeopardize its right to require the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Material Contract. There are no strikes or walkouts relating to any labor contracts with Borrower or any Subsidiary pending or threatened, and no labor contracts are scheduled to expire during the term of this Agreement, and no efforts are being made by any employees to form a union or collectively bargain with Borrower or any Subsidiary. 7.10 Investment Company Act; Public Utility Holding Company Act. Neither Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended, or a "holding company," a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7.11 Taxes. Borrower has and each Subsidiary has filed all United States federal tax returns and all other tax returns which, to Borrower's or either Guarantor's actual knowledge, are required to be filed and paid all taxes due pursuant to said returns or pursuant to any assessment received by it, including without limitation all federal and state withholding taxes and all taxes required to be paid pursuant to applicable law, except such taxes, if any, as are being contested in good faith, by appropriate proceedings and as to which adequate charges, accruals and reserves have been set aside. No tax Liens have been filed, and no claims are being asserted with respect to any such taxes, except such tax Liens and claims that will not have a material adverse effect, individually or in the aggregate, on the assets, business, operations or financial condition of Borrower or either Guarantor, on a consolidated or unconsolidated basis. The charges, accruals and reserves on the books of Borrower, on a consolidated basis, in respect of any taxes or other governmental charges are adequate. 7.12 Accuracy of Information. No information, exhibit or report furnished by Borrower or any Subsidiary to the Bank in connection with the negotiation of the Loan Documents contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not misleading. 13 7.13 Employee Benefit Plans. Neither Borrower nor any Subsidiary maintains, sponsors or contributes to any Defined Benefit Pension Plan. 7.14 No Undisclosed Dividend Restrictions. Except for limitations on the payment of dividends under applicable corporate statutes, neither Borrower nor any Subsidiary is subject to any agreement, covenant or understanding that limits or restricts its ability to declare or pay dividends. 7.15 Absence of Default or Event of Default. No Default and no Event of Default has occurred and is continuing. 7.16 Disclosure. The pro forma financial information contained in financial statements delivered to the Bank will be based upon good faith estimates and assumptions believed by Borrower to be reasonable at the time made. There is no fact known to Borrower (other than matters of a general economic nature) that has had or could reasonably be expected to have a material adverse effect and that has not been disclosed herein or in such other documents, certificates and statements furnished to the Bank for use in connection with the transactions contemplated by this Agreement. 7.17 Solvency. Based upon its financial and accounting records, Borrower has and each Subsidiary has assets of a value that exceeds the amount of its liabilities (excluding, for purposes of this representation, all intercompany loans from liabilities). Borrower reasonably anticipates that it and each of its Subsidiaries will be able to meet their respective debts as they mature. Borrower and each Subsidiary have adequate capital to conduct the business in which it is engaged. 7.18 Margin Regulations. Neither the making of the Loans hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or to extend credit to others for the purpose of purchasing or carrying Margin Stock (as defined in said Regulation U). 7.19 Copyrights, Patents and Other Rights. Borrower possesses and each Subsidiary possesses all licenses, patents, patent rights and patent licenses, trademarks, trademark rights and licenses, trade names, copyrights and all other intellectual property rights which are required or desirable to conduct its business as presently conducted; to the best of its knowledge, such rights do not infringe on or conflict with the rights of any other Person; and Borrower has and each Subsidiary has, and is current and in good standing with respect to, all governmental approvals, permits and certificates required to conduct its businesses as heretofore conducted. 7.20 Year 2000 Compliance. Borrower has (a) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by material suppliers and vendors) that could be adversely affected by the risk that computer applications used by Borrower or any Subsidiary or any of such suppliers and 14 vendors may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to and any date after December 31, 1999 (the "YEAR 2000 PROBLEM"), (b) developed a plan and time line for addressing the Year 2000 Problem on a timely basis, and (c) implemented that plan in accordance with that timetable. Borrower reasonably believes that all computer applications (including those of its suppliers and vendors) that are material to its or any of its Subsidiaries' business and operations will on a timely basis be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "YEAR 2000 COMPLIANT"), except to the extent that a failure to do so could not reasonably be expected to have material adverse effect on the financial condition or operations of Borrower, on a consolidated or unconsolidated basis, or of either Guarantor. ARTICLE 8 AFFIRMATIVE COVENANTS Unless the Bank shall otherwise consent in writing, Borrower agrees that it will, and will cause each of the Subsidiaries to, and each Guarantor agrees that it will: 8.1 Conduct of Business and Maintenance of Properties. Carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and do all things necessary to remain duly incorporated, validly existing and in good standing in its jurisdiction of organization and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted; maintain, preserve, protect and keep its properties in good repair, working order and condition; and comply in all material respects with all agreements and instruments to which it is a party. 8.2 Insurance. Maintain with financially sound and reputable insurance companies insurance on all its property, covering such liabilities and such risks (including business interruption risks) and in such amounts as is consistent with sound business practice and reasonably satisfactory to the Bank and furnish to the Bank upon request full information as to the insurance carried. 8.3 Compliance with Laws and Taxes. Comply with any and all laws, statutes, rules, regulations orders, judgments, decrees and awards, a violation of which, in any respect, may materially and adversely affect its business, assets, operations or condition, financial or otherwise, including, without limitation, those regarding the collection, payment and deposit of employees' income, unemployment, and Social Security taxes and those regarding environmental matters; pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside; make a timely payment or deposit of all FICA payments and withholding taxes required of it under applicable law; and, upon request, furnish to the Bank evidence satisfactory to the Bank that such payments have been made. 15 8.4 Financial Statements, Reports, etc. Maintain a system of accounting established and administered in accordance with GAAP and furnish to the Bank: (1) Annual and Consolidating Financial Statements. Within 120 days after the close of its fiscal year, audited financial statements, prepared in accordance with GAAP, including a balance sheet and statements of stockholders' equity, income and cash flows, prepared on a consolidated basis and setting forth in comparative form the corresponding figures for the preceding fiscal year, all in reasonable detail, accompanied by an unqualified opinion thereon or an unqualified opinion with explanatory language added to the auditors' standard report of independent certified public accountants satisfactory to the Bank, which opinion shall state that the financial statements fairly present the financial condition and results of operations and cash flows of Borrower and its consolidated Subsidiaries as of the end of and for such fiscal year in conformity with GAAP, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default or Event of Default continuing as of the date of such certificate; such financial statements shall also include an unaudited balance sheet and income statement on a consolidating basis. (2) Quarterly Reporting. Within 45 days after the end of each of the first three fiscal quarters and within 120 days after the end of the last fiscal quarter, (i) financial statements for Borrower and its Subsidiaries for the quarter or fiscal year, as applicable, then ended, including a balance sheet and statements of stockholders' equity, income and cash flows for such quarter and for the period from the beginning of the respective fiscal year to the end of such quarter, prepared on a consolidated basis and, with respect to each balance sheet and income statement, a consolidating basis, and setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, accompanied by (ii) a certificate of the chief financial officer or treasurer of Borrower stating that said financial statements fairly present the financial condition and results of operations of Borrower and its consolidated Subsidiaries in accordance with, as to the financial statements referred to in clause (i) above, GAAP consistently applied, as of the end of and for such period (subject to normal year-end adjustments and to the absence of footnote disclosures) and that, to the best of such officer's knowledge, no Default or Event of Default has occurred under this Agreement or, if any Default or Event of Default exists, stating the nature and status thereof. (3) Compliance Certificate. Together with each set of financial statements required under paragraphs (a) and (b) of this Section 8.4, a compliance certificate of Borrower in substantially the form of Exhibit 8.4 (a "COMPLIANCE CERTIFICATE"), signed on its behalf by the chief financial officer or treasurer of Borrower, showing the calculations necessary to determine compliance with all financial covenants contained in Article 9 of this Agreement and stating that all of the representations and warranties set forth in Article 7 hereof (including those referring to the Schedules to the Agreement) with respect to Borrower and the Subsidiaries, including Subsidiaries that are Acquired Companies, shall be true and correct as though made on and as of the date of the Compliance Certificate, except for matters specifically updated or described in the Compliance Certificate, and (ii) that no 16 Default or Event of Default exists or, if any Default or Event of Default exists, stating the nature and status thereof. (4) SEC and Other Filings. Promptly upon their becoming publicly available, copies of all registration statements and annual, periodic or other regular reports, final proxy statements and such other similar information as shall be filed by either Borrower or any Subsidiary with the Securities and Exchange Commission (the "SEC"), any national securities exchange or (to the extent not duplicative) any other similar U.S. or foreign Governmental Authority and, promptly upon the mailing thereof to the shareholders of either Borrower generally, copies of all notices, financial statements, reports and proxy statements so mailed. (5) Litigation. Prompt notice of all legal, arbitration or mediation proceedings and of all proceedings by or before any Governmental Authority affecting Borrower or any Subsidiary which, if adversely determined, might result in a monetary loss in an amount in excess of $750,000 individually or in excess of $750,000 in the aggregate for all such proceedings and of the issuance by any Governmental Authority of any injunction, order or other restraint prohibiting, or having the effect of prohibiting or delaying, any action on the part of Borrower or any Subsidiary, which injunction, order or restraint might materially and adversely affect the business, properties or affairs of Borrower or of either Guarantor (on a consolidated or unconsolidated basis) or the institution of any proceedings seeking any such injunction, order or other restraint. (6) Management Letters. Promptly upon receipt by Borrower, a copy of any management letter sent by Borrower's independent certified public accountants, and promptly upon completion of any response report, a copy of such response report. (7) Reportable Events. If at any time after the Closing Date, Borrower or any Subsidiary adopts, sponsors or contributes to any Defined Benefit Pension Plan, as soon as possible and in any event within ten (10) days after Borrower or any Subsidiary knows that any Reportable Event has occurred with respect to any such Defined Benefit Pension Plan, a statement, signed by an authorized officer of Borrower, describing said Reportable Event and the action which such Borrower or such Subsidiary proposes to take with respect thereto. (8) Environmental Notices. As soon as possible and in any event within 10 days after receipt, a copy of (i) any notice or claim to the effect that Borrower or any Subsidiary is or may be liable to any person as a result of the release by such Borrower, such Subsidiary or any other person of any toxic or hazardous waste or substance into the environment or that all or any of its properties is subject to an Environmental Lien and (ii) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by Borrower or any Subsidiary received after the Closing Date. (9) Other Information. Such other information (including consolidating financial reports and other financial information) as the Bank may from time to time reasonably request. 17 On request of the Bank, Borrower shall deliver a letter to Borrower's accountants (i) authorizing them to comply with the provisions of this paragraph, (ii) directing them to send to the Bank true, correct, and exact copies of any and all financial statements and reports which are prepared as a result of any audit or other review of operations, finances or internal controls of Borrower or any Subsidiary (specifically including any reports dealing with improper accounting or financial practices, defalcation, financial irregularities, financial reporting errors or misstatements or fraud), and (iii) authorizing the Bank to rely on financial statements of Borrower issued by such accountants, which letter shall be acknowledged and consented to in writing by such accountants. 8.5 Other Notices. Give prompt notice in writing to the Bank of the occurrence of any Default or Event of Default and of any other development, financial or otherwise, which might materially and adversely affect its business, properties or affairs of Borrower or any Subsidiaries or the ability of Borrower or any Guarantor to repay the Obligations. 8.6 Access to Properties and Inspections. Permit the Bank to make reasonable inspections of the properties, corporate books and financial records of Borrower and each Subsidiary, to make reasonable examinations and copies of their respective books of account and other financial records and to discuss their respective affairs, finances and accounts with, and to be advised as to the same by, their officers, auditors, accountants and attorneys at such reasonable times and intervals as the Bank may designate. All of the Bank's reasonable expenses incurred for travel in connection with such audits and inspections shall be paid for by Borrower. 8.7 Use of Proceeds. Use the proceeds of the Revolving Loans to pay indebtedness to the Bank existing on the date of this Agreement, to provide working capital, to make Acquisitions in an amount up to an aggregate $3,000,000 over the term of this Agreement and for other corporate purposes. 8.8 Year 2000 Compliance. Promptly notify the Bank in the event that it discovers or determines that any computer application (including those of any of its suppliers or vendors that could affect the business or operations of Borrower or any of its Subsidiaries) will not be Year 2000 Compliant (as defined in Section 7.20 above) on a timely basis, except to the extent that such failure could not reasonably be expected to have a material adverse effect on the financial condition or operations of Borrower or any Subsidiary. 8.9 Payment of Claims. Promptly pay when due all lawful claims, whether for labor, materials or otherwise. ARTICLE 9 FINANCIAL COVENANTS Borrower will, so long as this Agreement shall remain in effect or any Obligations shall be unpaid: 18 9.1 Minimum Consolidated Tangible Net Worth. Maintain as of the end of each fiscal quarter a Consolidated Tangible Net Worth of at least $40,000,000 up to December 31, 2001 and of at least $44,000,000 on December 31, 2001 and thereafter. "CONSOLIDATED TANGIBLE NET WORTH" means, at any date, (i) the aggregate book value of all assets (after deducting all applicable reserves and excluding any reappraisal or write-up of assets) which, under GAAP, would appear as assets on the consolidated balance sheet of borrower and its consolidated Subsidiaries, but excluding all patents, franchises and operating rights, research and development expenditures, treasury stock, goodwill, all other intangibles, and the net amount owed to Borrower or any of its Subsidiaries by any Affiliates, employees or shareholders and minus (ii) the aggregate amount of liabilities of Borrower and its consolidated Subsidiaries, all on a consolidated basis as determined in accordance with GAAP. 9.2 Consolidated Funded Debt/EBITDA Ratio. Maintain as of the last day of each fiscal quarter a Consolidated Funded Debt/EBITDA Ratio no greater than 4.00 to 1.00 to and including September 30, 2001, and no greater than 3.75 to 1.00 on December 31, 2001 and thereafter, determined in accordance with GAAP. "CONSOLIDATED FUNDED DEBT/EBITDA RATIO" means the ratio of (i) the aggregate outstanding principal amount of Funded Debt of Borrower and its consolidated Subsidiaries as of the last day of the fiscal quarter date to (ii) EBITDA of Borrower and its consolidated Subsidiaries for the four quarters ending on such date. "FUNDED DEBT" means, without duplication, all long term and current Indebtedness as described in subsections (i) and (iii) of the definition of "Indebtedness" in Exhibit 1 hereto (including any such Indebtedness to non-consolidated Subsidiaries, shareholders and other Affiliates). "EBITDA" means, for any period, the earnings before interest, taxes, depreciation and amortization for such period, plus expected, nonrecurring expenses in an amount not to exceed $2,400,000 related to the Georgia project taken during fiscal year ending September 30, 1999, and expected, nonrecurring charges in an amount not to exceed $1,500,000 related to the international restructuring of BHA Group, Inc. taken during fiscal year ending September 30, 1999; non-recurring charges must be reported on a quarter-by-quarter basis, and no non-recurring expenses or charges of any type may be added to EBITDA for any four-quarter period other than the fiscal year ending Sept. 30, 1999. 9.3 Consolidated Fixed Charge Coverage Ratio. Maintain as of the last day of each fiscal quarter a Fixed Charge Coverage Ratio of at least 1.50 to 1.00, determined on a consolidated basis in accordance with GAAP. "FIXED CHARGE COVERAGE RATIO" means, as of the last day of any fiscal quarter, the ratio of (i) EBITDA for the four fiscal quarters ending on such day, to (ii) the sum of interest expense, tax expense, scheduled principal payments and dividends paid during such four fiscal quarters. 9.4 Minimum Consolidated EBITDA. Maintain as of September 30, 2000 and September 30, 2001, a Consolidated EBITDA of at least $10,000,000 for the fiscal year ending on such dates. "CONSOLIDATED EBITDA" means EBITDA of Borrower and its consolidated Subsidiaries for each such period, determined on a consolidated basis in accordance with GAAP. 19 9.5 Consolidated Current Ratio. Maintain as of the last day of each fiscal quarter a Consolidated Current Ratio of at least 2.00 to 1.00. "CONSOLIDATED CURRENT RATIO" means the ratio of Borrower's current assets to current liabilities, determined on a consolidated basis in accordance with GAAP. ARTICLE 10 NEGATIVE COVENANTS So long as this Agreement shall remain in effect or any of the Obligations shall be unpaid, unless the Bank shall otherwise consent in writing, each Borrower agrees that it will and will cause each of its Subsidiaries to, and each Guarantor agrees that it will: 10.1 Indebtedness. Not incur, create or suffer to exist any Indebtedness (other than to the Bank), except (a) trade payables incurred in the ordinary course of business; (b) Indebtedness existing on the date of this Agreement and disclosed in Schedule 10.1 hereto; and (c) in addition to the Indebtedness described in Sections 10.1(a) and (b), Indebtedness on a consolidated basis not exceeding, at any time outstanding, an aggregate principal amount of $100,000. 10.2 Liens. Not create, incur, or suffer to exist any other Lien in, of or on any of their respective properties (now owned or hereafter acquired) or on any income or revenues or rights in respect of any thereof, except: (1) Liens in favor of the Bank; (2) Liens for taxes, assessments or governmental charges or levies, if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings; (3) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar Liens arising in the ordinary course of business, that secure payment of obligations not more than 60 days past due except for such Liens as are being contested in good faith by appropriate proceedings; (4) Liens arising out of pledges or deposits under laws relating to worker's compensation, unemployment insurance, old age pensions, or other social security or retirement benefits, or under similar laws; (5) Liens existing on the date of this Agreement and disclosed in Schedule 10.2 hereto; (f) Liens securing Indebtedness permitted in Section 10.1(c) above; and 20 (g) Options to purchase stock of Borrower under stock-based compensation plans or arrangements in favor of employees of Borrower or of any Subsidiary and non-employee directors of Borrower. 10.3 Sale and Lease-Back Transactions. Not enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred, provided that Borrower or any Subsidiary may enter into any sale and lease-back transaction if (a) at the time of such transaction no Default or Event of Default shall have occurred and be continuing, (b) the proceeds from the sale of the subject property shall be at least equal to its fair market value and (c) the subject property shall have been acquired such Borrower or such Subsidiary after the date of this Agreement and held by it for not more than one year. 10.4 Mergers, Transfers of Assets, Acquisitions. Not merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it; sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) any assets or any capital stock of any Subsidiary or be a party to any Acquisition of another Person or of all of substantially all another Person's assets, other than: (a) sales of inventory in the ordinary course of business; (b) the disposition of obsolete or worn-out fixed assets or other property no longer required by or useful to it in connection with the operation of its business; (c) sales, assignments, transfers or other dispositions of assets (other than stock of Subsidiaries) for cash consideration, but only so long as the aggregate fair market value of the assets so disposed of does not exceed $10,000,000 in the aggregate during the term of this Agreement; (d) any Acquisition by Borrower, so long as not less than 15 days prior to the consummation of any Acquisition, Borrower shall provide to the Bank, if the Bank so requests, the following information: pro forma financial statements and projections and a pro forma Compliance Certificate, demonstrating that Borrower will be, after giving effect to the Acquisition, in compliance with each of the financial covenants set forth in Article 9 of this Agreement. For purposes of such pro forma financial statements and pro forma compliance certificate, to calculate the Borrower's compliance with the financial covenants set forth in Article 9 hereof, after an acquisition of 100% of the stock or assets of a company (an "ACQUIRED COMPANY"), the EBITDA of the Acquired Company, based upon pro forma numbers acceptable to the Bank, from its last four rolling quarters may be included to the extent that such numbers reflect cash flow from assets fully transferred to Borrower as a result of the acquisition of the Acquired Company, with adjustments for any transactions not in the ordinary course of business. If Borrower acquires less than 100% of the stock or assets of an Acquired Company, the Bank shall make a good faith determination of what portion of such Acquired Company's EBITDA to include in the proforma financial statements; 21 (e) any merger or consolidation of Borrower and any Subsidiary, provided that Borrower is the surviving corporation thereof, or of any Subsidiary with another Subsidiary or any sale or other transfer of assets by a Subsidiary to Borrower. 10.5 Transactions with Affiliates. Not sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates (other than any Subsidiary as provided in Section 10.4 above), except that Borrower or a Subsidiary may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to it than could be obtained on an arm's-length basis from unrelated third parties. 10.6 Subsidiary Dividend Restrictions. Not permit any Subsidiary to be bound by or enter into any agreement, amendment, covenant, understanding or revision to any agreement which prohibits or restricts the ability of any Subsidiary to declare and pay dividends or make any other distribution to Borrower. 10.7 Use of Proceeds. Not use any of the proceeds of the Loans (a) for any purpose that entails a violation of, or that is inconsistent with, the provisions of the regulations of the Board of Governors of the Federal Reserve System, including without limitation Regulations G, T, U and X or (b) to make any acquisition for which the board of directors of the target company has not given its consent or approval. 10.8 Loans, Advances and Investments. Not make any loans, advances or extensions of credit to, or investments (whether acquisitions of stock or securities or otherwise) in, or acquire any assets of, any Persons, including, without limitation, any Affiliates of Borrower or any of its partners, shareholders, officers or employees (collectively, "INVESTMENTS"), other than: (a) expenses advanced in the ordinary course of business. (b) investments in short-term obligations issued or fully guaranteed by the U.S. Government and funds comprised of such obligations; (c) certificates of deposit and other time deposits with, and any other Investment purchased through any Bank; (d) commercial paper rated A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc.; (e) existing Investments listed on Schedule 10.8 hereto; (f) Investments made to acquire Acquisitions permitted under Section 10.4(d) above; 22 (g) Investments of Borrower in or to any one or more Subsidiaries in an aggregate amount not in excess of $3,000,000 at any time outstanding (in addition to those existing at the date of this Agreement and listed on Schedule 10.8 hereto). 10.9 Negative Pledge. Not permit or allow any Subsidiary to permit, to exist any Lien on any of its property, except as permitted under Section 10.2 above; on the request of the Bank, Borrower will and each Guarantor will execute acknowledgments or other forms of notice of such negative pledge, and the Bank may record or file the same in the appropriate filing offices. 10.10 Liquidation or Change in Business. Not liquidate, dissolve, discontinue business, materially change its general business purpose or the character of its business, engage in any type of business not reasonably related to its business as conducted on the Closing Date or take any action with a view towards the same. ARTICLE 11 EVENTS OF DEFAULT 11.1 Events of Default. Each of the following events shall constitute an Event of Default under this Agreement: (1) Misrepresentation. Any representation or warranty made or deemed made by or on behalf of Borrower or any Subsidiary to the Bank under or in connection with this Agreement, any Loan, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be materially false on the date as of which made; (2) Nonpayment. Borrower shall fail to pay any principal of the Note, any interest upon the Note, any reimbursement obligation respecting any Letter of Credit or any Fee or other Obligations within five (5) days after the same becomes due; (3) Non-Performance of Other Covenants. Borrower shall fail to perform or comply with any of the terms or provisions of Article 8 of this Agreement and such failure is not cured within fifteen (15) days or Borrower shall fail to perform or comply with or violates any covenant set forth in Article 9, Article 10 or any other covenant, term or provision hereof; (4) Other Indebtedness. The failure of Borrower or any Subsidiary to make any payment of principal or interest within five (5) days after the same becomes due on any Indebtedness to the Bank or any of the Bank's affiliates or subsidiaries (other than Indebtedness relating to the Loans) or with respect to any Indebtedness to Commerce Bank, N.A. or to any other Person or Persons or any default occurs under any agreement which evidences, secures or relates to, any such Indebtedness; 23 (5) Insolvency. Borrower or any Subsidiary shall (i) have an order for relief entered with respect to it under the federal Bankruptcy Code, (ii) not pay, or admit in writing its inability to pay, its debts generally as they become due, (iii) make an assignment for the benefit of creditors, (iv) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its property, (v) institute any proceeding seeking an order for relief under the federal Bankruptcy Code or under any other laws relating to bankruptcy, insolvency, dissolution, winding up, liquidation or reorganization or relief of debtors, (vi) take any corporate action to authorize or effect any of the foregoing actions set forth in this paragraph (e), or (vii) fail to contest in good faith any appointment or proceeding described in paragraph (f) of this Section 11.1; (6) Appointment of Receivers. Without the application, approval or consent of Borrower or Subsidiary, a receiver, trustee, examiner, liquidator or similar official shall be appointed for Borrower or any Subsidiary or any substantial part of its property, or a proceeding described in clause (v) of paragraph (e) of this Section 11.1 shall be instituted against either Borrower or any Subsidiary; (7) Judgment. Borrower or any Subsidiary shall fail within 45 days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $750,000 that is not stayed on appeal or otherwise being appropriately contested in good faith; (8) ERISA. Any Reportable Event shall occur in connection with any Defined Benefit Pension Plan adopted or sponsored by Borrower or any Subsidiary or to which Borrower or any Subsidiary makes contributions, which occurrence may have a materially adverse effect on such entity's business or financial condition; (9) Material Adverse Change. Upon the occurrence of any event or condition which the Bank, in its sole discretion, determines is a material adverse change in the business or financial condition of Borrower on an unconsolidated or on a consolidated basis or which materially and adversely affects its ability to perform its obligations to Bank; or (10) Ownership or Management Change. Any transfer of Control of Borrower or any 50% or more change in the ownership of Borrower shall occur or the employment of Borrower's chief executive officer and the employment of its chief operating officer terminate, for any reason, at the same time or during any one month period. 11.2 Rights and Remedies. Upon the occurrence of each and every Event of Default (other than an event with respect to Borrower or any Subsidiary described in paragraph (e) or (f) of Section 11.1 above), and at any time thereafter during the continuance of such event, the Bank may, by notice to Borrower, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitment and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with all accrued interest thereon and all other Obligations shall become forthwith due and payable, without 24 presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding; and in any event with respect to either Borrower or any Subsidiary described in paragraph (e) or (f) of Section 11.1 above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with all accrued interest thereon and all other Obligations shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding. Upon the occurrence and during the continuance of any Event of Default, the Bank may also exercise any or all of its rights and remedies, whether existing under this Agreement, other Loan Documents, applicable law or otherwise. ARTICLE 12 MISCELLANEOUS 12.1 Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telecopy or other telegraphic communications equipment of the sending party, as follows: (1) if to either Borrower or a Subsidiary, to it at 8800 East 63rd Street, Kansas City, Missouri, 64133, Attention: Stanley D. Biggs (Facsimile: 816-353-1873). (2) if to the Bank, to it at 10th & Baltimore, P. O. Box 419038, Kansas City, Missouri 64183, Attention: Bruce Easterly (Facsimile: 816/979-7561) (if by hand delivery or overnight courier service then the post office box is eliminated and the zip code is 64105) with a required copy to Steven H. Graham, Lathrop & Gage L.C., 2345 Grand Boulevard, Kansas City, Missouri 64108 (Facsimile: 816/292-2001); or to such other address or telecopy number as any party may direct by notice given as provided in this Section 12.1. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy or other telegraphic communications equipment of the sender, if received on or before 5:00 p.m., local time of the recipient, on a Business Day, or on the next Business Day if received after 5:00 p.m. on a Business Day or on a day that is not a Business Day, or on the date five (5) Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 12.1 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 12.1. 12.2 Survival of Agreement. All covenants, agreements, representations and warranties made by Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall 25 be considered to have been relied upon by the Bank and shall survive the making by the Bank of the Loans and the execution and delivery to the Bank of the Notes, regardless of any investigation made by the Bank or on its behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any other Obligations are outstanding. 12.3 Binding Effect. This Agreement shall become effective when it shall have been executed by Borrower, Guarantors and the Bank and thereafter shall be binding upon and inure to the benefit of Borrower, Guarantors, the Bank and their respective successors and permitted assigns, except that Borrower and Guarantors shall not have the right to assign or delegate any of their respective rights or duties hereunder or any interest herein without the prior consent of the Bank. 12.4 Successors and Assigns; Participations. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and permitted assigns of such party. The Bank may assign or delegate to one or more of its Affiliates all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of the Loans and the Note). The Bank may sell participations to one or more of its Affiliates in all or a portion of its rights and obligations under this Agreement (including all or a portion of the Loans and the Notes). The Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 12.4, disclose to the assignee or participant or proposed assignee or participant any information relating to Borrower and any Subsidiaries furnished to the Bank by or on behalf of Borrower or any Subsidiaries. 12.5 Expenses; Indemnity. (1) Borrower agree to pay all out-of-pocket expenses incurred by the Bank in connection with the preparation of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby contemplated shall be consummated) or incurred by the Bank in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made or the Note issued hereunder, including, but not limited to, all appraisal fees (equipment or otherwise), filing fees and search fees, the fees, charges and disbursements of Lathrop & Gage L.C., counsel for the Bank, and, in connection with any such amendment, modification or waiver or any such enforcement or protection, the fees, charges and disbursements of any other counsel for the Bank. Borrower further agrees that it shall indemnify the Bank from and hold it harmless against any documentary taxes, assessments or charges made by any Governmental Authority by reason of the Loans or this Agreement or any of the other Loan Documents. (2) Borrower agree to indemnify the Bank and its directors, officers, employees and agents (each such person being called an "INDEMNITEE") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or 26 asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the transactions contemplated thereby, (ii) the making of any loans or the use of the proceeds of the Loans or (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (i) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the negligence or wilful misconduct of such Indemnitee and (ii) have not, in whole or in part, arisen out of or resulted from any act, or omission to act, of either Borrower or any of their Affiliates. (3) The provisions of this Section 12.5 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document or any investigation made by or on behalf of the Bank. All amounts due under this Section 12.5 shall be payable on written demand therefor. 12.6 Right of Setoff. If an Event of Default shall have occurred and be continuing, the Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of Borrower or either Guarantor against any and all of the Obligations, irrespective of whether or not the Bank shall have made any demand under this Agreement or such other Loan Document and notwithstanding that such Obligations may be unmatured. The rights of the Bank under this Section 12.6 are in addition to other rights and remedies (including other rights of setoff) which the Bank may have. 12.7 Applicable Law. This Agreement and the other loan documents shall be governed by and construed and enforced under and in accordance with the laws of the State of Missouri applicable to contracts made and to be performed wholly within said state, without giving effect to choice of law or conflict of law principles. 12.8 Waivers; Amendment. No failure or delay of the Bank in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Bank hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by Borrower or either Guarantor therefrom shall in any event be effective unless the same shall be contained in a written instrument signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on Borrower in 27 any case shall entitle Borrower or any Subsidiary to any other or further notice or demand in similar or other circumstances. 12.9 Interest Rate Limitation. Notwithstanding anything herein or in the Note to the contrary, if at any time the applicable interest rate, together with all fees and charges which are treated as interest under applicable law (collectively the "CHARGES"), as provided for herein or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken or reserved by the Bank, shall exceed the maximum lawful rate (the "MAXIMUM RATE") which may be contracted for, charged, taken, received or reserved by the Bank in accordance with applicable law, the rate of interest payable under the Note, together with all Charges payable to the Bank, shall be limited to the Maximum Rate. 12.10 Entire Agreement. This Agreement and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents. 12.11 Severability. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 12.12 Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 12.3. 12.13 Headings. Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 12.14 Jurisdiction; Consent to Service of Process. (1) Borrower and each Guarantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any Missouri state court or the federal court for the Western District of Missouri, any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents or for recognition or enforcement of any judgment, and each of the parties hereto 28 hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such Missouri state or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Bank may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against Borrower or any Subsidiary or its properties in the courts of any jurisdiction. (2) Borrower and each Subsidiary hereby irrevocably and unconditionally waive, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this agreement or the other Loan Documents in any Missouri state court or federal court for the Western District of Missouri. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (3) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 12.1. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. 12.15 Terms Generally. The definitions contained in this Agreement and in Exhibit 1 hereto shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "INCLUDE," "INCLUDES" and "INCLUDING" shall be deemed to be followed by the phrase "WITHOUT LIMITATION." All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time, provided, however, that, for purposes of determining compliance with any covenant set forth in Article 9, such terms shall be construed in accordance with GAAP as in effect on the date of this Agreement applied on a basis consistent with the application used in preparing the Borrower' financial statements referred to in Article 9. 1.1 12.16 ARBITRATION. EXCEPT AS SET OUT BELOW, ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO, INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT (COLLECTIVELY "CLAIM"), SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH 29 BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CLAIM IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. THE INSTITUTION AND MAINTENANCE OF AN ACTION FOR ANY JUDICIAL RELIEF SHALL NOT CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE PLAINTIFF, TO SUBMIT THE CLAIM TO ARBITRATION IF ANY OTHER PARTY CONTESTS SUCH ACTION FOR JUDICIAL RELIEF. (a) SPECIAL RULES. ANY ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS AGREEMENT, OR IF THERE IS REAL OR PERSONAL PROPERTY COLLATERAL, IN THE COUNTY WHERE SUCH REAL OR PERSONAL PROPERTY IS LOCATED, AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATION SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. ANY DISPUTE CONCERNING THIS ARBITRATION PROVISION OR WHETHER A CLAIM IS ARBITRABLE SHALL BE DETERMINED BY THE ARBITRATOR. THE ARBITRATOR SHALL HAVE THE POWER TO AWARD LEGAL FEES PURSUANT TO THE TERMS OF THIS AGREEMENT. (b) RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (II)) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF ANY PARTY HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST OR SELL ANY REAL OR PERSONAL PROPERTY OR COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER, ANY PARTY MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE OR SELL COLLATERAL OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. NONE OF THESE ACTIONS SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CLAIM OCCASIONING RESORT TO SUCH REMEDIES OR PROCEDURES. 30 (c) WAIVER OF CERTAIN DAMAGES. THE PARTIES HERETO WAIVE ANY RIGHT OR REMEDY EITHER MAY HAVE AGAINST THE OTHER TO RECOVER PUNITIVE OR EXEMPLARY DAMAGES ARISING OUT OF ANY CLAIM WHETHER THE CLAIM IS RESOLVED BY ARBITRATION OR BY JUDICIAL ACTION. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU (BORROWERS) AND US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. THIS DOCUMENT, TOGETHER WITH OTHER WRITTEN AGREEMENTS BETWEEN BORROWERS AND BANK OF AMERICA, N.A., IS THE FINAL EXPRESSION OF THE CREDIT AGREEMENT BETWEEN SUCH PARTIES. THIS DOCUMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR OR CONTEMPORANEOUS ORAL CREDIT AGREEMENTS OR PRIOR WRITTEN CREDIT AGREEMENTS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF. ANY ADDITIONAL TERMS OF THE CREDIT AGREEMENT BETWEEN SUCH PARTIES ARE SET FORTH BELOW. THERE ARE NO SUCH ORAL AGREEMENTS BETWEEN SUCH PARTIES. IN WITNESS WHEREOF, the parties have executed this Agreement on the 6th day of October, 1999, by their duly authorized officers, effective for all purposes as of September 30, 1999. [SEAL] _____________________________, ________ ATTEST: [SEAL] By:_______________________________ ______________,__________ ATTEST: By: ___________________________ [SEAL] ______________,__________ ATTEST: By:_______________________________ 31 BHA GROUP HOLDINGS, INC. By: ___________________________ ______________,__________ BHA GROUP, INC. By: ___________________________ ______________,__________ BHA TECHNOLOGIES, INC. By: ___________________________ ______________,__________ BANK OF AMERICA, N.A., a national banking association By: ___________________________ ______________,__________ 32 EXHIBIT 1 DEFINITIONS For purposes of said Credit Agreement, the following terms shall have the meanings specified below: "Acquired Company" is defined in Section 10.4(d) of the Agreement. "Acquisition" shall mean any transaction, or any series of related transactions, consummated after the date of this Agreement, by which Borrower or any Subsidiary (in one transaction or as the most recent transaction in a series of transactions) (i) acquires any going business or all or substantially all of the assets of any Person (including, in the case of a corporation, any division thereof), whether through purchase of assets, merger or otherwise, (ii) directly or indirectly acquires control of at least a majority (in number of votes) of the securities of a corporation which have voting power for the election of directors, or (iii) directly or indirectly acquires control of a majority ownership interest in any partnership or joint venture. "Additional Eurodollar Rate Loan Costs" shall mean any costs or expenses resulting from any Regulatory Change (i) which imposes, modifies or deems applicable any reserve, special deposit, minimum capital, capital ratio or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, the Bank or any Commitment of the Bank and (ii) which is attributable to the Bank's making or maintaining any Eurodollar Rate Loans or its obligation to make any Eurodollar Rate Loans hereunder. "Affiliate" shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified and in any case shall include, when used with respect to either Borrower or any Subsidiary, any joint venture in which such Borrower or such Subsidiary holds an equity interest. "Agreement" or "Credit Agreement" shall mean this Agreement, together with all exhibits and schedules hereto, as it may be amended from time to time. "Applicable Margin" is defined in Section 4.3 of the Agreement. "Assets" shall mean all assets which, under GAAP, would appear as assets on the balance sheet of Borrower. "Business Day" shall mean any day (other than a day which is a Saturday, Sunday or legal holiday in the State of Missouri) on which banks in the State of Missouri are open for business. "Capital Expenditures" shall mean, without duplication, (i) expenditures (whether paid in cash or accrued as a liability) for fixed assets, tooling, plant and equipment (including without limitation the incurrence of Capital Lease Obligations), and (ii) any other 33 expenditures that would be classified as capital expenditures under GAAP. Capital Expenditures shall not include the amount of consideration paid or any monetary obligation incurred in respect of the purchase price for any Acquisition. "Capital Lease Obligations" shall mean, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP; and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986. "Charges" is defined in Section 12.9 of the Agreement. "Closing Date" shall mean October 6, 1999. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Commitment" shall mean the Revolving Credit Commitment. "Compliance Certificate" is defined in Section 8.4(c) of the Agreement. "Consolidated EBITDA," "Consolidated Current Ratio," "Consolidated Fixed Charge Coverage," "Consolidated Funded Debt/EBITDA Ratio" and "Consolidated Tangible Net Worth" are defined in Article 9 of the Agreement. "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and "Controlling" and "Controlled" shall have meanings correlative thereto. "Controlled Group" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with either Borrower or any Subsidiary, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Default" shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "Default Rate" shall mean the Prime Rate plus 2% per annum. 34 "Defined Benefit Pension Plan" shall mean any employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which Borrower or any Subsidiary may have any liability. "Disbursement Date" is defined in Section 4.2 of the Agreement. "dollars" or "$" shall mean lawful money of the United States of America. "EBITDA" is defined in Section 9.2 of the Agreement. "Environmental Laws" is defined in Section 7.4(b) of the Agreement. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurodollar Rate" shall mean, at any date, with respect to any applicable Interest Period, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. "Eurodollar Rate Loan" shall mean a Loan that accrues interest at a Eurodollar Rate. "Event of Default" is defined in Article 11 of the Agreement. "Fees" shall mean the unused commitment and Letter of Credit fees payable under Article 5 of the Agreement. "Funded Debt" is defined in Section 9.2 of the Agreement. "GAAP" shall mean generally accepted accounting principles, applied on a consistent basis. "Governmental Authority" shall mean any federal, state, local or foreign court or governmental agency, board, authority, instrumentality or regulatory body. "Guarantee" or "Guaranty" of a person shall mean any agreement by which such person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes liable upon, the obligation of any other person, or agrees to maintain the net worth or working capital or other financial condition of any other person or otherwise assures any creditor of such other person against loss, including, without limitation, any comfort letter, operating agreement or take-or-pay contract and shall include, without limitation, the contingent liability of such person in connection with any application for a letter of credit. The term "Guarantee" used as a verb has a corresponding meaning. 35 "Guarantor" shall mean each maker of a Loan Guaranty. "Hazardous Materials" is defined in Section 7.4(b) of the Agreement. "Indebtedness" shall mean, as to any Person, on a consolidated basis with such Person's Subsidiaries (unless otherwise specified), without duplication: (i) all obligations of such Person for borrowed money or evidenced by bonds, debentures, notes or similar instruments (including all indebtedness to stockholders, howsoever evidenced), (ii) all obligations of such Person for the deferred purchase price of property or services, except trade accounts payable and accrued liabilities arising in the ordinary course of business which are not overdue by more than 60 days or which are being contested in good faith by appropriate proceedings, (iii) all Capital Lease Obligations of such Person, (iv) all Indebtedness of others secured by a Lien on any properties, assets or revenues of such Person to the extent of the value of the property subject to such Lien, (v) all Indebtedness of others Guaranteed by such Person and (vi) all obligations of such Person, contingent or otherwise, in respect of any letters of credit or bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any partnership in which such Person is a general partner. "Interest Period" shall mean, with respect to any Eurodollar Rate Loan, each period commencing on the date such Loan is made or is converted from a Prime Rate Loan type or the last day of the next preceding Interest Period for such Loan, and ending on the numerically corresponding day in the first, second or third calendar month thereafter, as Borrower may select, except that each Interest Period which commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) any Interest Period for any Loan which would otherwise extend beyond the Revolving Credit Termination Date shall end on such Date; (ii) each Interest Period that would otherwise end on a day which is not a Business Day shall end on the immediately succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the immediately preceding Business Day); and (iii) Borrower shall select the duration of Interest Periods in such a way so that notwithstanding clauses (i) and (ii) above, no Interest Period shall have a duration of less than one month (and, if any Eurodollar Rate Loans would otherwise have an Interest Period of a shorter duration, they shall be Prime Rate Loans for the relevant period). "Investments" is defined in Section 10.8 of the Agreement. "Letters of Credit" is defined in Section 3.1 of the Agreement. "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset, and (c) in the case of securities, any purchase option, call, restriction on right to sell or similar right of a third party with respect to such securities. 36 "Loan" shall mean any Revolving Loan or any advance under the Credit Agreement, and "Loans" shall mean all Revolving Loans and advances thereunder collectively. "Loan Documents" shall mean, collectively, the Agreement, the Note, any Loan Guaranties and all other documents, agreements and instruments executed by either Borrower or any Subsidiary in favor of the Bank in connection with the transactions contemplated by the Agreement. "Loan Guaranty" is defined in Section 5.1 of the Agreement. "Material Contracts" is defined in Section 7.9 of the Agreement. "Net Income" shall mean, for any period, all operating and non-operating revenue, less all operating and non-operating expenses, including taxes, depreciation, amortization and interest expenses, all as determined in accordance with GAAP. In calculating Net Income, there shall be excluded extraordinary gains and losses (as determined in accordance with GAAP), any revenues and expenses from disposition of capital assets and insurance policies and condemnation awards and gifts, donations, grants, pledges, devises, legacies, requests and contributions which are specifically designated or restricted as to use by their terms. "Note" shall mean the Revolving Note. "Obligations" shall mean all unpaid principal of and accrued and unpaid interest on the Note, all accrued and unpaid Fees, and all other obligations and liabilities of Borrower to the Bank now existing or hereafter arising under the Loan Documents, including, without limitation, all renewals, replacements, extensions and modifications thereof and thereto and any and all draws under any and all Letters of Credit and any other letters of credit issued by Bank for the account of Borrower or any Subsidiary. "PBGC" shall mean the Pension Benefit Guarantee Corporation referred to and defined in ERISA. "Person" or "person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Prime Rate" shall mean, at any date, the rate of interest per annum then most recently established by the Bank as its "prime rate," it being understood and agreed that such rate is set by the Bank as a general reference rate of interest, taking into account such factors as the Bank may deem appropriate, that it is not necessarily the lowest or best rate actually charged to any customer or a favored rate, that it may not correspond with future increases or decreases in interest rates charged by other lenders or market rates in general, and that the Bank may make various business or other loans at rates of interest having no relationship to such rate. "Prime Rate Loan" shall mean a Loan that accrues interest at the Prime Rate. 37 "RCRA" shall mean the Resource Conservation and Recovery Act, as the same may be amended from time to time. "Regulation G, T, U or X" shall mean Regulation G, T, U or X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulatory Change" shall mean, with respect to either Bank, any change after the date of this Agreement in United States federal or state law or regulations, or the entry, adoption, or making after such date of any order, interpretation, directive, or request of or under any United States federal or state law or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof, applying to a class of banks including such Bank. "Reportable Event" shall mean any reportable event, as defined in Section 4043 of ERISA and the regulations issued under such Section, with respect to a Defined Benefit Pension Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event; provided that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA involving an amount aggregating $50,000 or more shall be a Reportable Event regardless of the issuance of any waiver in accordance with Section 412(d) of the Code. "Revolving Credit Commitment" shall mean Eighteen Million Dollars ($18,000,000) or such amount reduced as provided in Section 2.1(a) of the Agreement. "Revolving Credit Termination Date" shall mean October 1, 2002 or such other date as may be agreed to by Bank and Borrower from time to time. "Revolving Loan" is defined in Section 2.1 of the Agreement. "Revolving Note" is defined in Section 2.2 of the Agreement. "Subordinated Debt" shall mean Indebtedness subordinated in right of payment to the Indebtedness to the Bank on terms and conditions satisfactory to the Bank. "subsidiary" shall mean, with respect to any person (herein referred to as the "parent"), any corporation, partnership, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held by the parent, or (b) which is, at the time any determination is made, otherwise Controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" shall mean any subsidiary of Borrower, direct or indirect, now existing or hereafter acquired or created. 38 "Telerate Page 3750" shall mean the British Bankers Association Libor Rates (determined at 11:00 a.m. London, England time) that are published by Bridge Information Systems, Inc. "Year 2000 Compliant" and "Year 2000 Problem" are defined in Section 7.20 of the Agreement. 39 EX-11 4 EXHIBIT 11 Exhibit 11 BHA Group Holdings, Inc. Computation of Per Share Earnings (in thousands of dollars, except per share data)
1999 1998 1997 ------------------------------- ------------------------------ -------------------------------- Net Net Net Earnings Shares Per-Share Earnings Shares Per-Share Earnings Shares Per-Share (Numerator) (Denom.) Amt. (Numerator) (Denom.) Amt. (Numerator) (Denom.) Amt. ----------- -------- ---- ----------- -------- ---- ---------- -------- ---- Basic earnings per share: Earnings available to common shareholders $1,084 7,028 $ 0.15 $7,332 7,171 $1.02 $8,101 7,226 $ 1.12 Effect of dilutive securities--stock options -- 106 -- 381 -- 450 Diluted earnings per share: Earnings available to common shareholders and assumed conversion $1,084 7,134 $ 0.15 $7,332 7,552 $ 0.97 $8,101 7,676 $ 1.06 ============================ =============================== ===============================
40 EX-21 5 EXHIBIT 21 Exhibit 21 Subsidiaries of BHA Group Holdings, Inc. BHA Group, Inc., a Delaware corporation; PrecipTech, Ltd., a Canadian corporation; BHA Group, Ltd., a Canadian corporation; BHA International, Inc., a U.S. Virgin Islands corporation; BHA Group GmbH, a German corporation; BHA Group International, Inc., a Delaware corporation; and BHA Technologies, Inc., a Delaware corporation; BHA Purfilter S.L., a Spanish corporation; and BHA Group International Holdings B.V., a Dutch corporation, are the only subsidiaries of the Company, each of which are wholly-owned. Tool Rental and Supply Company, Inc., a Delaware corporation; Midwest Precipitator Corporation, an Illinois corporation (DBA Midwest Power Corporation); BHA Group AG, a Swiss corporation; BHA Environmental Technology Company, Ltd., a China corporation; and BHA Group Philippines, Inc., a Philippine corporation, are wholly-owned subsidiaries of BHA Group, Inc. BHA Group International Pvt. Ltd., an India corporation, is a wholly-owned subsidiary of BHA Group International, Inc.; BHA Technologies AG, a Swiss corporation; and BHA Technologies K.K., a Japan corporation, are wholly-owned subsidiaries of BHA Technologies, Inc.; BHA Group, C.A., a Venezuelan corporation, is a wholly-owned subsidiary of BHA Purfilter S.L.; BHA do Brazil Ltda, a Brazilian corporation; and BHA U.K. Ltd., a United Kingdom corporation, are wholly-owned subsidiaries of BHA Group International Holdings B.V. 41 EX-23 6 EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES AND CONSENT The Board of Directors BHA Group Holdings, Inc.: The audits referred to in our report dated November 9, 1999 included the related financial statement schedule as of September 30, 1999 and for each of the years in the three-year period ended September 30, 1999, included in the 1999 annual report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We consent to the incorporation by reference in the registration statement (No. 33-58782) on Form S-8 of BHA Group Holdings, Inc. of our reports dated November 9, 1999 relating to the consolidated balance sheets of BHA Group Holdings, Inc. and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of earnings, shareholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended September 30, 1999, and the related schedule, which reports are included in the September 30, 1999 annual report on Form 10-K of BHA Group Holdings, Inc. /s/ KPMG LLP Kansas City, Missouri November 16, 1999 42 EX-27 7 ARTICLE 5 FDS FOR ANNUAL FORM 10K
5 This schedule contains summary financial information extracted from unaudited condensed consolidated financial statements for the year ended September 30, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS SEP-30-1999 OCT-01-1998 SEP-30-1999 877 0 29,594 1,238 28,043 61,944 67,674 32,770 108,148 18,659 20,345 87 0 0 58,805 108,148 89,823 155,725 65,842 113,785 37,460 837 1,984 1,659 575 1,084 0 0 0 1,084 .15 .15
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